Rosenberg Defines European Insanity

Wednesday, June 13th, 2012

The situation in Europe goes from bad to worse. Gluskin Sheff’s David Rosenberg is back to his bearish roots as he remind us that ‘throwing more debt after bad debts ends up meaning more debt‘. As he notes, the definition of insanity is (via Bloomberg TV):

When you realize that of the potential $100 billion to spend, 22% of that has to be provided by Italy and their lending to Spain is at 3% but Italy has to borrow at 6%. They have to lend to Spain $22bn at 3% – it is just madness. Everybody is getting worried again. The solution that they seem to have come up with seems to be worse than the problem in the first place.

As we have pointed out vociferously over the past few days, even though the assistance is being earmarked for the banks, the Spanish government assumes the responsibility and so this once ‘low national debt’ sovereign is following in Ireland’s footsteps as its debt/GDP takes a 10pt jump to 89% (based on the government’s data) and much higher in reality (when guarantees and contingencies are accounted for). As Rosie explains succinctly, this is right at the Reinhart-Rogoff limit of 90% at which debt begins to erode the nation’s economic fabric.

It is probably not long before this credit – two notches away from junk and having to raise money at 6.75% when its economy is contracting at nearly a 2% annual rate – is going to require external assistance as it follows Ireland onto the sidelines.

The situation in Europe indeed goes from bad to worse.

Tags: Bad Debts, Contingencies, David Rosenberg, Definition Of Insanity, Economic Fabric, External Assistance, Few Days, Footsteps, GDP, Gluskin Sheff, Guarantees, Madness, National Debt, Notches, Roots, Rosie, S David, Sidelines, Sovereign, Spanish Government
Posted in Markets | Comments Off

Welcome Back (Kotter or Otherwise)

Tuesday, May 29th, 2012

U.S. investors return from the long weekend to find futures up and shell games continuing across the pond.   What has been interesting during almost the entire month of May is despite a market that has stunk during normal hours, a lot of buying by ‘someone’ has been happening in the thinly trading futures market.  This has led to a lot of frustration for those seeking a bottom who wish to find a ‘wash out morning’ which can never happen with that persistent bid.   Anyhow, looking back at a chart I posted late last week not much changed Thursday and Friday, nor will today barring a massive rally.

The S&P 500 has yet to claim even a 38.2% retracement (Fibonacci talk) of the drop from recent peaks, which would be near 1340.  This appears to be an area those of a bearish bent are waiting to make their stand.   So the chart is a few days old but the roadmap is not any different.  Until (if and when) we get nearer to 1340 we remain in the white noise area, waiting for more interesting levels to surface.  Very oversold conditions are being worked off, and a ‘bear flag’ appears to be forming.   The longer the market stays under this 1340-1350 level the more bearish it would appear to be.  That said, massive central bank intervention – which can be announced at any second of any day – makes all charts moot points.

Over in Europe some of the news is getting downright silly.  Greece is recapitalizing their banks with … what money?  Spain is trying to get around collateral rules by proposing a shell game that would have made a major Las Vegas magician act proud.

• Spain may recapitalize Bankia with Spanish government bonds in return for shares in the bank which last week asked for rescue funding of 19 billion euros ($24 billion), a government source said on Sunday.  Bankia could use the sovereign paper as collateral to get cash from the European Central Bank, forcing the ECB to get involved with restructuring Spain’s banking sector.
• “The biggest problem here is that the ECB could object. That’s a legal issue, but technically it is possible,” said Jose Carlos Diez, economist at Intermoney Valores.

Whatever the shell game, the key is Spanish yields are approaching mid 6%s, which means the market is not buying the shells.  So why are futures up? Who knows – fatigue, hopes for intervention, technical reasons, QE3 announcement in 3 weeks, Chinese easing sooner rather than later, etc etc.  We are not seeing any glee in the U.S. bond market or currency which are the more important tells.  One could argue the U.S. dollar has indeed become parabolic – which is a bit scary.

