PM Daily Market Commentary - 2/24/2016

davefairtex
By davefairtex on Thu, Feb 25, 2016 - 3:32am

Gold rose +3.40 to 1229.40 on very heavy volume; silver fell -0.06 to 15.24 on extremely heavy volume.  Both metals started rallying in asia; falling e-minis and oil prices encouraged gold, silver and the long bond higher, hitting a peak at 10:30.  That is when everything reversed; oil rallied strongly, so did equities, and PM plummeted, more or less returning back to its starting point.

To me, it appears that oil is the piper playing the tune, and the rest of the markets dance accordingly.  Today, when oil appeared to be continuing to move lower off yesterday's big move down, gold eagerly broke through its downtrend line and looked to be on its way to testing the previous high at 1263.  But then the Petroleum Status Report came out at 10:30, which revealed that while there was an inventory build, US gasoline demand was some 5% higher than last year.  WTIC ended up +0.85, while Brent was up +1.40, and gold promptly tipped over and sank, erasing almost all of its gains for the day.

On the charts, gold printed a shooting star candle - at least that's what my software tells me anyway.  Its an odd-looking candle, but bottom line for me it is a failed rally on high volume.  My read: a large number of newly-added managed money shorts were hosed on the strong move higher, and then once oil turned, the commercials jumped on gold with a vengeance, hammering price right back down.

The move looked a whole lot like what happened back in October 2015: a strong rally in gold ended up reversing lower.  This led to a long month-long sell-off for gold.  Its impossible to know if the same thing will repeat this time, but the COT report says a top should be coming soon.  If oil decides to pick a direction, and that direction is up, I believe gold will probably sell off, encouraged lower by the commercials in the usual cycle.

Once again silver underperformed gold; on the way up, and on the way down.  Silver has had two large moves in the past few days; one violent sell-off that was (mostly) bought, and today's rally that was sold hard.  COT report suggests the next move for silver should be lower.  If oil rallies...I think that will happen without much of a doubt.  The big volume on today's failed rally underscores the danger for silver here.  A close in silver below today's low...I think silver ends up dropping hard.

Miners broke out to a new high today, with GDX up +1.00% on heavy volume, and GDXJ rose +2.52% on heavy volume also.  The miners continue to be the strongest component in the PM space, with GDX:$GOLD ratio continuing to give off very bullish signals.

Platinum fell -0.68%, palladium dropped -2.70%, while copper rallied +0.86%, coming back from a brisk sell-off earlier in the day - like a whole lot of other things.  Industrial metals overall look to be in a decent uptrend right now; on the other hand, palladium looks to be in the process of breaking down.

The buck closed up +0.03 to 97.51, moving largely independently of the rest of the market.  It tried to rally and it too failed, peaking at about 07:00 Eastern, which was several hours before the US market opened.  USD printed a doji candle on the day.  Dollar/yen printed a shooting star candle after making a new high; this is a reversal bar.  For those that believe dollar/yen is a critical driver for gold prices - this could be bad news, as this would signal dollar/yen might be topping out.

Overnight, the e-mini futures were sold hard, and once market opened the selling continued, with SPX hitting 1891 (31 points down) by 10:30 Eastern.  But then oil spiked higher immediately following the oil report, and once it became clear the oil move would stick, equity prices just never looked back and rose right into the close.  Energy led, not surprisingly, while the financials remained weak - they were the worst performing sector on the day.  VIX fell -0.26 to 20.72.

JNK initially sold off along with oil and equities, but rallied with many other things to close up +0.15%.  Its not exactly a risk on signal - but overall, JNK has managed to put together a decent move higher in recent weeks off the lows.

TLT rallied sharply alongside gold, but then sold off hard along with gold as equities and oil rose.  TLT closed down -0.20%.

CRB rose +0.66% - it is still bouncing along the bottom; no new lows, and yet no signs yet of a reversal.  While industrial metals look like they are rebounding, CRB didn't seem to get the memo.

WTIC crude (CLJ16) rose +0.85 [+2.71%] to 32.22; Brent was up +1.45 [+4.40%] to 34.41.  As I mentioned earlier, oil was the key driver of today's price action in most every market I watched.  The amount of money that is waiting to pounce on any bit of good news in oil is amazing.  This sort of back-and-forth struggle reminds me of October 2008, where markets moved strongly first down, then up, then down - rinse/repeat until everyone was thoroughly tired of it all.

