Consolidating Previous Large Gains in a Mild and Contained Manner

Correcting and consolidating previous large gains in a mild and contained manner. 

Over the past 3 weeks, many world markets appear to be merely correcting and consolidating previous large gains in a mild and contained manner, which is entirely normal and natural in a bull market.

Materials stock sector absolute price successfully tested its rising 50-day SMA again and remains bullish.

Consumer Staples stock sector absolute price fell below its 50-day SMA thereby turning neutral.

Health Care stock sector absolute price fell below 8-week lows.

Utilities stock sector absolute price of XLU fell below 13-week lows.

Foreign Stocks ETF (EFA) Relative Strength Ratio (EFA/SPY) broke down below 5-month lows.

Crude Oil price moved above 8-day highs, again confirming a bullish trend for the short term.

VIX Fear Index rose from 17.76 on 11/19/10 to 23.84 intraday on 11/29/10. A relatively high and rising VIX indicates increasing anxiety, worry, and fear for market prospects on the part of options players.

S&P 500 Composite (SPX, 1,187.76) fell 1.64 points or 0.14% on Monday. Stocks suffered a deeper loss in the morning, again on fears of war in the Korean Peninsula and fears of European debt. Stocks recovered the bulk of that early loss after 2:00 p.m. ET, thereby demonstrating bullish resilience. The S&P 500 ETF (SPY) formed a Bullish Engulfing Candlestick. Over the past 3 weeks, SPX appears to be merely correcting and consolidating previous large gains in a mild and contained manner, which is entirely normal and natural in a bull market. Although these same old fears may linger in the short term, nevertheless, it appears that the US stock market is handling obvious uncertainties with relative calm and resilience, which suggests that there may be accumulation under the surface of unsophisticated reactive selling. I have no special insight into what might happen next abroad, but I do know from long experience that the worst-case scenario does not happen very often. SPX has been holding above 1173.00, the low of 11/16/10, and above key Simple Moving Averages: the 50-day SMA, now at 1177.31 and rising, and the 200-day SMA, now at 1133.30 and rising. This ability to hold support suggests that the bull may be still alive and merely taking a brief nap. Longer term, SPX rose above 2-year highs on 11/5/10, again reconfirming a bullish major trend.
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Spotlight on event stocks: Here is a stock screen I designed to pick out potential event stocks, both Bullish and Bearish. Sometimes, stocks with large changes in price and volume are revealed to be deal stocks, sooner or later, or are the subject of some other extraordinary events, positive or negative.

Bullish Stocks: Rising Price and Rising Volume
Ranked by Price Change * Volume Change
% Price Change, Symbol, Name
4.67% , FDX , FEDEX
4.32% , HBAN , HUNTINGTON
3.48% , HMA , HEALTH MGMT STK A
3.33% , WAG , WALGREEN
4.08% , SNV , SYNOVUS
1.98% , FRX , FOREST LABS STK A
2.94% , KEY , KEYCORP
3.58% , HAL , HALLIBURTON
3.64% , EK , EASTMAN KODAK
0.24% , PZJ , SmallCap PS Zacks, PZJ
2.25% , USO , Oil, Crude, U.S. Oil Fund, USO
0.42% , RZV , Value SmallCap S&P 600, RZV
2.51% , AXP , AMERICAN EXPRESS
3.25% , RIG , TRANSOCEAN
2.29% , RF , REGIONS FINAN
3.45% , FCX , FREEPRT MCMORAN STK B
1.65% , MTG , MGIC INVESTMENT
2.04% , CVG , CONVERGYS
1.98% , UNH , UNITEDHEALTH GRP
2.06% , WFC , WELLS FARGO
2.02% , NBR , NABORS
1.97% , COF , CAPITAL ONE FNCL
1.96% , CI , CIGNA
1.95% , BHI , BAKER HUGHES
0.61% , IYE , Energy DJ, IYE
2.09% , OIH , Oil Services H, OIH
1.39% , AMP , Ameriprise Financial Inc.
0.29% , MYY , Short 100% MidCap 400, MYY
1.00% , BMS , BEMIS
0.93% , RKH , Bank Regional H, RKH
1.28% , ERTS , ELECTRONIC ARTS
1.93% , ININ , Interactive Intelligence ININ
1.43% , FITB , FIFTH THIRD BANC
0.63% , ITF , Japan LargeCap Blend TOPIX 150, ITF
1.61% , EWH , Hong Kong Index, EWH
1.71% , BAC , BANK OF AMERICA
1.34% , SLB , SCHLUMBERGER
1.83% , CAR , Avis Budget Group, Inc. (CAR)
0.91% , AA , ALCOA
1.60% , ATI , ALLEGHENY TECH

