Wednesday, November 27, 2013

A Closer Look at Gold & Silver

Carlos Slim
During the final blow-off stage for silver in April of 2011, we caught our fair share of criticism and rebuke for pointing out what appeared to be a terminal run for the silver bullet (see Here). We heard from many of the usual suspects that in one breath marginalized our analysis as nothing more than technical mysticism, then went on to cite truly false and misleading fundamental comparisons as rational for further gains. Rampant inflation, rampant quantitative easing - rampant debasement! With time as the great revelator - mostly rampant ignorance. 

With that said and considering silver and gold have languished back towards their late June lows, we thought we'd check back in on a comparative chart we first made in May 2011 after silver had broken down. While we had relied on more acute comparatives as guideposts in the road during the initial break (Here, Here & Here) - we took a broad-brush look at the last great momentum cycle that culminated in the Nasdaq, circa 2000. Not surprisingly, the two assets - both from a momentum and relative performance perspective, expressed notable similarities. 

Nearly 30 months out from our initial chart, Carlos Slim's timely placed hedges on his own silver production appear to have been presciently purchased. And although the magnitude of silver's decline came up a bit short, the timeline for a mid 2013 cycle low and the structure of the turn (W bottom) still compare closely with how silver has performed today.
The ratio chart below for silver and gold was normalized by the momentum low prior to each parabolic build - rather than the asset highs of the comparison. Despite this, the concept of the asset cycle and prospective low stands very much the same. 
To help validate what we expect will be a major turning point for the sector, we thought we would also check back in on a longer-term performance comp we introduced last January (see Here) between the value traps of the previous cycle (financials) and the miners today. Similar to the Nasdaq chart, the value-trap comparative pointed towards a cycle low for the miners this year - specifically in November. 

And although the sector has audibled lower from our more acute comparative work with the banks in Q4 of 2011 (see Here), the timing for a prospective pivot higher now sits in the same seasonal window. Back in 2011, it was directly after the Thanksgiving break that the tax-loss selling for the beaten down asset class subsided and the banks started leading the broader equity market higher into 2012. 
One of the more dangerous narratives that many participants continue to lean on is how quantitative easing influences precious metals, commodities and the dollar. During the explosive commodity led rally that was kicked off with Bernanke's August 27th 2010 Jackson Hole speech, additional stimulus by the Fed was seen as one of the leading motivating catalysts for taking part in an already crowded trade. The thesis that more stimulus equated with dollar debasement was momentarily reinforced by the correlation overlap of the currency markets as a major causative theme. Throw in a healthy dose of hysteria on the backside of the Financial Crisis and voila - the herd was galloping towards El Dorado. Of course we all know what happened only a few months after QE2 was enacted. The commodity markets cracked under their own weight, the dollar bottomed and El Dorado was found to be nothing more than a small Tex-Mex restaurant on the outskirts of Princeton...

With the resumption of QE3 in September of last year, the perceived benefit towards the asset class was short lived to say the least. While not surprising to us at the time (see Here) - gold, silver and the CRB all crested within days following the enactment of QE3. In the end, further stimulus was just more causative smokescreen for those wed to a poor investment idea. 
Today, as the precious metals and commodity sector continues to languish in the smoldering ruins of those hitched to this false narrative, we ask ourselves what likely will be the next upside catalyst for these assets. Does further easing provide such causative propellent and make much sense in the shadow of what transpired with QE2 and QE3? From our perspective the opposite appears more likely. The Fed's taper that many precious metals bulls fear and bears embrace will likely be the confirmation that reflation in world-wide growth, the key ingredient missing over the last two years - is the next chapter for the markets to chew on. With China and emerging markets now knocking on overhead resistance, we feel that the commodity sector expressed through its most emotional proxies of silver and gold, will once again begin leading the next reflationary leg higher.

Tuesday, November 26, 2013

Ghengis Khan Approaches

The Great Wall(s) of China (SSEC & FXI) both held firm last week. Like our emerging market profile, we would expect them to fall with the next advance.  

How Do You Like Them Apples?

Going on nearly a year since we first introduced the concept that compared the momentum breakdown in oil in 2008 with the momentum breakdown in Apple in 2012, the comparative profile still holds true today. For those not familiar with this work, here's a snippet from last March that describes the parallels and underlying logic: 

"If our memory serves us, Apple diverged from an arguably already exuberant growth path directly after its visionary and genius marketeer passed away on October 5th, 2011. Over the next year, the stock (which just happened to be the largest public market cap company in the world, as well as the most widely held security by hedge funds) roughly doubled from the intraday low on his death. Did it make much sense based on the fundamentals of Apple's known and extrapolated market share or the underlying governing future of the company at the time? Certainly not - but momentum was at its back. The same market psychology and trend dynamics could be said for the oil comparative we have frequently used to presciently remain on the right side of the stock. Back in late 2007 as the equity markets were starting to cough out and the first signs of an economic downturn were becoming readily apparent, oil - the literal fuel for the economy, started its parabolic ascent. With hindsight 20/20,  it was anything but rational and largely a herded stampede - spearheaded by hedge funds both large and small that were bidding the commodity markets to icarus heights and the US dollar to its secular low.