Oil will eventually rally, possibly even soon, but I'm not sure "this one is it" - Saudi Arabia has not yet pulled the plug on production, and US oil inventories are still building.  I mean, I could be wrong (and if I am, I'm going to adjust my positions in a big hurry), but that's my current sense.

GLD added 8 tons of gold today.  That's not bad.  Western gold demand remains strong, it seems.  The bad news is, GLD buyers don't seem to be great market timers.  Sometimes, they load up on GLD right near the tops.  Here's a chart that shows an instance of this behavior - January 2015:

It appears that holders of GLD are sometimes the "dumb money" - they buy the highs.  Right now, GLD tonnage has been sharply increasing, as the price for COMEX gold has declined.  This is the "magazine cover" phenomenon.  Retail aren't great watchers of charts and trends - "gosh I heard on MSNBC that gold was doing well, I think maybe I should buy some - I don't want to miss out on another great gold rally like I did last time..."  And that marks the cycle top.  Theoretically anyway.

In asia trading this evening (morning?), gold has moved up about $8 - there remains a strong bid underneath gold right now on any hint of oil weakness.

Ultimately, I fall back to my charts.  If gold closes below its 9 EMA, that suggests to me that lower prices are ahead, more likely than not.  Until then, its hard to know which way things will jump.  We could still see another high for gold, especially if oil plunges below 30.  Yesterday I had a nice clear chart pattern for you; today, not so much.

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9 Comments

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
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Posts: 5464
COT-driven high/low detector

Here's a simple chart I put together using the COMEX gold COT report (legacy version), trying to add together smart money + dumb money plus a momentum detector to come up with a more formal set of "danger zones" for COT data.

Blue line indicates "top near", red line indicates "bottom near".  It works fairly well.  You can see where blue is right now.  You can see it also can take a while for the danger from the blue region to "have impact" and push price lower.

If we filter out all the hype from the goldbugs, and all the horrid news - all else being equal, doesn't it seem like its a good idea to buy the red zone, and sell the blue zone?  I mean, it doesn't always work, but over time, I bet you'd have made money even during the gold downtrend if you did this.  And that's saying something.  Using a trailing stop, you'd probably do even better.

Penny551's picture
Penny551
Status: Silver Member (Offline)
Joined: Nov 8 2012
Posts: 154
Oil

Oil will eventually rally, possibly even soon, but I'm not sure "this one is it" - Saudi Arabia has not yet pulled the plug on production, and US oil inventories are still building.  I mean, I could be wrong (and if I am, I'm going to adjust my positions in a big hurry), but that's my current sense.

I agree and added just a couple of long dated (Jan '17, Jan '18) USO calls when WTIC was sub $28, but am waiting to add anything else.  How do you plan to play the eventual rebound?

 

cmartenson's picture
cmartenson
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Posts: 5754
Playing the oil rebound
Penny551 wrote:

Oil will eventually rally, possibly even soon, but I'm not sure "this one is it" - Saudi Arabia has not yet pulled the plug on production, and US oil inventories are still building.  I mean, I could be wrong (and if I am, I'm going to adjust my positions in a big hurry), but that's my current sense.

I agree and added just a couple of long dated (Jan '17, Jan '18) USO calls when WTIC was sub $28, but am waiting to add anything else.  How do you plan to play the eventual rebound?

All at once?

Of course such an immediate rocket ride for oil means, naturally, that the rest of the stock ""market"" gets bought instantly and gold gets sold.

The new meme is "it's all about oil."

A few months ago it was all about the yen.  I think they keep switching the meme focus to make it seem like it's a legitimate thing rather than extreme market-monkeying by whomever it is that now drives multi trillion dollar markets over timeframes best measured in minutes.

davefairtex's picture
davefairtex
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Posts: 5464
its about oil

Oil rebound - high risk play has to be the offshore drillers.  They are selling for 25-30 cents on the dollar right now.  They are probably a fourbagger after oil prices return to "something reasonable."  Some are selling for much cheaper prices, and they will probably survive - but their equity probably will not.  SDRL is one example.  It was around $50 in mid-2014, now trading for $1.83.

The other E&P companies aren't quite as exciting - they seem to be priced for about $60 oil.

If you want to buy an oil futures contract, you could get a CL Dec 2016 crude oil contract for $40/bbl.  Each CL contract controls 1k bbl.  Margin is...$4375 to hold it overnight.  (And if the trade goes against you...more margin is required).  If by the time Dec 2016 rolls around oil is at $50, you make $10k.

