PM End of Week Market Commentary - 7/8/2016

davefairtex
By davefairtex on Sat, Jul 9, 2016 - 9:21am

On Nonfarm Friday, gold rose +5.60 [+0.41%] to 1367.40 on heavy volume, while silver jumped +0.60 [+3.06%] to 20.35 on heavy volume also.  Metals were hit fairly hard at the time of the initial report, but buyers appeared almost immediately pushing prices of both gold and silver right back up - with silver behaving much more strongly than gold.

To me the surprising result was not the rise of silver, it was the bid under gold.  In recent times, a positive NFP report would end up hurting gold probably due to rate-rise considerations.  Now it seems as though every news item good or bad results in traders buying gold.  That's bullish!  It suggests to me that traders see no possibility at all of a rate increase regardless of how good the payrolls report happens to be.

On the week, gold climbed +22.50 [+1.67%], silver climbed +0.50 [+2.49%], GDX moved up +5.13%, and GDXJ rose +8.88%.  Platinum climbed +3.60%, palladium moved up +2.10%, and copper fell -4.39%.  Copper was a real fly in the ointment this week.  If not for the NFP report, silver most likely would have turned in a loss this week.  All the gains in silver came on Friday.

On the chart we see that gold broke out to new highs this week, and there was a $30 dip on Friday that was bought.  Volume on both the breakout and the rebound from the NFP-related selling were both strong.  The open interest for gold continues to climb (about 33k contracts just this week - 100 tons of paper gold) and still price continues to rise.  The bid for gold remains quite strong.

Silver's first couple days this week involve a high volume failed rally, which to me is always a sign of trouble.  That, combined with a change in trend for copper (it is now in a downtrend) suggested we probably will see lower silver prices going forward.  That was true right up until NFP Friday, where a 50 cent sell-off was almost immediately bought, followed by a steady rally through the reminder of the day.  Now its hard to know where we are; Friday saw a "bullish engulfing" candle print which is bullish 40-55% in this context.

Can silver continue to rally if oil and copper keep falling?  That's the question.  Just looking at the reaction to the NFP report, answer appears to be yes, but I remain cautious.  Silver is not as dreadfully overbought as it was previously, but it still remains in danger at RSI=82.

Miners

Miners spent most of the week moving higher, with the one-day dip on Thursday being bought on Friday.  Even a 3% discount brings those buyers out of the woodwork.  Not much else to say - that's bullish.  Candle print on Friday was a mid-range "bullish tasuki line" which marks a low 32-46% of the time.

The USD

The buck moved higher this week, up +0.61 to 96.33, aided by a -2.39% drop in GBP (to 129.50) and an -0.78% drop in the Euro, now hovering around 110.  BRExit and the Italian banking crisis continues to pressure currencies.

 

US Equities/SPX

US equities followed through on last week's rally, up +26.95 [+1.28%] to 2129.90, only 5 points shy of the all time high at 2134.72 set back in May 2015.   As with silver, all of the gains in SPX this week came on Friday following the strong NFP report.  A new high for SPX is likely, in my estimation.  It is not so very far away, after all.  VIX fell -1.57 to 13.20.  That's half of where it was just two weeks ago.

Here's the sector map; its a bit of a mixed bag.  Homebuilders and discretionary doing well is typical for a bull move, as is utilities near the bottom, but its odd to see financials and energy continuing to do poorly.  Something remains amiss with what would otherwise be a fairly bullish arrangement.