Bearish Stocks: Falling Price and Rising Volume
Ranked by Price Change * Volume Change
% Price Change, Symbol, Name
4.67% , FDX , FEDEX
4.32% , HBAN , HUNTINGTON
3.48% , HMA , HEALTH MGMT STK A
3.33% , WAG , WALGREEN
4.08% , SNV , SYNOVUS
1.98% , FRX , FOREST LABS STK A
2.94% , KEY , KEYCORP
3.58% , HAL , HALLIBURTON
3.64% , EK , EASTMAN KODAK
0.24% , PZJ , SmallCap PS Zacks, PZJ
2.25% , USO , Oil, Crude, U.S. Oil Fund, USO
0.42% , RZV , Value SmallCap S&P 600, RZV
2.51% , AXP , AMERICAN EXPRESS
3.25% , RIG , TRANSOCEAN
2.29% , RF , REGIONS FINAN
3.45% , FCX , FREEPRT MCMORAN STK B
1.65% , MTG , MGIC INVESTMENT
2.04% , CVG , CONVERGYS
1.98% , UNH , UNITEDHEALTH GRP
2.06% , WFC , WELLS FARGO
2.02% , NBR , NABORS
1.97% , COF , CAPITAL ONE FNCL
1.96% , CI , CIGNA
1.95% , BHI , BAKER HUGHES
0.61% , IYE , Energy DJ, IYE
2.09% , OIH , Oil Services H, OIH
1.39% , AMP , Ameriprise Financial Inc.
0.29% , MYY , Short 100% MidCap 400, MYY
1.00% , BMS , BEMIS
0.93% , RKH , Bank Regional H, RKH
1.28% , ERTS , ELECTRONIC ARTS
1.93% , ININ , Interactive Intelligence ININ
1.43% , FITB , FIFTH THIRD BANC
0.63% , ITF , Japan LargeCap Blend TOPIX 150, ITF
1.61% , EWH , Hong Kong Index, EWH
1.71% , BAC , BANK OF AMERICA
1.34% , SLB , SCHLUMBERGER
1.83% , CAR , Avis Budget Group, Inc. (CAR)
0.91% , AA , ALCOA
1.60% , ATI , ALLEGHENY TECH

9 major U.S. stock sectors ranked in order of long-term relative strength:

Consumer Discretionary (XLY) Bullish, Over Weight. The Relative Strength Ratio (XLY/SPY) rose above 12-year highs on 11/26/10 and remains bullish. XLY has been at the top of my sector rankings for more than a year and has outperformed substantially. Absolute price rose above 3-year highs on 11/5/10 and remains bullish. Support 35.32, 35.02, 34.78, 33.94, 33.11, 32.66, 31.70, 29.80, 28.64, 28.21, and 26.62. Resistance 38.25 and 39.09.

Energy (XLE) Bullish, Over Weight. The Relative Strength Ratio (XLE/SPY) rose above 10-month highs on 11/19/10 and remains bullish. Absolute price rose above 2-year highs on 11/11/10 and remains bullish. Support 60.96, 60.21, 57.70, 55.68, 53.22, 50.33, 48.56, 46.16, and 43.66. Resistance 63.89, 69.95 and 78.10.

Industrial (XLI) Bullish, Over Weight. The Relative Strength Ratio (XLI/SPY) rose above 6-week highs on 11/26/10, thereby turning bullish following a normal correction. Absolute price rose above 2-year highs on 11/5/10 and remains bullish. Support 31.82, 31.58, 30.79, 30.51, 30.32, 29.77, and 27.67. Resistance 33.53, 35.00, and 36.16.

Materials (XLB) Bullish, Over Weight. The Relative Strength Ratio (XLB/SPY) appears to be holding above both 50- and 200-day SMAs, which are rising. Absolute price successfully tested its rising 50-day SMA again on 11/29/10 and remains bullish. Support 34.20, 33.70, 32.36, 29.88, 29.43, and 27.67. Resistance 36.71, 37.56, and 39.00.

Technology (XLK) Bullish, Over Weight. The Relative Strength Ratio (XLK/SPY) rose above its 50-day SMA on 11/22/10 and turned bullish again. Absolute price of XLK rose above 2-year highs on 11/4/10 and remains bullish. Support 23.74, 23.64, 23.56, 22.68, 22.53, 21.60, 20.01, and 19.51. Resistance 25.28 and 25.69.

