Monday, February 18, 2013

Connecting the Dots - 02/18/2013

The long and short of things:  Silver, Gold, the CRB & the precious metals miners - put the dis in inflation: 
  • Silver and the silver:gold ratio fell sharply (-5.12% and -1.75%, respectively) last week. The silver:gold ratio's performance spread to the SPX also contracted. We maintain a bearish perspective towards silver and the precious metals and expect the lows from 2012 to be broken in the first half of this year. 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.   Conversely, should silver and silver:gold ratio bounce sharply - while the SPX corrects or underperforms on a relative basis, we would view that dynamic favorably towards the short to intermediate term in equities. Our expectation is that silver and gold are working on short term lows. Each retracement bounce since QE3 was announced in September has been shallower in performance. We expect the same diminishing reflex again this time. 
  • The euro traded marginally (-0.07%) lower last week reversing the retracement bounce it held early in the week. The US dollar traded modestly (+0.42%) higher - rejuvenating the atypical correlation drop that began in December. Since the euro peaked in July 2008, these diminished correlation extremes have marked exhaustion for the currency. We continue to view the US dollar index as primarily "caged" by the euro, as evident in the atypical correlation as well as the glaring divergence to the equal weighted US dollar index (FXCM) - which extended to new two year highs again last week.  
  • The Australian dollar further extended away from long-term resistance with net speculative long positions plunging over the previous week. We continue to focus on the Aussie, considering its long-term correlation to risk appetites in the SPX as well as the precious metals market - specifically gold. The window in the diminished correlation extreme between the Australian dollar and gold sharply began to revert last week. We maintain the bearish expectations of long-term breakdowns in both the Aussie as well as gold, as the respective pivots once again tighten from the kinetic wand of the US dollar.
  • Although the Russell 2000 extended their new all-time highs last week, over the intermediate to long-term - we favor large cap stocks over small and make the ratio (RUT:SPX) comparison to the downturn through 1997. Noteworthy, is the atypical positive relative strength divergence to the lower lows in the RUT:SPX ratio that is once again present as it was during the last secular turn. We also continue to follow the strong inverse correlation of the RUT:SPX ratio to the US dollar index that was present as well during the last turn. Considering the weekly RUT:SPX chart is at its divergent resistance, a sharp reversal in the ratio - as well as the equity markets appears imminent.
  • The SPX is once again pressured by the overhead resistance of the long-term (monthly) meridian. Since it broke through with Lehman Brothers in September 2008, the meridian has capped every subsequent advance. Although price appears to be on the cusp of a break through (circa May 1995) - momentum has stalled at resistance. Despite the calls by many for a new secular bull market, we find no indications that it will be different this time around. 
  • Although Apple has taken greater time - when compared with the great momentum unwind of oil, circa October 2008; it appears vulnerable in the short term to rolling over once again and making new lows for the year. 
  • The Shanghai composite index was closed last week - while the CRB index was again modestly lower (0.87%). Considering our outlook on the US dollar, we continue to maintain that the CRB index will once again roll-over and break the lows from 2012. 
  • The XAU index continues to underperform - even during pronounced weaknesses in spot prices. We maintain the bearish perspective on the miners, for the simple reason we believe weakness in the precious metals complex is ongoing. The XAU:Gold ratio has colored this expectation and continues to point to new lows in the coming weeks for the miners - as well as spot prices.