First a quick apology, I know we live in a soundbit and picturebook modern world. However for me, it’s Saturday night, we have out-of-town guests, and I just don’t have time to go put my charts together for the post this week. So I’m asking my loyal followers to read without the pictures (well, there’s 1), and I avoided talking levels on anything for that reason.
Dow Jones Industrial Average
close 17,568.53 5 Day Change – 2.86%
Today’s Volume 103,471,357
3 month Average Volume 93.323.924
Average P/E 17.0
Dow Jones Transportation Average
close 8,072.57 5 Day Change – 2.67%
Today’s Volume 17,173,421
3 month Average Volume 16,085,175
Average P/E 20.6
Dow Jones Utility Average
close 562.74 5 Day Change – 2.20%
Today’s Volume 14,916,167
3 month Average Volume 13,727,942
Average P/E 18.2
A few weeks ago I posted the following chart CLICK HERE. Based on the simple Dow Theory assumption that transportation and utility averages can lead the way for equities. This past week we had one of the nicer set ups I’ve seen for a short entry, and the follow through has thus far been excellent. At this point I’ve giving my Target 1 a very high probability, and upgrading my Target 3 outlook to High Probability.
Circle The Wagons
When crisis hits, people with their eyes on the markets follow three simple steps with their money. First, they eliminate fear by eliminating the thing that caused it. In markets, this means taking some profits off the table, moving stop losses up, or even flat-out liquidating positions. Second thing a person does is wrap their arms around their new stockpile of cash. This is where we are now. Then finally comes decision time; do you assume that the potential crisis has passed, or do you run for higher ground by moving into assets like physical commodities.
So why are people starting to take stock of what they have? Why are we running to cash, namely US Dollars on a global basis? Let’s take a quick trip around the globe. China is in the midst of its worst market sell-off in 4 years, with the Hang Seng Index down 20% in the last month. The 2011 drop was 33% and the 2007-08 was a whopping 66%, so this is not an unreasonable amount, but I find the news reports interesting that any major player in China taking large positions off the table, or daring to say publicly that the market is heading down potentially faces jail time. Reminds me of Russian soldiers in WWII caught between German guns in their face, and their own officers guns at their back. So foreign investment is likely avoiding the Asian markets at the time being, as the only thing worse than bad news, in uncertainty.
Likewise, Europe still faces its problems, both in that no real steps have yet been made in Greece, and the austerity vote be damned. While the EU continues to throw blankets on the flames in Greece, with a debt load of almost 170% of GDP, Italy begins to rear its head again, as their national debt reaches over 135% of GDP, a level not seen since 1925. Forgive the political opinion here, but the “you can have everything you want now” policies of monetarist Europe (and America for that matter) are a plague, and it continues to spread. And why can’t Europe just wash their hands of Greece? History… it’s that simple. The reality is, when Europe sits down to the table, there is always the tick in the back of someone’s head saying, “your grandpa put my grandpa in an oven 80 years ago… and we’d really like to avoid that happening again.” The reality is reparations following the Great War ruined Germany, and other nations were happy to swoop in and buy up the whole country for pennies, and that didn’t end well for anyone’s grandparents. I firmly believe that most politicians would like to keep that from happening again.
With Asia and Europe out, what’s wrong with considering the commodity producing nations of Canada, Australia and New Zealand? Traditionally one would think that as things get tough, people turn to good assets; food, oil, gold, etc. But commodity prices are abysmal, and the farmers and miners are feeling the squeeze in the handful of countries that actually produce anything necessary. As I stated above, it’s a three step process, and we’re not there yet. We’ll get to that in a minute
So all we’re left with is the US. One would assume that money coming into the States would find a home in the equity market, but this has not been the case. As mentioned the equities appear to be rolling over as industry in the US just can’t keep pace with trader speculation, with massive margin waiting to be called. So the only bastion of salvation has been our hegemonic world currency, the US Dollar. Or for banks, it’s the SDR, which, lets be honest, is pretty much also just US Dollars. Our currency here in the states is bearing the weight as people circle their wagons around what they have, and sit waiting to make a decision. Will we see opportunity back in the equity markets around the world, or is it time to find that higher ground. But a glance at the DXY US Dollar Index, even the dollar itself is showing some topping behavior.
The Road to Step 3
Best case scenario for everyone, China bounces, Europe lands on reasonable austerity that everyone agrees to, and markets self-correct. However, should we the people instead decide to follow the 2007-08 path again, my money would be on hard assets, and the countries that produce them. Just when no one else wants something, it’s time to back the truck up and cram as much in as you can. So this brings me to gold. It’s really this simple, are we going to once again trust the thing that we’re leaving, or are we going to go that extra step further?
All That Glitters
On Sunday night US, at the open of the Asian markets, over 2 Billion Dollars worth of gold was liquidated, effectively taking out all standing orders at the double 0, $1,100 spot. There are two ways to sell a substantial amount of something, either you sell it all at once and take whatever price you can get, or you unwind your positions slowly over time in order to secure the best price possible. Option 2 is generally for those that are trying to take real profits. Option 1 however, is a whole different animal, and it’s either caused by intense fear, or something much more sinister. In my opinion, you manage a trillion dollar company, you never make fearful decisions.
Investors love even numbers, I don’t know why, but they all do. Investment firms know this, so what better place for a firm to take a small hit on its trillion dollar books than to wipe out standing orders at an obvious price. Placing that size of a transaction in a 5 minute period cost them millions, as the positions were sold at any price possible. However, this move all but ensured lower price opportunities to repurchase positions, as the smaller players in the market, namely you and I, whether we’re educated or not on markets, will not be placing massive buy orders any time soon. Any time you can demoralize buyers out of a market, you get to buy it cheaper.
This move will allow for the final push down in the only real monetary asset the world has ever been able to agree on. I believe this will be the final push for a few reasons, namely because of the pattern of topping behavior in almost all major paper markets across the globe. As the paper markets begin their descent, gold will follow suit for a while. It’s only reasonable, there’s roughly 10 times as much gold traded in the leveraged markets than actually exists above ground, so as leveraged positions reach bottom levels and initiate a slew of margin calls, the price will drop like a rock. This is exactly what happened in 2008, as gold fell from 1,050 to under 700 along side the US equity market. However, the population voted with their dollars from that point on, causing the equities to continue down while gold and other metals increased between 2 and 3 fold in under a year.