Consumer Staples (XLP) Bearish, Under Weight. The Relative Strength Ratio (XLP/SPY) fell below 5-month lows on 11/10/10 and remains bearish. Absolute price fell below its 50-day SMA on 11/29/10 thereby turning neutral. Support 28.04, 27.76, 27.63, 27.46, 26.34, 25.30, and 24.95. Resistance 28.85, 29.27, 29.29 and 30.29.

Health Care (XLV) Bearish, Under Weight. The Relative Strength Ratio (XLV/SPY) fell below 6-month lows on 11/10/10 and remains bearish, as it has been most of the time since peaking on 2/23/09. Absolute price of XLV fell below 8-week lows on 11/29/10. Support 30.11, 29.87, 28.00, 27.49. Resistance 31.04, 31.73, 32.05, 32.18, 32.42, 32.69, 33.16, 33.37 and 33.74.

Utilities (XLU) Bearish, Under Weight. The Relative Strength Ratio (XLU/SPY) fell below 5-month lows on 11/24/10 and remains bearish. Absolute price of XLU fell below 13-week lows on 11/29/10. Support 29.66, 27.91, 27.44, and 25.76. Resistance 32.11 and 32.40.

Financial (XLF) Bearish, Under Weight. The Relative Strength Ratio (XLF/SPY) fell below 18-month lows on 11/26/10 and remains bearish. Absolute price of XLF fell below 9-week lows on 11/23/10, and the 50-day SMA remains below the 200-day SMA. Support 14.25, 14.20, 13.29, and 13.08. Resistance 14.96, 15.68, 16.13, 16.90, 17.12, 17.16, and 17.87.
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Emerging Markets Stocks ETF (EEM) Relative Strength Ratio (EEM/SPY) broke down below 3-month lows on 11/26/10 and remains neutral.

Foreign Stocks ETF (EFA) Relative Strength Ratio (EFA/SPY) broke down below 5-month lows on 11/29/10 and remains neutral.

NASDAQ Composite/S&P 500 Relative Strength Ratio rose above 9-year highs on 11/26/10 and remains bullish for the long term. This RS Ratio has been in an uptrend for nearly 2 years, since 12/2/08. Absolute price rose above 2-year highs on 11/8/10 and remains bullish.

iShares Russell 1000 Growth/S&P 500 Relative Strength Ratio (IWF/SPY) rose above 19-month highs again on 11/26/10 and remains bullish.

The Largest Cap S&P 100/S&P 500 Relative Strength Ratio (OEX/SPX) fell below 28-year lows on 11/26/10. This RS Ratio has been trending lower since 8/3/10. Longer term, big caps have been relatively out of favor for more than 10 years, since 3/29/2000.

The Small Cap Russell 2000 Index/Large Cap Relative Strength Ratio (IWM/SPY) rose above 20-year highs on 11/26/10 and remains bullish.

The S&P MidCap 400/Large Cap Relative Strength Ratio (MDY/SPY) rose above 15-year highs on 11/26/10 and remains bullish. Absolute price rose above 2-year highs on 11/24/10 and remains bullish.

Crude Oil nearest futures contract price moved above 8-day highs on 11/29/10, again confirming a bullish trend for the short term. Longer term, Oil rose above 2-year highs on 11/11/10, again reconfirming a bullish major trend. Support 80.28, 79.84, 79.25, 78.86, 72.63, 70.76, 70.35, 69.51, 68.59, 67.15, 65.05, and 64.24. Resistance 88.63, 89.10, 90.51, 98.65, and 102.84.

Gold nearest futures contract price over the past 3 weeks appears to be merely correcting and consolidating previous large gains in a mild and contained manner, which is entirely normal and natural in a bull market. Longer term, Gold rose above previous all-time highs on 11/9/10, again confirming the bullish major trend. Support 1329.0, 1315.6, 1297.0, 1274.8, 1270.5, 1232.4, 1210.9, 1191.5, and 1155.6. Resistance: 1382.9 and 1424.3.

Gold Mining Stocks ETF (GDX) Relative Strength Ratio (relative to the Gold bullion ETF, GDX/GLD) rose above 11-month highs on 11/22/10 and remains bullish.

Silver nearest futures contract price over the past 3 weeks appears to be merely correcting and consolidating previous large gains in a mild and contained manner, which is entirely normal and natural in a bull market. Longer term, Silver rose above previous 30-year highs on 11/9/10, confirming a bullish major trend.