Back in the U.S. some economic news will provide a “respite” from Europe – mainly Thursday and Friday with the ADP employment data/Chicago PMI (Thu) and monthly jobs data/ISM manufacturing (Fri).  Chinese PMI also will be released, but at this point one does not know whether to root for bad (more intervention!) or good.

Bottom line, keep an eye on the bond and currencies market – the equity markets seem a sideshow for now as we play out the latest iteration of “waiting for intervention”.   That said, a reminder than any +1.7% move on substantial volume this week would trigger an IBD “Follow Through Day” as it would come in the 4 to 10 day window from last Monday’s “Day 1″ of a rally attempt.

Tags: Banking Sector, Bear Flag, Central Bank Intervention, Collateral, ECB, Few Days, Frustration, Futures Market, Government Bonds, Government Source, Magician, Massive Rally, Restructuring, Roadmap, Shell Game, Shell Games, Spanish Government, Trading Futures, Welcome Back Kotter, White Noise
Posted in Markets | Comments Off

Chinese, European Data Continues to Weaken as Market Potentially Forming New Bear Flag

Thursday, May 24th, 2012

First we’ll go to the technicals.  Back in mid April I had opined a ‘bear flag’ formation was being created. [Apr 17, 2012: Potential Bear Flag Forming]  But the market being the difficult beast it is, head faked everyone and rather than a break down from said flag it first went UP and nearly touched yearly highs.  This caused everyone to think the bear flag had failed…. only to lead to a horrid May in the market.  Generally a bear flag will resolve relatively quickly but the longer that one lasted the more doubt it created and potentially transitioned into a market that was creating a new range before a new move up.  Hence, why it was so tricky.

I speak of this only because we potentially are forming a new bear flag.  After extreme oversold conditions the markets finally held a previous low Monday and rallied.  This had been expected for a few days but anyone trying to catch the knife last week had their fingers chopped off… repeatedly.   We had mentioned a potential bounce level to 1338 minimum [May 22, 2012: Market Bounce Arrives - How Durable?] but as of Tuesday mid day the rally only hit 1328 as it was rejected by the quickly falling 10 day moving average.  Then yesterday started horribly as news surfaced that discussions / preparations for a Greek exit from the EU are formally starting behind the scenes, and it really looked like the bears would take charge.  Instead it was a trap, as rumors out of Europe that (a) Merkel supports backstopping all EU bank deposits (b) Italy and France support Eurobonds [May 22, 2012: Are Eurobonds Coming?] and/or (c) pick your rumor, hit.

The larger picture is this environment is akin to summer 2010 and latter 2011 where headline rumors, European comments, intervention hopes dominate the landscape and the market is herked and jerked around while in a downward path.   The action is violent in sharp contrast to January and February of this year.   Stocks are moving en masse as correlations return, and individual stock picking is nearly useless again.  Meanwhile the safe havens – the U.S. dollar and Treasury bonds, surge.  Therefore, unless you know the rumor/intervention hope of the day ahead of time it’s really not a place anyone with intermediate term views is going to risk a lot of capital.

Speaking of the bear flag, yesterday’s sharp rally to take markets out of steep losses to very modest gains helps define a current potential bear flag range of about 50 points: S&P 1290 to 1340.  While we did not reach the 1338 in the S&P 500 I am still going to include that in the range as that is a multi month resistance/support level the market has been dealing with throughout the year.   So just as I said in mid April what happens WITHIN that range means nothing.  The market could be UP 25 S&P points or DOWN the same, but as long as it’s within that range it is only a basing activity and nothing but “white noise”.  And until further notice it is has the potential of a new bear flag forming.   Of course we sit almost smack dab in the middle of said range today.

If you turn this chart upside down you would call this very bullish…. we’d be saying after a large move up, the market is going sideways for a few days to digest the move.  Hence, it is only fair to lean bearish when we have the inverse situation.  The market can always differ and change things – technicals are only a roadmap and in a world of massive intervention they can quickly be obliterated as said roadmap.  So if we hear that to stop bank runs every single cent of bank deposit in the Eurozone will be backstopped by the ECB or “Germany” (with what money???) you will get a ‘face ripper’ type rally I am sure.  You can see that from yesterday where nothing but rumors got the Dow up 200 points from the low.  We repeat the same pattern year after year now, downfall, bad news, crisis, intervention, rally.  Rinse, wash, repeat.