Name Chart Chg (W) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Gold Miners GDX 5.13% 81.94% rising rising rising rising ema9 on 2016-06-24 2016-07-08
Homebuilders XHB 3.35% -3.92% rising rising falling rising ma50 on 2016-07-06 2016-07-08
Telecom XTL 3.10% 8.28% rising rising rising rising ema9 on 2016-06-29 2016-07-08
Cons Discretionary XLY 2.22% 6.57% rising rising rising falling ma50 on 2016-07-06 2016-07-08
Healthcare XLV 2.12% 0.35% rising rising rising rising ema9 on 2016-06-29 2016-07-08
Industrials XLI 1.85% 8.54% rising rising rising falling ma50 on 2016-07-06 2016-07-08
Technology XLK 1.52% 9.77% rising rising rising falling ma50 on 2016-06-30 2016-07-08
Cons Staples XLP 1.46% 16.75% rising rising rising rising ema9 on 2016-06-29 2016-07-08
Materials XLB 1.29% 1.49% rising falling rising falling ema9 on 2016-07-08 2016-07-08
REIT RWR 1.20% 19.00% rising rising rising rising ema9 on 2016-06-28 2016-07-08
Financials XLF 0.79% -4.30% rising falling rising falling ema9 on 2016-07-08 2016-07-08
Utilities XLU 0.11% 26.32% rising rising rising rising ema9 on 2016-06-23 2016-07-08
Energy XLE -1.30% -7.39% rising falling rising falling ema9 on 2016-07-08 2016-07-08

Gold in Other Currencies

Gold rallied in most currencies again this week, doing a bit better in XDR (+30.6) because of the rise in the buck.  The only currency in which gold fell is JPY, which continues to climb against the rest of the world.  That's one I don't understand; how can the Yen continue to appreciate with the BOJ buying all those bonds with new money?  I just don't get the mechanism in play there.

Rates & Commodities

Bonds (TLT) broke to new highs this week again, up another +2.16%.  This week Treasurys were on their own in terms of "high yielding" things attracting money; the 20 year bond yield fell to a new all time low of 1.69%.  The 30 year is at 2.16%, also an all time low, as is the 10 year at 1.37%.  All the concern about foreigners selling US treasury debt and turning the dollar into confetti?  Not this week anyway.  Now imagine what happens with the EU really starts to have trouble.  Perhaps negative rates in the 10 year?

Here's what an all time low in the 30 year yield looks like.  If you own bonds, you are a very happy camper.

JNK rose too, up a big +1.52% making a new high for this cycle, with most of this week's gains coming on Friday.  It appears that all dollar-denominated debt is very popular this week, regardless of the drop in oil prices.  This is a new development.  Looks like risk on, at least from a US perspective.

CRB fell -3.65%, reversing last week's gains and making a new low.  Only the PM commodity component was up - energy, livestock, agriculture, and industrial metals fell this week.  While there was a modest recovery on Friday, CRB is now below its 50 MA - which is a serious warning shot across the bows of our 5 month commodity rally.

WTIC fell a huge -4.16 [-8.44%] to 45.12, breaking below 46 support and dropping below its 50 MA.  A big chunk of this week's losses came after Thursday's Petroleum Status report showed an inventory draw of "only" -2.1 million barrels.  "Not good enough" the oil traders howled and crude lost perhaps $2.00 in about 60 minutes.  At least that's how it looked to me when I was watching.  Market is selling off on nominally good news.  Most likely we have lower oil prices ahead.

Physical Supply Indicators

* The GLD ETF tonnage on hand rose +24.38, with 978.29 tons in inventory.

* Gold is not in backwardation; the two front month contracts differ by +3.60.

* ETF Premium/Discount to NAV; gold closing of 1346.80 and silver 19.77.

 PHYS 11.33 +0.53% to NAV [down]
 PSLV 7.82 +1.15% to NAV [up]
 CEF 14.85 -2.28% to NAV [up]

* Bullion Vault gold (https://www.bullionvault.com/gold_market.do#!/orderboard) showed no particular premiums for gold or silver.

* HAA big bar premiums are higher for gold [2.17% for 100 oz bars in NYC], higher for silver 1000 oz bars  [5.73% for 1000 oz bars in NYC], and higher for silver eagles at +16.02%.  The 1000 oz silver bar premiums are quite high for HAA - but another supplier had them for +2.75% over spot.

Futures Positioning

COT report covers trading up through Tuesday July 5th.  This includes the big failed silver rally on Monday & Tuesday.

Gold commercials added +11k to their short positions (current: 464k, record high in 2010: 485k) and sold -3.4k longs.  Managed money added +14k longs, which is a new record (300k).  Here's what that looks like in context.  Managed Money just keeps piling in.  Of course - so do GLD buyers and CEF buyers and PHYS buyers.  Its not all about managed money.

