Friday, March 29, 2013

Gold vs. S&P 500

Gold vs. S&P 500 – Where is the Value?


This past week we received the final 4th Quarter GDP number which came in at 0.39%. The total 4th Quarter growth was terrible, plain and simple. Based on the performance in the equity markets that we have seen thus far in the 1st Quarter of 2013 investors would expect strong GDP growth. However, the only thing spurring stock market growth is the constant humming of Ben Bernanke’s printing press.

The real economy and the stock market are no longer strongly correlated. Essentially, they are meaningless. How do you evaluate risk when Treasury linked interest rates are artificially being held down by the Federal Reserve? How do you evaluate earnings growth estimates when most government based statistics are manipulated or “smoothed” to perfection?

My final argument to anyone who is a true believer that the stock market is representative of the economy is a very simple premise. If the stock market is the economy, how does the stock market evaluate small business earnings growth when most small businesses are not publicly traded? It is a simple question, but I have yet to find a sell side analyst that can work around it with facts.

To back up this information, here is a chart courtesy of www.zerohedge.com that demonstrates the S&P 500’s price action compared to economic data and overall macro risk.



The chart above clearly depicts the divergence between the macroeconomic data and the performance of the S&P 500 Index. Yet the sell side continues to scream that stocks are cheap, earnings are going to ramp up later this year on insane S&P 500 earnings growth expectations, and the consumer is going to remain strong even though payroll taxes have increased and the “wealthy” are paying more in taxes.

Even amid those concerns, no one knows for sure what the impact that Obamacare and the various new taxes associated with it will have on the business community. Again, the only thing driving growth is directly linked to the Federal Reserve’s balance sheet expansion. The chart below is courtesy of the Federal Reserve’s website.


On August 8, 2007 the Federal Reserve’s total assets were $869 billion dollars. As can clearly be seen today, according to the Federal Reserve the central bank’s total balance sheet has grown to over $3.2 trillion dollars. The increase is on the verge of rising exponentially. With QE, QE2, QE3, Operation Twist, Extended Operation Twist, and now with QE 4 in Perpetuity this trend is certainly unlikely to shift.

At this point in time the Federal Reserve is printing roughly $85 billion dollars each month to purchase Treasury securities with a focus on the long end of the maturity curve. As primary dealers of Treasury securities process these flows the money eventually finds its way into riskier assets that offer higher rates of returns through balance sheet machinations at large money center banks.
It has proven that the flow of the Federal Reserve’s printed monies are more important than the total money stock for a variety of reasons and inflation according to the government’s data is under control ex food and energy.

However, how are people supposed to survive without food and energy in today’s world? The last time I went to fill up my gas tank or to purchase food prices have gone up significantly. According to the 1990 version of consumer price reporting, real consumer inflation is running around 6% currently and shadowstats.com has the following comparison.


Unfortunately the 1980 based inflation numbers are even uglier, which based on Shadowstats’ data chart would place consumer inflation at nearly 10%. The calculations being used by Shadowstats.com are based on the government’s OLD ways of calculating inflation. The calculations were adjusted over time and today the data is completely manipulated by not including items that typically experience the largest levels of inflation.

Normally I talk about price action, probability based option trading, and technical information. However, before investors consider buying stocks near the all-time NOMINAL (non-inflation adjusted) highs, why not simply consider the backdrop of the total economic situation.
Central banks around the world are printing money at an alarming rate and their balance sheets are growing to levels not seen in human history. Interest rates are being manipulated to levels that are historically at record lows or near record lows based on real inflation data.

Macroeconomic indicators are issuing a cautionary tone with significant divergences showing up in many areas. Earnings expectations for the S&P 500 in the 3rd and 4th Quarter of 2013 are extreme and borderline ridiculous.

So before jumping headlong into equities based on some sell side analysts recommendation or even worse, a financial advisor who is more interested in his/her commission than they are about producing gains consider the following comparisons.

S&P 500 Index (SPX) Price Chart – 1 Year Price History



Gold Futures Spot Price Chart – 1 Year Price History





Clearly paper gold represented by gold futures is no substitute for physical ownership, but when one considers the fundamental backdrop for gold versus the S&P 500 Index, it should be clear which asset is offering the most value at current price levels. It does not require any inserted trendlines or oscillators, it should be clear which asset is expensive and which asset is cheap based on the real long-term economic fundamentals.