As for economic news overnight – it continues bad.  China continues to weaken, but I think commodities have been telling us this for months.  Expect more easing in the future although they cut reserve requirements 50bps a week and a half ago.  And Europe data is also very weak, but this should come to no surprise to anyone.  I think some/much of this is ‘priced in’ the market but the mess that is the Eurozone remains the key issue.  Everyone awaits the authorities to swoop in and “fix it” (kick the can).  My thesis that QE3 is arriving has not changed since last fall, and is only being strengthened by the day.  In fact we might get coordinated global central bank action since the level of worries are global – we’ll see in a few weeks.

• The euro zone composite PMI, a combination of the services and manufacturing sectors and seen as a guide to growth, fell to 45.9 this month from April’s 46.7, its lowest reading since June 2009 and its ninth month below the 50-mark that divides growth from contraction.
• Markit, which complies the PMIs, or purchasing managers indexes, said the reading was consistent with gross domestic product, which stagnated in the first quarter, falling by at least 0.5 percent across the region in the current quarter.
• “The flash PMI figures for May look horrible and provide a clear warning that euro zone GDP will almost certainly show a contraction in Q2 after stagnating in Q1,” said Martin van Vliet at ING.
• Across the channel, official data showed Britain’s economy shrank more than first thought between January and March, after the deepest fall in construction output in three years, while government spending made the biggest contribution to growth.
• PMI data from Germany, Europe’s largest economy, showed its manufacturing sector contracted at a far greater pace than was expected, and its service sector saw minimal growth. In neighboring France, both sectors contracted faster than predicted by most economists.
• German business sentiment also dropped for the first time in seven months in May, the Ifo think tank said, missing even the most conservative forecasts, in a sign that Europe’s largest economy is vulnerable to euro zone turmoil despite holding up well until now.
• HSBC’s Flash China PMI, the earliest indicator of China’s industrial sector, retreated to 48.7 in May from a final reading of 49.3 in April. It marked the seventh straight month that the index has been below 50.  ”The series of highly disappointing April activity data – exports, imports, industrial production and retail sales indicators all fell short of even the most pessimistic forecasts – the first gauge for economic activity in the current month is a further signal that internal and external headwinds are still biting into economic momentum,” said Nikolaus Keis at UniCredit.

Tags: Bank Deposits, Bear Flag, Bears, Beast, Bounce, Doubt, Downward Path, Environment, Eurobonds, Europe, Few Days, Fingers, Italy And France, Landscape, Merkel, Mid Day, Moving Average, Rally, Sharp, Technicals
Posted in Markets | Comments Off

The “Great Bond Selloff” of 2012

Thursday, March 15th, 2012

There has been a lot of talk since Tuesday afternoon of the “great bond selloff”…  this started post FOMC meeting and supposedly was due to the Fed’s “upgrade” of the economy in the statement.  The same upgrade that will do little to stop them from continuing a new round of easing once Operation Twist is over.  But it has a bunch of people in a huff.

Short term the move is relatively dramatic for such a large and deep market.  I will use iShares Barclays 20+ Year Treasury Bond (TLT) ETF to demonstrate but there are any number of maturities I could use; this is just a widely used instrument so a good example.   Looking at a 4 month chart, a big change appears afoot.

However, if we pull the chart back some to say 8 months, we simply see the price has moved to the end of a longer term range.  Indeed, this ETF is not even at October lows (remember October 2011 was one of the biggest up month’s for equities in many years), not to mention levels it was at last summer.

That said, it’s a sharp move in the span of a few days and since U.S. Treasuries yield so little the losses on the underlying can wipe out gains from interest very quickly.  On the flip side, Treasuries were generally an incredibly lucrative asset class in 2011 returning far in excess of equities.  So for now, it simply looks like a give back, and not the “bursting of a bond bubble” as many are screaming.