Silver/Gold Ratio rose further above 2-year highs on 11/22/10, again confirming a bullish trend. Silver has outperformed Gold substantially since 8/20/10.

Copper nearest futures contract price over the past 2 weeks appears to be consolidating previous large gains. Longer term, Copper rose above previous 2-year highs on 11/11/10, again confirming the bullish major trend. Strength in Copper suggests confidence about prospects for the world economy, while weakness in Copper suggests doubts. Support 3.6065, 3.3930, 3.1775, 2.9285, 2.8555, 2.8445, and 2.72. Resistance 3.90, 4.0825, and 4.27.

U.S. Treasury Bond nearest futures contract price over the past 2 weeks appears to be consolidating previous losses. The bond fell below the lows of the previous 4 months on 11/15/10, confirming the preexisting bearish trend for the intermediate-term trend. Support 125.15, 125.07, 124.19, 123.03, 121.28, 119.26, 118.24, 118.12, 115.15, 114.06. 113.04, and 112.15. Resistance 129.03, 129.27, 132.26, 133.00, 135.12, 135.19, 136.31, 137.31, and 142.31.

Junk/Investment-Grade Corporate Bonds Relative Strength Ratio (JNK/LQD) fell below 5-week lows on 11/23/10 and remains neutral. Absolute price fell below 8-week lows on 11/23/10 and is now neutral.

U.S. Treasury Inflation Protected / U.S. Treasury 7-10 Year Relative Strength Ratio (TIP/IEF) has firmed up moderately since making a low on 8/24/10, which implies that fixed-income investors have been choosing somewhat greater inflation protection over the past 3 months.

The U.S. dollar nearest futures contract price moved further above the previous 9-weeks’ highs on 11/29/10. The short-term trend has been up since the low on 11/3/10. USD could be heading toward a test of its 200-day SMA, which stands just below chart resistance at 82.02. Longer term, USD fell below 11-month lows on 11/3/10, thereby confirming a bearish long-term price trend. Support 78.01, 75.23, 74.27, and 70.80. Resistance 82.02, 83.64, 84.73, 85.36, 86.71, 88.80, 89.22, 89.71, and 92.53.

Advisory Service Sentiment: There were 56.2% Bulls versus 20.2% Bears as of 11/17/10, according to the weekly Investors Intelligence survey of stock market newsletter advisors. The Bull/Bear ratio stands at 2.78, which is between one and two standard deviations above the long-term mean. This is not overly excessive bullish sentiment in the second year of a bull market. The 20-year range is 0.41 to 3.74, the median is 1.54, and the mean is 1.61.

VIX Fear Index rose from 17.76 on 11/19/10 to 23.84 intraday on 11/29/10. A relatively high and rising VIX indicates increasing anxiety, worry, and fear for market prospects on the part of options players. VIX is a market estimate of expected constant 30-day volatility, calculated by weighting S&P 500 Index CBOE option bid/ask quotes spanning a wide range of strike prices for the two nearest expiration dates.

The Dow Theory reconfirmed a Primary Tide Bull Market as of 11/3/10, when both the Dow-Jones Industrial Average and the Dow-Jones Transportation Average closed above their closing price highs of the previous 25 months. The Dow Theory originally signaled the current Primary Tide Bull Market on 7/23/09, when both the Dow-Jones Industrial Average and the Dow-Jones Transportation Average closed above their closing price highs of the previous 6 months. Many other analysts were fooled into calling “Bear Market” by the big downside Secondary Reaction in May and June 2010, but my interpretation has been steadily Bullish on the Primary Trend.

S&P 500 Composite (SPX, 1,187.76) fell 1.64 points or 0.14% on Monday. Stocks suffered a deeper loss in the morning, again on fears of war in the Korean Peninsula and fears of European debt. Stocks recovered the bulk of that early loss after 2:00 p.m. ET, thereby demonstrating bullish resilience. The S&P 500 ETF (SPY) formed a Bullish Engulfing Candlestick. Over the past 3 weeks, SPX appears to be merely correcting and consolidating previous large gains in a mild and contained manner, which is entirely normal and natural in a bull market. Although these same old fears may linger in the short term, nevertheless, it appears that the US stock market is handling obvious uncertainties with relative calm and resilience, which suggests that there may be accumulation under the surface of unsophisticated reactive selling. I have no special insight into what might happen next abroad, but I do know from long experience that the worst-case scenario does not happen very often. SPX has been holding above 1173.00, the low of 11/16/10, and above key Simple Moving Averages: the 50-day SMA, now at 1177.31 and rising, and the 200-day SMA, now at 1133.30 and rising. This ability to hold support suggests that the bull may be still alive and merely taking a brief nap. Longer term, SPX rose above 2-year highs on 11/5/10, again reconfirming a bullish major trend.