In silver, commercials added just +2.6k shorts, while managed money added +2.4k longs.  The net changes in the silver COT were surprisingly modest, but the overall concentration remains quite bearish.

Moving Average Trends [9 EMA, 50 MA, 200 MA]

This is a poster child for a PM bull market.  Juniors lead seniors, and silver leads gold.  While a lot of fuss happened during the week, by the end, everything remains in place in terms of a bullish picture for PM.  123% 52w change for the junior miners.  That's pretty good, but if you bought them in 2011, you're still severely underwater.  Buying the highs = a bad idea.

Name Chart Chg (W) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Junior Miners GDXJ 8.88% 123.88% rising rising rising rising ema9 on 2016-06-22 2016-07-08
Silver Miners SIL 6.57% 106.62% rising rising rising rising ema9 on 2016-06-03 2016-07-08
Senior Miners GDX 5.13% 81.94% rising rising rising rising ema9 on 2016-06-24 2016-07-08
Platinum PL.CW 3.60% 7.58% rising rising rising rising ma50 on 2016-06-30 2016-07-08
Silver SI.CW 2.49% 32.40% rising rising rising rising ma50 on 2016-06-08 2016-07-08
Gold GC.CW 1.71% 18.08% rising rising rising rising ema9 on 2016-06-24 2016-07-08

Gold Manipulation Report

There were a ridiculous number of spikes - in both directions - that occurred on Monday and Tuesday of this week in silver.  First on Monday, silver spiked higher repeatedly - it is said, due to commodity traders in China deciding they wanted to jump on the silver train.  Then on Tuesday, the reverse happened - repeated spikes down took prices lower ending up with silver being "mostly unchanged" for the two-day period, but printing a failed rally for that time.  Chart ended up looking quite bearish.  Jury is out as to whether or not this will mark the high.

Summary

I think we're still dealing with a market struggling to find a direction.  When risk assets rise, and copper & oil fall, that's two forces pulling in opposite directions - rising copper and oil prices being typical signs of growth in the economy.  That probably won't last too long.  While this is going on, bonds and stocks are rallying together, and junk debt rallies while crude falls.  I can't see that lasting too long either.

The gold/silver ratio moved a bit lower, down -0.58 to 67.19, with all of that move happening on Friday.  That's bullish.  GDX:$GOLD rallied, and looks bullish, GDXJ:GDX rallied as well and also looks bullish.   All systems go from the ratios.

COT report for both gold and silver shows more builds in commercial short positions.  COT grows ever more bearish, but managed money continues to load up long.  Managed money continues to win the struggle.  It appears that money continues to pour into the PM space.  What, you'd rather have a bond where you pay the government?  Gold looks infinitely better - especially now that its going up again.

Gold and silver big bar shortage indicators show no signs of shortage.

To me, it appears that there is a lot of money out there looking for a zero-penalty home - and the budget for suppressing price moves in gold appears to be significantly lower than that potential money flow looking for a zero-penalty safe haven.  The increase in OI at COMEX for gold cost about $6.4 billion for this week.  There is 11 trillion dollars just in the negative-yield bonds alone.  11 trillion >> 6.4 billion.  As in, factor of 1000.

The current problem on deck is the Italian banking situation.  This shows up in the share prices of the banks.  Although risk assets rose, the bank index is still dramatically underperforming the SPX, and some banks in Europe are underperforming the bank index.  Just look at a chart of DB:$BKX and you'll see what I mean.  All you had to do was buy the bank index, and then short DB, and you'd be insulated from changes in the banking sector overall while making yourself a 60% gain - assuming you put the trade on in 2014.

Do I expect the ECB to order the Italian banks to die, thus precipitating a banking crisis in the Eurozone?  No.  There will probably be some negotiated can-kicking settlement where the taxpayers foot at least part of the bill in some clever new way.  Perhaps the ECB will turn into a "bad bank."  All we are concerned about are the terms.  Bank stocks will bounce when this happens, more likely than not, but banks will remain problem children.  No economic growth = no loan growth, and ZIRP means continuing problems for bank profitability.  Its not a great sector to be in right now.  I'd sell that rally.