Tags: asset class, Barclays, Economy, Few Days, Flip Side, Huff, Losses, Lot, Lows, Maturities, People, Selloff, Sharp, Span, Term Range, Tlt, Treasuries, Tuesday Afternoon, Year Treasury Bond
Posted in Markets | Comments Off

Breadth is Narrowing

Wednesday, February 22nd, 2012

Other than that rally last Thursday that caught a lot of technicians flat footed (i.e. post the Apple reversal) the breadth in this market has been relatively poor the past 5 sessions or so.  The Russell 2000 has been lagging the major indexes dominated by large caps, and my watch lists have contained far more red than green.   Some people have been calling it the NBA market (“Nothing but Apple”) but it’s been a bit broader than that – i.e. Microsoft has acted well, and some groups are still working.

A bearish take on this is of course what I cited above – breadth is narrowing which usually happens near tops.  Fewer and fewer stocks are pushing the market forward; many more are faltering.  The bullish take is “a correction is happening under the surface while the indexes hold in.”  Obviously this market has not rewarded a bearish take in a very long time.  So until we see at least a break of the 20 day moving average on a few major indexes it is difficult to continue to ride the bear, since he runs into a buzz saw every few days.

That said the transports I cited this morning continue to suck wind; the index is down another 1.6% and now sits right at its 50 day moving average.  Oil continues to go up (at what point does that stop being “bullish”?).

While the action in some of the giants, especially tech, remains impressive – the market has become much more difficult the past month under the surface.  A lot of stocks rally a few days and then give much/all of it back in 1 session.  They churn while the big boys rally and take the indexes with them upward.   To put it in perspective the NASDAQ contains about 3000 stocks but 10 of them are 35% of the weighting.  It’s a different story than the first three weeks of January where just about anything that was not a leadership stock of late 2011 (i.e. utilities, boring healthcare, consumer staples) was rallying together.

Showcasing the lack of breadth, we are actually lower on the Russell 2000 than we were on jobs report Friday….

…. but you wouldn’t know it as long as you piled into big cap tech

Disclosure Notice

Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog

Tags: Big Boys, Breadth, Buzz, Caps, Consumer Staples, Different Story, Few Days, Giants, Healthcare Consumer, Indexes, Last Thursday, Long Time, Moving Average, Nasdaq, Nba, Rally, Russell 2000, Sessions, Stocks, Transports
Posted in Markets | Comments Off

Dow Rings in 2012 With a “Golden Cross”

Thursday, January 5th, 2012

I often refer to the 50- and 200-day moving averages in my commentary as indicators of the intermediate and primary trends respectively. In a perfectly bullish scenario the price series should trade above both the 50- and 200-day lines, with both these lines rising, and also with the 50 DMA trading above the 200 DMA.

In the case of the Dow Jones Industrial Index, the 50 DMA has just breached its 200 DMA, thereby forming a so-called golden cross. This is the first time the 50-day line trades above the 200-day line since August 2011. However, as always with charting signals, it is wise to wait a few days in order to guard against a false break.

The Dow has experienced 20 golden crosses over the last 50 years. Although historically the Dow traded in positive territory after six months in 65% of the instances following a golden cross, the average return of 2.9% is not all that exciting as it lags the 3.5% average of all six-month periods (research via Bespoke Investment Group).

As far as the S&P 500 Index, the Nasdaq Composite Index and the Russell 2000 Index is concerned, the 50 DMAs were still trading below the 200DMAs by 1.56%, 1.69% and 4.34% respectively as of yesterday’s close.

Source: Arthur Hill, StockCharts, January 4, 2012.

Tags: Amp, Arthur Hill, Crosses, Dma, Dmas, Dow Index, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Index, Few Days, Golden Cross, Instances, Investment Group, January 4, Moving Averages, Nasdaq Composite Index, Russell 2000 Index, Signals, Six Months, Stockcharts, Stocks
Posted in Markets | Comments Off

Doug Kass: Being Out of the Market is the Most Crowded Trade

Thursday, October 13th, 2011

A few days ago Doug Kass asked 10 questions for the bulls, and he now asks 10 questions addressed to bearish investors. The answers to these questions could help us determine the outlook for equities over the balance of the year and into 2012.