Article contributed by JW Jones from Technical Traders

Thursday, March 7, 2013

SP500 Wave Pattern

Final Stages of The Advance on SP 500-The Wave Pattern


Over at our TheMarketTrendForecast.com service we have been projecting  a potential rally pivot at 1552-1576 for many weeks now.  The recent drop to 1485 although harrowing, was a normal fibonacci re-tracement of the last major rally leg to 1531 pivot highs.  We believe that this 5 wave advance 1343 pivot lows is nearing an end based on mathematics and relationships to prior waves 1-3.

At 1569 the SP 500 would mark a perfect fibonacci relationships to waves 1-3 for this final 5th wave to the upside.  In the big picture, we are still working higher off the 1010 pivot lows on the SP 500, and this rally takes 5 full waves to complete. We think we are near wave 3 highs, and wave 4 correction would be up next, followed by another thrust to highs if all goes well this year.

That all said, a multi-week correction and consolidation wave 4 pattern is likely once we pivot at 1552-1576.  We should expect this correction to retrace anywhere from 80-100 points on the SP 500, but one week at a time.


Article contributed by Chris Vermeulen from Market Trend Forecast

Tuesday, March 5, 2013

The currency wars


The currency war: now and then

Global currency wars worries have resurfaced in recent weeks, mainly because of Japanese action on the yen. In order to understand the meaning of this so-called war, we would have to go back in time to the 1930's. Back then, the currency wars scared economists as they had a big part in the Great Depression in the 1930's. The damage done to global financial markets in that period took several decades to repair, and a repeat of this nightmare cannot be ruled out completely. However, there are large differences between the 1930’s and nowadays and the results of what is happening may differ as well. In the past, it seems like currency wars were defined as any policy that is intentionally designed to drive down the value of a currency, whether by local inflation or an exchange rate decline. It is quite the same thing in the long run since a rise in inflation relative to other countries will eventually be fully reflected in a lower exchange rate.

So what about today's currency wars? The conclusion of what happened back then was that a currency war which results in an equal currency devaluation, along with monetary easing, would probably have been much less damaging than the direct trade and exchange control retaliations which actually occurred in the 1930’s. Currency wars could still develop into direct trade wars, though even if they do not, they could lead to other problems like commodity inflation and asset price bubbles in the emerging economies, though so far, we are not seeing a repeat of the 1930’s.

Goldman Sachs bank support this opinion, stating that "this configuration of asset market moves - the real rate declines, steepening in nominal curves, currency depreciation and the pattern of domestic equity sector outperformance - is  more consistent with a bout of monetary easing that is expected to prove expansionary, rather than a currency war interpretation".

American economist Paul Krugman also believes that what is going on today is all a currency war misconception. According to Krugman, it would be a very bad thing if policy makers take it seriously, as "the stuff that’s now being called “currency wars” is almost surely a net plus for the world economy. In the 1930’s this was because countries threw off their golden fetters, they left the gold standard and this freed them to pursue expansionary monetary policies".

G-20 and the currency war

The Group of 20 finance chiefs sharpened their stance against governments trying to influence exchange rates. Two days of talks between G-20 finance ministers and central bankers ended last week with a commitment not to “target our exchange rates for competitive purposes”. This stance is stronger than the one they took three months ago and might affect Japanese officials to stop publicly giving guidance on their currency’s value. Today the yen is near its lowest level against the dollar since 2010, while policy makers are trying to calm concerns that some countries might be trying to weaken their exchange rate in order to encourage export and by that, the economic growth. According to the G20, and contrary to the opinions of GS and Krugman noted above, the risk is a 1930’s style of devaluations and protectionism. Bundesbank President cited that “Politically-motivated devaluations can’t sustainably improve competitiveness; they don’t solve structural problems and they set off reactions”.

We shall mention Japan once again, as the Bank of Japan Governor Masaaki Shirakawa said: “The Bank of Japan’s measures have been and will remain targeted at achieving a robust economy through stable prices". In the G20 meeting, Japanese officials denied driving down their currency, and according to them, its fall was a byproduct of their effort to accelerate the Japanese economic growth rate.    

More we shall mention that the IMF Managing Director said that the talk of currency wars is overblown, and Federal Reserve Chairman Bernanke said: "the U.S. has deployed domestic policy tools to advance domestic objectives and bolstering the U.S. economy will support world growth".

