Wednesday, January 30, 2013

A Closer Look

After describing the ratio comparison this weekend between the precious metals miners and the financials through the credit crisis, I thought I would run a performance study to see how the comparison held up. The study was defined by each of the respective ratio's high in the cycle - with the end point in the financials as March 2009. I fit the current XAU:Gold comparative to the BKX:SPX study, based on the congruency of momentum - as expressed by the RSI & stochastic oscillators, as well as time.  
Certainly this is not an apples to apples comparison, but an expression of how a derivative sector capitulates - relative to its eroding and denominating backdrop. To add insult to those fundamental analysts who have been strongly marketing the idea of the miners, based on their valuations relative to gold - the simple truth is the market knows more than you. My best guess - just as the early weakness in the financials in 2007 alluded to the underlying credit crisis that was about to sink the economy and the SPX, the miners are alluding to a deflating tide in the precious metals sector. This of course could impression one to believe that despite the exuberant gains in the equity markets, the perception of breaking through the liquidity trap is still at best an illusion. 

Tuesday, January 29, 2013

Apple Update

Based on the 2008 momentum drain in oil, the retracement bounce in Apple should begin to roll-over in the next few sessions.  
Here is the weekly performance comparative updated from a few weeks back (see Here). 

Monday, January 28, 2013

Part II - Connecting the Dots - 1/28/2013

The long and short of things: Historic trends, tarnished silver and perished Apple's are no match for the euro & equities - so far. 
  • Although risk appetites in the equity markets continued to run open in full-bore last week, the breathtaking - albeit on-script, action in Apple exemplifies how swift the markets can recapture profits. We appreciate the historic unwind in Apple as placed in a broader equity market context. With hindsight 20/20 - we continue to feel the cyclical bull market in equities is "packing its bags". As most analysts and investors in Apple can recently testify, the pants come down quick when you're caught looking up at the sky. By the time they're at your feet, the mystique is broken - as well as your investment model. 
  • As expected, silver made the turn down last week. The silver:gold ratio's performance spread to the SPX also started to come in. Should silver once again fail - we would expect it to be of the cascading variety. Downstream, this could put the SPX in jeopardy of outperforming the silver:gold ratio (as measured from the start of the secular bear market in 2000); which in the past (2000 & 2007) has indicated the start of another cyclical leg lower in the equity markets.
  • The historic trend continues in the diminished correlation window between the euro and the US dollar. As in nature, we feel that the more pressure and time that builds in this atypical dynamic - the more explosive the recoil back to normal correlation will be.
  • The Australian dollar further extended away from long-term resistance - with net speculative long positions once again increasing over the previous week. The last instance the Australian dollar broke through long-term resistance was in September 2010. This breakout was accompanied with a broad rally in risk appetites across most asset classes - with the caveat, it was accomplished with significantly less speculative interest and momentum.
  • The Shanghai composite index began to stall last week - with the Australian dollar and the CRB index. We expect all three to trend in unison over the long-term. The CRB comparative was rescaled to fit the QE3 highs in September.  


Sunday, January 27, 2013

the Value Trap

If you have followed me on Twitter over the past six months you know that one of my standing refrains throughout the weeks has been that the precious metals miners are still one of the larger value traps of this market cycle. And similar to the financials in the tail end of the previous cycle - it has ensnared some rather large whales in its net. From the sophisticated palettes of Einhorn to Gundlach, the extraordinary valuations of the miners - relative to gold, have been too attractive to simply pass up for these marque money managers. 

Generally speaking, I have maintained a bearish perspective on the miners - despite valuations, for the simple reason I believe(d) weakness in the precious metals complex was and is ongoing.   

Perhaps it may be come sooner than I anticipate, but similar to the financials trading through 2008 into the first half of 2009 - cheap - can get a whole lot cheaper.  

Part I - Connecting the Dots - 1/27/2013








Thursday, January 24, 2013

From Train - to Drain

We continue to view Apple as a stock largely dissociated from both fundamentals and technicals - and primarily trading under the Universal Law of Gravitation. And although Apple's mass is diminishing by the week - the backside of the great momentum train that was Apple has become the great momentum drain. 

Despite the inevitable retracement  - we still feel it will continue to bounce down. The massive 2008 momentum breakdown in oil has provided a prescient roadmap to date.   