Here is his question on valuation:

“Over the last 50 years the S&P 500 has averaged 15x (while the yield on the 10-year U.S. note averaged 6.67% during that period). Today, the market’s multiple is about 12x on projected 2011 profits of $95 per share (while the yield on the 10 year U.S. note is only about 2%). The risk premium (earnings yield less corporate bond rates) is at a multi-decade high, placing stocks statistically (very) inexpensive on a quantitative basis. In fact (relative to interest rates), the U.S. stock market seems to be discounting 2012 S&P profits of around $60 a share, a level of profits that seems incomprehensible.

“Given that interest rates will be low as far as the eye can see, shouldn’t we give interest rate dependent valuation models more weight, and shouldn’t we be attracted to a 12x multiple within the context of a 2% 10-year bond yield?

“Finally, stocks are even cheaper today than in late 2008 relative to sales, cash flow and earnings.”

Click here for the full article.

Also, see the Yahoo! Finance interview with Kass below.

Sources: The Street, October 10, 2011 and Yahoo! Finance, October 12, 2011.

Tags: Amp, Bond Yield, Bulls, Cash Flow, Corporate Bond Rates, Decade, Doug Kass, Earnings, Few Days, Incomprehensible, Interest Rate, interest rates, Nbsp, Profits, Quantitative Basis, Risk Premium, Stocks, U S Stock Market, Valuation Models, Yahoo Finance
Posted in Gold, Markets, Outlook | Comments Off

Preparing for a Greek Default (Hussman)

Sunday, September 18th, 2011

Preparing for a Greek Default

by John P. Hussman, Ph.D., Hussman Funds

The yield on 1-year Greek government debt ended last week at 110%, down slightly from a mid-week peak of 130%. Even with the pullback, the Greek yield structure continues to imply default with certainty. All the markets are really quibbling about here is the recovery rate – what percentage of face value investors can expect to obtain post-default. That figure was still hovering near 50% as of Friday, but was a bit higher than we saw a few days earlier.

Despite a Greek 1-year yield that is already over 100%, it is still possible to kick the can down the road for another few months with another bailout, but the costs of that would now be extraordinarily high because of the low expected recovery rate. Much better to provide the funds to a post-default Greece, or to use them to recapitalize the banking system after losses that now appear inevitable.

Doureios Hippos: Greek 1-year yields – Quidquid id est, timeo Danaos et dona ferentes.

As a refresher on how all of this works, the following chart appeared years ago in the Economist, a chronicle of the frantic bail-outs in the months preceding the default of Argentine debt (which amounted to about $81 billion. Needless to say, the numbers involved in a potential Greek default are much larger, but the pattern we are seeing in Greece is identical to the signature of other historical sovereign defaults (see Uruguay, Russia and other countries as well ) – a sustained rise in yields, coupled with official statements about the “impossibility” of default, multiple bailout efforts that quickly fail, culminating in a vertical spike in yields (toward the inverse of the expected recovery rate, minus 1).

The case of Argentina is instructive because it was in a situation much like that of Greece. Argentina’s currency was both pegged and officially convertible into the U.S. dollar, and most of Argentina’s debt was denominated in U.S. dollars, creating a situation where its debt burden was in the form of a currency that it effectively could not print. The subsequent default was accompanied first by an abrupt devaluation of the peso to a new peg, and eventually to complete abandonment of the pegged exchange rate.

From the history of sovereign defaults, we can already create something of a roadmap of the financial crisis that appears about to unfold, and the associated choices involved.

Suppose first that Greece agrees to implement new austerity measures and receives another tranche of bailout funding. We already know that applying severe budget austerity in an economy that is in depression (as Greece essentially is) does not materially close the budget deficit, but instead produces further economic weakness and revenue shortfalls. The past year has been a clear example of that. By the end of the year, even with new bailout funding, Greece will have a debt-to-GDP ratio approaching 180%. This is an impossible debt burden to service, and would be even if interest rates in Greece were only a few percent. New bailout funding here means that we’ll observe more rioting in Greece as new austerity measures are implemented, the Greek economy will largely shut down, and within a few months, we’ll be facing the default issue again but at an even higher debt-to-GDP level and even lower anticipated recovery rates.