That's better than a poke in the eye.  If you believe T Boone Pickens, we should get there by summer.  You could sell out then - no need to wait until Dec.

I suspect the services companies are where the big money will be, but it might take a while for them to get back up there.

Contango will really affect OIL and the other ETFs.  Oil now is $32 and Dec oil is $40.  That says that 25% of OIL will (more or less) vanish between now and then if price remains the same.  In other words, you basically need $40 oil in Dec to break even.  So factor that into your call buying.

Look at the ratio OIL:$WTIC.  See how it declines?  That's contango.  USO does the same thing.  The decline of that ratio shows the real losses the owners of OIL and USO are enduring, above and beyond the losses due to the price of oil dropping.  If oil stays flat, and the current contango remains in place, USO and OIL will lose maybe 3% per month, sometimes more.

Illustration: Suppose you had a barrel of oil at the start of 2015.  It was worth about $50.  Its now worth $32 right now.  50-32 = 18.  Loss: 18/50 = 36%.  Ouch.

USO was $18 at start 2015.  Its 8.78 right now.  Loss: 18-8.78 = 9.22.  9.22/18 = 51.2%.  Double ouch!!

OIL was $11 at start 2015.  its 4.80 right now.  Loss: 11-4.80 = 6.20.  6.20/11 = 56.4%.  OMG.

Moral of the story: USO and OIL lose more than you think they do when contango is in place.

I don't hold USO for very long because of this issue - usually just for a 2-3 week swing trade.

davefairtex's picture
davefairtex
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Posts: 5464
current memes

A few months ago it was all about the yen.  I think they keep switching the meme focus to make it seem like it's a legitimate thing rather than extreme market-monkeying by whomever it is that now drives multi trillion dollar markets over timeframes best measured in minutes.

I think the great sucking sound of Japanese money from US assets has wound down in intensity.  But a 10% move in a big currency does imply a whole lotta money fleeing the US.  I'm pretty sure this was not just some trick of optics by some sneaky fellow behind the scenes whose goal was to mess with your mind.

I'm going to quote Hoover, who talked about a similar effect that happened to him back when it was gold that moved around the world rather than currencies:

http://www.ecommcode.com/hoover/ebooks/pdf/FULL/B1V3_Full.pdf, pp 67.

During this new stage of the depression, the refugee gold and the foreign government reserve deposits were constantly driven by fear hither and yon over the world. We were to see currencies demoralized and governments embarrassed as fear drove the gold from one country to another. In fact, there was a mass of gold and short-term credit which behaved like a loose cannon on the deck of the world in a tempest-tossed era.

So replace the word "gold" with the word "currency" and you have exactly the same situation, except its asset prices that get wanged around due to currency moves.  Assets in foreign countries are "parked" somewhere: treasury bills & bonds, equities, bank deposits.  So a 10% move in JPY over one month = "loose cannon on the deck of the world."  Fleeing Japanese assets get sold, the dollars are converted to yen, and then money is repatriated back to Japan.  Yen rises, US asset prices drop.  Its not some trick - its just what happens.

And - quite frankly - I think "we ain't seen nothin yet."  I believe when TSHTF in the Eurozone - pick your cause: BRExit, FRExit, whatever, the dollar will absolutely scream higher.  The US will be inundated with Euro currency refugees, and they'll have to park somewhere.  US equities?  Treasury bonds?  Prices of US assets will all scream higher - not because of price/earnings ratios, but because money needs a place to hide.  I hope we don't think its some plot by the Fed and we can recognize it for what it really is: capital flows.

Bad stuff happened during the gold standard.  When gold fled a country because of some concern, the currency contracted as a result.  Now wouldn't that be fun to happen during a depression?

Read Hoover's memoirs.  Then ask yourself, do I really want to have a gold standard?

cmartenson's picture
cmartenson
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It's more than contango....
davefairtex wrote:

Moral of the story: USO and OIL lose more than you think they do when contango is in place.

I don't hold USO for very long because of this issue - usually just for a 2-3 week swing trade.

USO is rigged…sort of...to lose money for investors.

The other other problem with USO and other similar ETFs, especially those that use futures contracts, is the problem of them being front run by other players.