Economic releases and events of the week

  • Monday: Eurozone Finance Ministers Meet in Brussels
  • Tuesday: EU-27 Finance Ministers Meet in Brussels, Eurozone Services PMI, Eurozone Composite PMI, U.S. ISM Non-Manufacturing (all for February), Eurozone Retail Sales (January, expected to slightly increase)
  • Wednesday: Eurozone GDP 4th quarter (expectations for a decrease of 0.6%), U.S. Federal Reserve Releases Beige Book
  • Thursday: ECB Main Refinancing Rate, Draghi to hold a press conference after Rate Decision, U.S. Trade Balance January (expectations for an increase in the deficit)
  • Friday: Germany Industrial Production, U.S. labor market data - unemployment rate and Change in Nonfarm Payrolls

Monday, March 4, 2013

Gold, Oil & the SPX Trends and Setups

Over the past year my long term trends and outlooks have not changed for gold, oil or the SP500. Though there has been a lot of sideways price action to keep everyone one their toes and focused on the short term charts.

We all know that if the market does not shake you out, it will wait you out, and sometimes it will even do both at the same time. So stepping back to review the bigger picture each week is crucial in keeping a level trading/investing strategy in motion.

The key to investing success is to always trade with the long term trend and stick with it until price and volume clearly signals change of trend. Doing this means you truly never catch the market top nor do you catch market bottoms. But the important thing is that you do catch the low risk trending stage of an investment (stage 2 – Bull Market, Stage 4 Bear Market).

Let’s take a look at the charts and see where prices stand in the grand scheme of things for gold, oil, energy and stocks…

Gold Weekly Futures Trading Chart:

Last week I talked about how precious metals were nearing a major tipping point and to be aware of those levels because the next move is likely to be huge and you do not want to miss it or even worse be on the wrong side of it.

Overall gold and silver remain in a secular bull market and hav gone through many similar pauses to what we are watching unfold with them over the past year. As mentioned above the gold market looks to be trying to not only shake investors out but to wait them out also with this 18 month volatile sideways trend.

A lot of gold bugs, and gold investors of mining stocks are starting to give up which can been seen on the charts when reviewing the price and selling volume for these investments. I am a contrarian in nature so when I see the masses running for the door I start to become interested in what everyone is unloading at bargain prices.

Gold is now entering an oversold panic selling phase which happens to be at major long term support. This bodes well for a strong bounce or start of a new bull market leg higher for this shiny metal. If gold breaks below $1500 – 1530 levels it could trigger a bear market for precious metals but until then I am bullish at the current price.  I do think we could see another spike lower in gold to test the $1500- $1530 level this week but after that it could be off to the races to new highs.


Crude Oil Weekly Trading Chart:

Oil had a huge bull market from 2009 until 2011 but since then has been trading sideways in a narrowing bullish range. I expect some big moves this year for oil and technical analysis puts the odds in favor for a higher price.  If we do get a breakout and rally then $130 will likely be reached. But if price breaks down then a sharp drop to $50 per barrel looks like the next stop.


Utility & Energy Stocks – XLU - XLE – Weekly Investing Chart

The utility sector has done well and continues to look very bullish for 2013. This high dividend paying sector is liked by many and the price action speaks for its self… If the overall financial market starts to peak then these sectors should hold up well because they are services, dividend and a commodity play wrapped in one.



SP500 Trend Daily Chart:

The SP500 continues to be in an uptrend which I am trading with until price and volume tell me otherwise. But there are some early warning signs that another correction or a full blown bear market may be just around the corner (Selloff in May??).
Again, sticking with the uptrend is key, but knowing what could happen in the coming months gives you some time to start looking for some great shorting opportunities for when the trend changes. Your transition from long positions to short positions should be a simple measured move in your portfolios and not a panic reaction.


Weekend Trend Conclusion:

In short, I remain bullish on stocks and commodity until I see a trend change in the SP500.
The energy sector is doing well and looks bullish for the next month or so.

Gold and gold miners, I feel they are entering a low risk entry point to start building a new long position. Risk is low compared to potential reward so depending on how things unfold this week I may start to get active in this sector.

Keep in mind that when the price of a commodity or index trades near the apex of a narrowing range or long term support/resistance level volatility typically increases as fear and greed become heightened. This creates larger daily price swings so be prepared for some turbulence in the coming weeks while the market shakes things up.

If you like my work then be sure to get on my free mailing list to get these each week on various investments for investment ideas at www.GoldAndOilGuy.com

Article contributed by Chris Vermeulen