Thus, a bailout today does not avert default, but at best defers it to a later date, and squanders funds that could otherwise be used to stabilize the European banking system once that inevitable default occurs.

Of course, there is the implausible option for stronger countries such as France and Germany to literally pay off half of the government debt of Greece, taking those debt burdens upon themselves. But this clearly would not be tolerable politically, and would invite similar expectations from other teetering Euro-zone countries such as Portugal, undoubtedly also encouraging them to completely abandon any remaining fiscal discipline.

So Greece will default, either now or within several months. In response, three actions will be critical: preventing contagion, preserving the euro, and stabilizing the banking system.

Tags: Argentina, Bailout, Banking System, Bonds, Currency, Economist, Face Value, Few Days, Government Debt, Greece, Greek Government, Hippos, Hussman Funds, Impossibility, Losses, Official Statements, Pullback, Signature, Spike, Timeo Danaos Et Dona Ferentes, Value Investors
Posted in Bonds, Brazil, Markets | Comments Off

The Case for Silver: Buy!

Wednesday, June 15th, 2011

I am on record calling the silver market a Hunt Brothers type of market a few days before the market crashed. Well, it has happened. After soaring to a peak of $49.79 per ounce on 26 April, the silver price crashed to a low of $33.01 on 18 May.

With silver trading at a notch below $35, the question is: whereto now? In my analysis of the platinum market I compared the platinum price after the Tohoku quake in March this year to the platinum price after the Kobe quake in 1995. I did the same with the silver price, and wow, see what emerged!

Sources: I-Net Bridge: Plexus Asset Management.

The silver price reverted to the levels prior to the Tohoku disaster and has since tracked the price movements of the Kobe disaster. It is most interesting to note that the silver price took off a few days after Japan’s twin disaster. Why? I ask myself.

Sources: I-Net Bridge: Plexus Asset Management.

The only argument I can come up with is that sudden demand caught the market seriously short. This sudden demand could have emanated from the crisis in the MENA region as the affluent people in those countries took refuge in silver as a store of value that they could move across borders. In addition to that, investors probably took fright at the jump in energy prices as a result of the MENA situation and rushed into the silver market. I think the earthquake in Japan perhaps led to fears that silver scrap recovery could also be severely hampered as the annual scrap recovery is equivalent to 29% of annual mining production.

It seems to me that, as in the case of industrial metals, the outlook for silver is heavily dependent on China. China’s fabrication demand for silver amounted to 21% of world fabrication demand ex coins last year. The country’s fabrication demand over the past five years has grown in line with the GDP at a rate of 11% per year. At a growth rate of 9% per year it means that China’s fabrication demand will swell by 88 million ounces from the current 163 million to 251 million ounces by 2015. Mining production over the past five years has grown by 4% per year. If I assume that the growth rate will be maintained, it means the country’s mining production will rise by 22 million ounces from 98 million ounces in 2010 to 120 million ounces by 2015. A net shortfall of 66 million ounces! Yes, that excludes scrap recovery and investment demand.

Sources: CPM; Silver Institute; Plexus Asset Management.

China used to be a net exporter of silver in the past mainly due to sales from government stockpiles. The situation was reversed in 2007, though, and the country’s imports are currently around 11% of total world supply.

Sources: CPM; Silver Institute; Plexus Asset Management.

From my research a very interesting fact came to the fore. The CPM Group’s seasonality index for silver has a very close relationship with the seasonality of China’s CFLP manufacturing PMI! That explains the importance of China in the world silver market.

Sources: CPM; CFLP; Li & Fung: Plexus Asset Management.

With this year’s trend of China’s CFLP manufacturing PMI being significantly lower than the apparent normal seasonal pattern, it shows how artificial the jump in the silver price was in March and April.

