Saturday, December 29, 2012

The Past, Present & Future

The Past: As we remarked last week, the silver:gold ratio's precipitous decline was favoring near term equity market weakness. 
Present: While the silver:gold ratio treaded water this week, the large divergence with the equity markets narrowed in form and proportion. 
 & Future: Considering that we are currently working from the perspective that the near term decline in silver is roughly only halfway completed, considerable downside risks remain - both for the equity and commodity markets.

Thursday, December 27, 2012

One Bad Apple

While I am off this week with family, here are a few charts I have been following for a number of months that continue to point towards market turbulence in Apple, the SPX and the NDX.
Below is the original formatting of the SPX/NDX topping comparative from the November 16th intraday reversal  (see Here). 


Considering Apple's precarious posture - as well as the NDX's fragile opening once again right below its 38.2% retracement level, I realigned the comparative to the pivot of the next leg down. 

Friday, December 21, 2012

The Last To Know

Call me crazy, but I continue to work from the perspective that the market's have typically performed the calculus on something as protracted as the political wrangling around the Fiscal Cliff - before we actually get there. It's just that the equity markets are typically the last to know. Financial journalism of course will be reactionary and paint the market's as such.

Below is a chart of the silver:gold ratio up to yesterday's close. As we have noted over the past two weeks, it had been rolling over - before its large swoon this week. 
So goes the silver:gold ratio - so goes the equity markets.  

Thursday, December 20, 2012

When Denial - Turns to Fear

A few thoughts on silver - as the sector continues to flush. These charts were prepared last night, hence, they do not reflect today's large decline. 
As of this morning, silver has broken the early November lows - completing the equal retracement move of this leg of the 91' Nikkei comparative. 
However, as you can see in the comparison of price structures below, silver is still considerably higher than the lows put in this past June, when I initially introduced the comparison in the Trilogy  and recommended precious metals as a perspective long trade.  As of this morning, the trend support from late June - which one could argue represents the psychological threshold of denial - has been broken. 
Because silver and its less emotional cousin - gold, had not confronted their more existential issues of purpose and value earlier,  an upstream comparative to the Nikkei may be more appropriate through this window.   
With that said, sentiment has eroded considerably as the market has grounded lower over the past several weeks, so - Stay Frosty






Wednesday, December 19, 2012

Waiting for Santa

As the euro/silver divergence grows as wide as my impatience for the dollar to turn - I'm reminded of that feeling on Christmas Eve as a child counting the hours until daybreak. No worries here, I still have faith - and a short position in silver. 

P.S - Watch that negative divergence in what the dollar buys you in the SPX. It leaked in October and its leaking again. 



Silverrrrrr


Monday, December 17, 2012

Friend or Foe

Although the SPX is roughly back to where it was after last Wednesday's Fed meeting, the NDX as well as some of the more emotional risk proxies have continued to wilt. Despite the assessments by the savvy central bank game theorist of one David Tepper, in which he believes the proverbial put is still present, just with a European accent - we remain cautious coming through a time frame where we anticipate the US dollar to once again find a strong bid. The dilemma of course downstream is determining the impetus - of which could run the gamut. Friend or foe continues to be our concern. 



Sunday, December 16, 2012

Point of Recognition

With the December Fed meeting and disclosure of QE4 now in the rearview mirror, the markets look to continue administering the psychological exams convened following QE3. 

Back in September, subsequent to the announcement of QE3, I wrote a note titled - A Lucid Confusion. Here are a few abstracts from that note that I believe will continue to apply to a market environment that is just starting to transition from the denial phase of the effects and affects of QE - to recognizing its limitations to various assets.
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"While I am impressed with the Chairman's conviction and fortitude in persisting down a path he clearly defined over a decade ago, I find myself with increased skepticism towards many investors perception of its perennial influence - that closely correlates with my comparative work with trends, analogs and historical market data. What many in the financial punditry will describe as an obvious cause and effect - is more than a little bit nuanced when you step back and gauge the broader environments the Chairman has created monetary policy in."
  