So it comes as no surprise, that the most recent signatures of one of the last large crowded canyons are leaving similar momentum footprints on both the front and backside of the parabolic face. This is largely captured in the final culmination phase and expressed with similar moving average profiles and a stubbornness towards the downside without much relief for retracements." - Apple Picking 3/12/13

As the comparative pointed towards last month, Apple has largely consolidated its gains and traded sideways since finding a low in September. While Apple today has marginally broken above its October 29th high, there are some respectable near-term risks that the stock could once again cough-out with the equity markets and remain in a consolidating range a bit longer. 

Either way, we continue to like the comeback and position. 

For further reading on this concept - see some our previous Apple notes:

Apple Cider

Reboot Complete
Apple Reboots 
Apple Picking
Fruit Salad
Apple Turnover
The Universal Law of Gravitation

Monday, November 25, 2013

Legends of the Falls

Below is an update for the Australian dollar that maintains the comparative profile from the Waterfalls of Australia note a few weeks back.  
Click to enlarge images
Taken in context with our earlier note that points towards a resumption of downward pressures on the US dollar index, we feel the Aussie is likely completing today the proportions of its retracement decline that began last month. 
Although the intermarket correlation environment is different today than it was during the last commodity driven deflationary scare in 2008 and 2009, to a certain degree the commodity currencies that are most influenced by the cycle are still the gear exchange in the relationship. Considering we are immanently looking for a major turn higher from corners of the commodity and reflationary story (gold and silver), we would expect the Aussie to follow higher in their wake. 
Downstream, this development should eventually provide the equity assets most closely tied to this reflationary trend a catalyst to first break-out of the over three year old consolidation and bear market.    

The Buck Stops Here

Friday, November 22, 2013

Meridian Market Insights

The S&P 500 traded sideways this week and currently resides ~ 200 points above the Meridian. The market continues to follow the 1995 breakout trajectory we have been contrasting throughout the year. While we expect the overall trend to continue, we suspect that the broader market will have some trouble maintaining positive inertia next week and could be susceptible to falling back below the 95' benchmark.  
The financial sector had a very strong showing this week. We continue to favor the banks relative to the broader market. 
The Nasdaq also traded sideways this week and should keep working off the build in outperformance that began in Q2.
With the chorus of bubble prognosticators cautioning and demagoguing their respective interests from the cheap seats of the pundit-sphere, small-cap stocks continue to most closely follow in the Nasdaq's footprints of the previous cycle. It may behoove them to realize that although the concept of a bubble is a relative expression, this one may have a ways to go. Lest we forget, by a comparative perspective Greenspan didn't coin the phrase, "Irrational Exuberance" for over another year in December 1996. By that time the Nasdaq had risen ~ 285% above the October 1990 crisis low. Of course, the real parabolic swell didn't materialize until after the LTCM crisis in the fall of 1998. At it's zenith in March 2000, the Nasdaq was over 1400% above the 1990 crisis low.
The VIX appears to have found a floor last week as we expect volatility to increase as the market makes its way into December.  
From a tactical short-term perspective we favor bonds relative to the SPX here and continue to like the 10 year Treasury note.

Thursday, November 21, 2013

Connecting the Dots - 11/21/13

Gold and silver hit the drop zone yesterday of the commodity comparative we had made with the previous downturn in 2008/2009. We added a TIP chart to the series, considering the fever pitch surrounding inflation - or lack there of. To normalize the two, we also added a ratio chart that depicts the narrative we had described in which the equity markets (EEM) that are predominantly derived from the commodity story have led the currency and commodities sectors themselves this time around. While roughly half as deep as the 2008/2009 deflationary scare, the composite picture for us points towards a rejuvenation of inflation expectations - via commodities - in 2014. 

Despite starting to feel like Rob Ford at yet another press conference, we still like idea that the precious metals sector will begin to (full)fill the reflationary shoes we had expected them to run in.

*  All stock chart data originally sourced and courtesy of 
*  Subsequent overlays and renderings completed by Market Anthropology

Tuesday, November 19, 2013

Impressionist Paintings of March 2009

- A quick word from your local painter: 

We approach comparative analysis from a different point of view than most. We typically do not start our work from correlations in price, rather triangulate a market through several different perspectives - such as momentum, intermarket relationships and historic asset trends. Like most methodologies applied in the behavioral sciences, it is a moving target with an ever shifting backdrop to appraise. We view markets through a qualitative lens that reflects on both the quantitative framework many participants trade from and the physical reflection of underlying market psychology. 

We build perspectives based on the belief that although the markets on a day-to-day basis may flutter with all the uniqueness of a random walk, over time will tend to conform to a collective market psychology that travels a rather defined behavioral continuum - irrationality included.

Monday, November 18, 2013

Breaking Through the Great Wall of China

This summer while the esteemed professor from Princeton was looking for a more tragic denouement at the Great Wall - we took the opposing perspective after sizing up what appeared to be the end of a long consolidating trend for China's equity markets.  

After knocking on overhead resistance since September, the Shanghai Composite Index as well as China's equity ETF - FXI, appears poised to once again disappoint those calling for China's immanent collapse.