From the gold-owner's perspective, we have ZIRP and effective negative rates as far as the eye can see, with hints of banking crisis popping up here and there, and a side dish of uncertainty courtesy of BRExit.  Gold really likes this environment.  I don't see anything that changes this situation coming anytime soon.

Current view from the computer:

  • Uptrend: gold, silver, miners, TLT, USD, SPX, DJIA.
  • Downtrend: copper, and crude.

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9 Comments

Penny551's picture
Penny551
Status: Silver Member (Offline)
Joined: Nov 8 2012
Posts: 154
Fine Work, Dave!

Way to make some sense out of the many cross-currents in the markets right now....it's certainly not easy piecing everything together. 

 

 

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5967
The most important signal...

Look, there cannot be any doubt about one related set of facts; there were heavy buyers for equities on Friday and there were heavy buyers for bonds on Friday.

And not just long-dated sovereign bonds, but JNK and virtually every class I could examine, and that includes "bond-like" dividend stocks.

So this screams "LIQUIDITY!" to me, and says that somehow, from somewhere, this is a very, very liquid ""market.""

But the money flows are perplexing to say the least.  As you might expect, gold ETFs have seen persistent and decent inflows.  Okay. 

But how do we account for the equity outflows even as stocks keep mysteriously powering higher?

NEW YORK, July 7 Investors poured the most money into U.S.-based funds invested in precious metals since February, adding $2 billion to these funds in the latest week, data from Thomson Reuters' Lipper service showed on Thursday. 

SPDR Gold Shares was especially popular, taking in $1.4 billion over the week. "Investors had been down on gold for such a long period of time," said Tom Roseen, Lipper's head of research services. Now the metal is a top performer. Precious metals funds posted strong gains in four of the past five weeks, rising more than 4 percent over the most recent week Lipper measured. The latest week marks the 10th straight week of inflows for gold funds.

Safe-haven U.S. Treasury funds also reeled in $864 million, their third straight week of inflows, according to Lipper.

Investors pulled $1.3 billion from financial-sector funds during the same week - the largest outflows since the week ended July 15, 2015 - as yields on long-term U.S. Treasury debt sank to record lows.

Bank revenues are curbed by persistently low rates.

Taxable bond funds took in $4.1 billion, following strong weeks for corporate-debt funds.

Stock funds posted $1.4 billion in outflows. The optimism of exchange-traded fund investors that the Brexit vote might not derail stocks was nonetheless overwhelmed by a long-running trend of withdrawals from stock mutual funds. U.S.-based stock mutual funds posted $6.1 billion in outflows in the latest week, their 17th week of cash withdrawals, according to Lipper data.

Stock ETFs took in $4.6 billion in the latest week ended Wednesday, according to the data. "The flight to safety was a bit mixed," said Roseen. Some people, he said, "have finally breathed a sigh of relief that Brexit was not as bad as they anticipated."

Funds focused on domestic shares took in $1.5 billion, breaking a streak of outflows that lasted nine consecutive weeks.

Funds focused on international stocks posted $2.9 billion in outflows. European stock funds posted $1.4 billion in outflows during the week, their largest withdrawals in Lipper's database since May. Low-risk money market funds posted $34 billion in outflows after $25 billion inflows the week prior, which Roseen said could be attributed to end-of-quarter cash movements by investors.

(Source - Reuters)

So gold and bonds saw inflows, fine.  that makes sense.  But the net for equities was outflows.  And not just for the week, but for 17 weeks in a row.

Hunh.

So then who's buying?

Well, these next charts pretty much tell us, and I think the recent Fed stress test decision that unlocked $50+ billion in bank equity buybacks has some explanatory power here:

(Source)

But if the big money is selling, and there's no appreciable buyers besides corporations and momentum traders, then this has all the signs of a massive distribution play.

FWIW, I happen to think February scared the crud out of the central pranksters and they silently flooded the world with liquidity to rescue it one more time, and here we are.  Good luck trying to make sense of this mess.  The cross currents and signals are wildly choppy and messed up.