"I suggest we now minimize the academic conventions and transmission mechanisms of QE, and the purported impacts of the intervention playbook penned by the Fed over the past decade. Why? Because now that the central banks have once again responded to the drumbeat of their constituencies, the marketplace will now carry out psychological exams in the face of their monetary proctors. The final results, once the initial anxiety and euphoria abate - will likely uphold the long-standing market tradition of breaking conventional wisdom against the grain. 

The commodity markets, that have rallied so fervently this summer in anticipation of another bolus by the Fed, the ECB and the PBC - will need to overcome the notion of "pushing on a string", that was not nearly as applicable in 2010 - as it is today. It is my belief, based on my comparative work with the US dollar, the Australian dollar and the CRB, that the commodity rally ignited this summer will fail - and fail as prominently as the equity markets faired to the aggressive monetary policy regimes enacted by the Fed at the end of 2007.

Back then, market psychology quickly pivoted from - "Don't fight the fed!", to "the Fed is pushing on a string!" - almost overnight."
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Where we find ourselves today, downstream of both QE announcements, is in a market environment that is beginning to collectively realize that some of the investment theses - such as the benefits of QE to the commodity and precious metals sectors - no longer hold the same correlations they once were perceived to have. Since the announcement of QE3 in September through the announcement last week of QE4, the CRB index and silver are lower by 7%, gold is lower by 4%, the SPX is lower by 3% and the US dollar index is higher by 0.4%. For many market participants - this runs counter to what they widely believed would occur. This should not, however, come as a surprise to anyone following my comparative cycle work. In fact, it is a very good example of how utilizing the right comparative framework of broad market cycles can help establish one's bearings in the current cycle. The asset relationships will likely be different - yet, market psychologies will largely remain constant throughout history. These are all expressed in the charts through patterns in price and momentum. 

During this past summer I published a note that compared trends expressed in the NDX circa 2000-2002, to the current CRB index. Here is an abstract from that note. 
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"In 2000 and 2001, as the pendulum was swinging away from equities towards the safe(r) haven and sturdier shores of the commodity sector, the Fed reached for the monetary fire hose to provide both structural and psychological liquidity to a financial system under duress. And although it initially provided momentary support towards equities and the seeds for the secular bull market in commodities, stocks eventually succumbed to the path of least resistance. It was a bear market and the psychological bid of the Greenspan Put was now immaterial to the larger forces at work.   
Today, we have a very similar dynamic in the now matured commodity sector with the prospect of QE and central bank interventions on the table. Whether emanating from the Fed, the ECB or the PBC - resource investors now work with a dangerous level of moral hazard in the face of reality within their respective investment theses. The general thought has been: more easing - higher commodity prices. And although this causality helped drive the dramatic returns since the fall of 2008, the several dozen easing initiatives by the world's major central banks over the past year have done very little to arrest the decline in the commodity sector that began in May of 2011." - Denial 
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Below are a few of the charts initially presented in that note. 
Throw a few more easing initiatives in by the world's major central banks and voila - a lower CRB? The light blue profile is after the comparative was made last August. I am undoubtedly biased by my own perspective, but you can clearly see where the euphoria of QE3 was quickly ephemeral, and the long-term downtrend established in May of 2011 - reaffirmed. 
Here is an update of this comparative, contrasted with the NDX's large 61.8% retracement rally that was completed at the end of 2001. 
Undoubtedly factoring into the arc of commodities is the US dollar index. And although most of the "hollering" last week was on the downside, it appears to moving - both from an asset relationship and comparative cycle perspective - to the point of breaking out. 

As I have mentioned in the past, silver has led by several sessions, pivots - both on the downside and higher, in the euro. This lagging, but correlated asset relationship, has been in place since both silver and the euro peaked in May of 2011. Considering how poorly silver has traded, both last week and since QE3 was announced - colors my expectations for a lower euro and a higher dollar in the not so distant future. 
Getting back to the disillusionment and false optics of asset relationships to QE, the USD continues to closely follow the last time it made a secular low in the mid 1990's. Should the comparative continue, the next move higher is the breakout leg. 

Friday, December 14, 2012

The Universal Law Of Gravitation

As the 2007 SPX topping comparative diverges with the recent action in the NDX - it's clear what has turned this analogy down. Gravity - once again expressed through an Apple