Monday, January 21, 2013

Connecting the Dots - 01/21/2013

The long and short of things: Pressure builds on the euro and in the dollar 
  • Risk appetites in the equity and commodity markets have run strong in a rare window of diminished correlation between the US dollar and the euro that began in early December. The two comparatives (2008 & 1996/1997) suggest that the strength in the dollar and weakness in the euro that began last week should continue to build momentum - with long-term correlations realigning.    
  • Despite its recent strength, we feel silver remains vulnerable to another large leg lower - with the expectations that the 2012 lows will be revisited and broken. We continue to focus on silver - and various timeframes and contrasts of the silver:gold ratio, because it has provided an excellent proxy for the overall health of risk appetites within the markets. Although the silver:gold ratio's performance spread to the SPX continued to blow-out last week, should silver once again fail with the euro - we would expect it to be of the cascading variety. Downstream, this could put the SPX in jeopardy of outperforming the silver:gold ratio (as measured from the start of the secular bear market in 2000); which in the past (2000 & 2007) has indicated the start of another cyclical bear leg lower in the equity markets.
  • The Australian dollar was rejected last week at long-term resistance with net speculative interest (long) near historic highs - even increasing over the previous week. The last instance the Australian dollar broke through long-term resistance was in September 2010. This breakout was accompanied with a broad rally in risk appetites across most asset classes - with the caveat, it was accomplished with significantly less speculative interest and momentum. 
  • The Shanghai composite index continues to closely track the momentum and price comparative of the explosive August 1982 SPX springboard low. While we are skeptical of its lasting character, the rally has begun to draw the CRB up in its wake. Should the US dollar continue to gain momentum, we would expect this to mitigate and reverse those effects.  
  • The SPX continues to crawl up the weekly meridian - despite Apple's precarious posture below support and threatening to retrace the parabolic rally that took place after its founder and visionary's death. The NDX has also stalled at the equal retracement level of the 2007 SPX comparative.     

Saturday, January 19, 2013

The Insatiable's

Back in November, as investors appetites for the silver ETF eclipsed the historic benchmark from late April 2011, I referenced an earlier version of the above chart with a note bluntly titled, "Denial" (see Here). Granted, I have worked the reference into more than a few notes in the past, because the shoe continues to fit with respect to investors insatiable appetites for capital commitments and market enthusiasm in the precious metals and commodity complex. And while some contrarians will point to either suppressed investor sentiment surveys or advisor and fund portfolio commitments of these assets, I continue to look at the broader picture of where most participants vote with their wallets. Needless to say - the opposite is very much the case. Investors continue to pour capital into sectors that are working against an outgoing tide.

On Wednesday, as silver and the silver ETF moved into our expected retracement zone (see Here), investors bought 18.4 million ounces of the silver ETF. For context, the silver ETF had only added 20.8 million ounces - in the twelve months prior to WednesdayAnd although one could certainly argue that a bull market is built and maintained on the backs of healthy investment demand - for a continuation of an already matured trend, one would have expected that investors appetites for silver to be significantly eroded after a nearly two year downtrend. From my perspective, their commitments and entrenched dogma has run commensurate with a misplaced causation that primarily revolves around the notion that more "printing" by the worlds largest central banks - translates into higher precious metals and commodity prices.  

Over the last two years, I have arguably been one of the most accurate forecasters of silver, the dollar and the CRB index - by maintaining one fundamental belief:
  • The US dollar index bottomed in May 2011 - regardless of QE
Downstream, this has translated into a sloughing environment for the precious metals complex, the euro and the CRB index. Notwithstanding of the previous secular low comparative, the chart published Friday (seen below) strongly impressions me to believe that the euro has been strengthening in a rare window of diminishing correlations to long-term relationships - such as the dollar and silver. 
Considering this dynamic in the past has typically marked exhaustion for the euro, I believe the strong inverse correlation to the dollar and strong positive correlation with silver will be reestablished in the not so distant future.  

To date, silver continues to follow the price, momentum and retracement path of the 1991 (now 1992) Nikkei comparative. 
Should the comparative continue to be prescient, silver will soon pivot lower after fulfilling the 50.0% retracment level last week.