Sources: CFLP; LI & Fung; Plexus Asset Management.

Now we are back to normal, but we are not in normal times yet. The manufacturing sectors in China and the rest of the world were severely affected by Japan’s disaster and it is thus unlikely that the normal seasonal patterns will repeat themselves, at least not over the next three to four months. The rebuilding of Japan is likely to rub off positively on the rest of the globe and especially on China’s manufacturing industry. It seems to me that the normal seasonal lull in China’s manufacturing activity has been brought forward by Japan’s disaster. Will Japan’s recovery reinforce the normal strength from September through end-December?

But what are the major market players up to?

It normally hits the headlines about what investors in physical silver ETFs are doing. My research however indicates that the silver price leads the physical holdings of ETFs by approximately four days. It also seems to me that the number of players in the physical silver ETF market as represented by the ETFS Physical Silver Shares is limited as the physical silver held by the custodian are normally unchanged for nearly a week. What the graph below is telling me is that the recent rise in the price of silver indicates that an inflow into physical silver ETFs can be expected in the next few days.

Sources: etfSecurities; I-Net Bridge; Plexus Asset Management.

To me the most important factor to watch in the silver market to get a lead where the silver price is heading is the open interest in derivatives in silver on Comex. The commitment of traders is given on Tuesdays. In the graph below I plotted the open interest (futures and options combined) with the closing price of silver the week prior to the announcement of the open interest. Amazing stuff! The week before the silver price plummeted in the closing week of April, the open interest fell by 24 000 contracts equal to 120 million ounces of silver! Somebody made big bucks at the expense of others.

Sources: CFTC; I-Net Bridge; Plexus Asset Management.

What the relationship suggests is that when the open interest is trending upwards you should be buying silver and conversely, when it trends down you should cut your longs and if you are brave enough you can even short the market with some confidence. The current situation is a clear bottoming of the open interest and that, together with increased interest in physical silver interest is indicating to me that the current bounce in the price of silver is likely to be extended.

I am therefore as positive on silver as on platinum. Buy!

Tags: Asset Management, Borders, China China, Coins, Earthquake In Japan, Energy Prices, Few Days, GDP, Hunt Brothers, Industrial Metals, Kobe Quake, Mena Region, Notch, Ounce, Platinum Market, Platinum Price, Silver Market, Silver Price, Tohoku
Posted in ETFs, Markets | Comments Off

S&P 500 – the “soldiers are deserting,” says Richard Russell

Friday, May 20th, 2011

Where breadth goes, the market usually follows,” goes an old market saying. Breadth indicators are useful tools to assess the inner workings of the market’s rallies or corrections, and are used to identify strength or weakness behind market moves, i.e. to assess how the bulls and the bears are exerting themselves.

Let’s consider one measure of stock market “internals”: The number of NYSE stocks trading above their respective 50-day moving averages has declined to 55% from more than 75% at the end of April (see top section of chart below). In order to be bullish about the secondary or intermediate trend, one would expect the majority of stocks to trade comfortable above the 50-day line. Although the indicator is back above 50 after a dip below this level a few days ago, the outlook for the intermediate trend has weakened over the past few weeks, but it is premature to cry “wolf”.

For a primary uptrend to be in place, the bulk of the index constituents also need to trade above their 200-day averages. The number at the moment is 76% – somewhat down from its early April high of 83%, but nevertheless still firmly in bullish territory.

Source: StockCharts.com

Richard Russell, 86-year old author of the Dow Theory Letters commented as follows on the deteriorating market breadth: “This is a bearish picture. The ‘soldiers’ are deserting even while the ‘generals’ continue to march forward. In a war, this would be a prelude to disaster. In the stock market, it may be the same.”

Tags: Bears, Bulls, Dow Theory Letters, Few Days, Generals, index constituents, Inner Workings, Intermediate Trend, Market Breadth, Market Internals, Market Moves, Moving Averages, Nyse Stocks, Prelude To Disaster, Rallies, Richard Russell, Stock Market, Stocks Trading, Uptrend, useful tools
Posted in Markets | Comments Off