 

Penny551's picture
Penny551
Status: Silver Member (Offline)
Joined: Nov 8 2012
Posts: 154
timely Bill O'Neill quote..
"Normal liquidation near the market peak will usually occur on three to six specific days over a period of four or five weeks. In other words, the market comes under distribution while it’s advancing! This is one reason so few people know how to recognize distribution. After four or five days of definite distribution over any span of four or five weeks, the general market will almost always turn down."
I'm re-reading his book, and came across this right after reading your comment above....timely. 
davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5681
another option besides liquidity

Chris-

Liquidity as an explanation might make sense for the immediate post-BRExit market move, but I do not think it makes sense regarding the Friday Nonfarm Payrolls market move.  Friday's move seems more driven by a change in the macro story - "things in the US aren't as bad as we were worried they might be after last month's NFP report."

Some good information on the fund flows there - stuff I did not know (and don't closely follow, unfortunately).

It does appear that retail is continuing to bail out of the market.  Mutual funds = retail.  I'm less sure who ETFs are owned by.  Pension funds?  I suspect they are the primary ones who have been jumping back in.  They are desperate.  Absolutely they can't miss out on any possible rally given the situation in bonds.

The move in JNK was the biggest surprise for me.  That just seems crazy in light of the drop in oil - and in the shale drillers too.

Last point: buying a bond with a negative rate doesn't necessarily imply selling that bond to someone else.  It might just be a preference; a way to park money in a potential new currency that doesn't involve taking the risk of a bank deposit.

If you own a Bund, and the EZ blows up, you will probably make more on the Euro-DM conversion than you will lose on the negative rate, and you won't have to face the DB denouement.

Maybe think of it as a relatively cheap "call option on the DM."

stevejermy's picture
stevejermy
Status: Bronze Member (Offline)
Joined: Dec 13 2011
Posts: 51
CONFIDENCE

Great report, and subsequent comments, too.

But perhaps the big take away is not that our populations at large are loosing confidence in our central banks and our fiat currencies, not yet at least. But rather that the broader investment community is beginning to do so, hence the difficulty now of smashing down the price of gold and silver?

If so, the big question is how long it takes for this to spread to the broader investment community, and then to the people?

Steve

Mark Cochrane's picture
Mark Cochrane
Status: Diamond Member (Offline)
Joined: May 24 2011
Posts: 1227
So much for that correlation

One minute correlation with crude prices was seemingly the most critical market story then this. Crude is so yesterday. I wonder when those oil prices are going to start biting again.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5681
SPX 2137.16: new all time high

I'm sure this will absolutely delight Chris, but SPX made a new all time high today.  Industrials and tech led, sickcare trailed.  (Every time sickcare does badly, inside, I am happy.  We all have our "things" I suppose.)

Anyhow, new high.

There are long opportunities out there, but I know talking about longs here is not so popular.  Think: oil services and refineries - a follow-up on Art .  My new code has a couple of suggestions: I've bought them already, so if you buy, realize you're helping me out.  :-)

BRS: this stock is down 85% from its high, the company supplies aviation services to the oil & gas industry.  My code has this as one of its top picks.  Might drop another 50% from here - but will also probably be a threebagger if/when oil recovers.  It is moving sideways while oil continues to drop.  That's bullish.  Warning: the monthly chart looks simply horrid.  On the daily you can see a triple-bottom.

WNR: a trader I respect doesn't particularly like this refiner, but my code likes it for some reason.  Most likely, that is because it was beaten down more than the others.  It has a nice 7% dividend, but who knows if that will remain in place.  It has been chopping sideways recently after being down 50% from its highs.  It too has moved sideways even though oil continues falling.  That's a bullish sign.

Code expects you to hold these stocks for a few years.  These are buy & hold, at least until oil moves back up to $70/$80/bbl.

I'm not a financial advisor, YMMV, caveat emptor, etc.

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 3936
Got it.

XDR means the Special Drawing Rights on the gold foreign exchange chart.  (The light green line. )

It looks as though no one has full faith in whatever scheme they are peddling. 

Cornelius999's picture
Cornelius999
Status: Gold Member (Offline)
Joined: Oct 17 2008
Posts: 381
These tips are very much

These tips are very much appreciated Dave.

Thanks

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