I don’t think this has been fixed…just noted way back in 2009 and left there as an oddity of which one should be aware:

U.S. Oil Fund Finds Itself at the Mercy of Traders

Mar 6, 2009

The exchange-traded fund U.S. Oil Fund LP has expanded from a $7 million ETF just three years ago to $3.8 billion, drawing the attention of regulators and making it harder for the fund to keep up with oil prices.

U.S. Oil's size has prevented it from tracking the price of oil. While crude has lost 2.2% in 2009, the fund has declined 20%. The fund is designed to track oil's daily percentage move.

Since the fund is so big, it is unable to switch in and out of contracts, a process known as "rolling," without moving markets and giving speculators an opportunity to make bets on those moves. It is adding to the costs of U.S. Oil's roll and raising concerns among regulators that traders may be manipulating prices.

"It's like taking candy from a baby," said Nauman Barakat, senior vice president at Macquarie Futures USA in New York.

That candy comes out of the returns of investors in the fund. Take Feb. 6, when U.S. Oil moved its 80,000 contracts from March to April at the end of the trading day, selling the March contract and buying April. Because U.S. Oil publishes the dates of its roll in advance, traders knew the switch was coming.

At 2 p.m., 30 minutes before closing, trading in New York Mercantile Exchange oil contracts soared, and the price of the April contract narrowed to $4 more than the March contract. Within minutes, that gap had widened and closed at $5.98, according to trading records.

As the fund's managers were about to roll their contracts, "suddenly came the awfully extreme move," said one manager. Some said the move is a sign that big trades were placed ahead of U.S. Oil's roll.

The price move instantly made it more expensive for U.S. Oil to roll into the April contract and cost the fund about $120 million more than it would have a day earlier. At the same time, a trader could have pocketed $1,390 on each spread trade, which costs $810 to place.

Just more fun and games in your free and fair US “”markets.””

Probably best to not hold USO over an month-end roll over window either...?

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5464
USO and the roll

All the ETF stuff is one reason I prefer the straight futures contracts.  I know exactly what I'm getting with them, and I can trade 23.5 hours a day.  They have a mini-crude contract, the QM, that I like best.  Its not as liquid but it provides reasonable exposure for us cheapskates who don't want $30,000 of oil price exposure.

BTW, from what I understand, the USO roll now takes place over three days, not one.  Whoops, make that four.

http://www.unitedstatescommodityfunds.com/fund-details.php?fund=uso&pagetype=roll-dates&page=fund-details

Roll Dates are projected and subject to change without notice. Roll Dates are the expected dates on which the composition of the Benchmark Futures Contract is changed or ''rolled'' by selling the near month contract and buying the next month contract. The change occurs over four days.

Penny551's picture
Penny551
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Joined: Nov 8 2012
Posts: 154
USO / Oil Rebound?

Dave / Chris,

That's great info...thank you!  I feel a little ignorant for the lack of due diligence, but I guess that's why I read this commentary every day; to learn stuff like that.

I suspect the services companies are where the big money will be, but it might take a while for them to get back up there.

I read some commentary recently where a TA guy (Clive Maund) noted what looked like a capitulation washout in KMI and a nice reverse head and shoulders on that chart.  He suspects that may be a leading indicator for the industry, especially service companies, as a whole.  As Dave has noted, the fundamentals look terrible short term, esp w/ Cushing about to "overflow", but I'm beginning to think all of that "stuff" may be priced in already.  FWIW, Buffet recently bought a bunch of KMI as well.

KugsCheese's picture
KugsCheese
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Joined: Jan 2 2010
Posts: 1449
davefairtex wrote: All the
davefairtex wrote:

All the ETF stuff is one reason I prefer the straight futures contracts.  I know exactly what I'm getting with them, and I can trade 23.5 hours a day.  They have a mini-crude contract, the QM, that I like best.  Its not as liquid but it provides reasonable exposure for us cheapskates who don't want $30,000 of oil price exposure.

BTW, from what I understand, the USO roll now takes place over three days, not one.  Whoops, make that four.

http://www.unitedstatescommodityfunds.com/fund-details.php?fund=uso&pagetype=roll-dates&page=fund-details

Roll Dates are projected and subject to change without notice. Roll Dates are the expected dates on which the composition of the Benchmark Futures Contract is changed or ''rolled'' by selling the near month contract and buying the next month contract. The change occurs over four days.

Stockman thinks the ETF Market is going to implode.

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