S&P 500 Cash Index Potential Resistance
1576.09, high of 10/11/2007
1552.76, high of 10/31/2007
1523.57, high of 12/11/2007
1498.85, high of 12/26/2007
1440.24, high of 5/19/2008
1406.32, high of 5/29/2008
1381.50, Fibonacci 78.6% of 2007-2009 range
1366.59, high of 6/17/2008
1335.63, high of 6/25/2008
1313.15, high of 8/11/2008
1274.42, high of 9/8/2008
1255.09, high of 9/12/2008
1238.81, Fibonacci 78.6% of 1,576.09 high
1228.74, Fibonacci 61.8% of 2007-2009 range
1227.08, high of 11/5/10
1200.29, high of 11/18/10

S&P 500 Cash Index Potential Support
1173.00, low of 11/16/10
1171.70, low of 10/27/10
1166.74, low of 10/20/10
1159.71, low of 10/19/10
1,151.41, low of 10/7/10
1,131.87, low of 10/4/10
1122.79, low of 9/23/2010
1114.63, low of 9/15/2010
1110.88, low of 9/10/2010
1091.15, low of 9/7/2010
1039.70, low of 8/27/10
1039.31, Fibonacci 23.6% of June-Aug. 2010 range
1010.91, low of 7/1/2010
1008.55, Fibonacci 38.2% of 2009-2010 range
991.97, low of 9/2/2009
978.51, low of 8/17/2009
956.23, high of 6/11/2009
943.29, Gann 50.0% of 2009-2010 range
878.04, Fibonacci 61.8% of 2009-2010 range
874.17, Gann 62.5% of 2009-2010 range
869.32, low of 7/8/2009
805.17, Gann 75.0% of 2009-2010 range
785.13, Fibonacci 78.6% of 2009-2010 range
666.79, intraday low of 3/6/2009

One-Day Ranking of Major ETFs, Ranked from Strongest to Weakest of the Day:
% Price Change, ETF Name, Symbol

2.25% Oil, Crude, U.S. Oil Fund, USO
1.74% Thailand MSCI iS, THD
1.65% India PS, PIN
1.61% Hong Kong Index, EWH
1.61% Silver Trust iS, SLV
1.48% China 25 iS, FXI
1.14% Australia Index, EWA
1.06% India Earnings WTree, EPI
0.86% Materials SPDR, XLB
0.86% Taiwan Index, EWT
0.86% Bond, 20+ Years Treasury, TLT
0.83% Financial SPDR, XLF
0.83% Pacific ex-Japan, EPP
0.79% Metals & Mining SPDR, XME
0.78% Emerging Markets, EEM
0.76% Agriculture DB PS, DBA
0.76% Financial Services DJ, IYG
0.68% Brazil Index, EWZ
0.67% Energy SPDR, XLE
0.67% Russia MV, RSX
0.61% Energy DJ, IYE
0.57% Emerging VIPERs, VWO
0.55% Natural Resource iS GS, IGE
0.53% Bond, High-Yield Junk, JNK
0.51% Pacific VIPERs, VPL
0.50% Financials VIPERs, VFH
0.49% Energy VIPERs, VDE
0.49% Japan Index, EWJ
0.43% Basic Materials DJ US, IYM
0.42% Value SmallCap S&P 600, RZV
0.41% Financial DJ US, IYF
0.37% Mexico Index, EWW
0.37% China LargeCap Growth G D H USX PS, PGJ
0.36% Transportation Av DJ, IYT
0.36% Value S&P 500 B, IVE
0.36% South Korea Index, EWY
0.30% S&P 500 SPDRs LargeCap Blend, SPY
0.30% Gold Shares S.T., GLD
0.29% Malaysia Index, EWM
0.26% Bond, High-Yield Corporate, HYG
0.25% Latin Am 40, ILF
0.23% LargeCap 1000 R, IWB
0.23% S&P 500 iS LargeCap Blend, IVV
0.22% Bond, 10 Year Treasury, IEF
0.20% Canada Index, EWC
0.20% Commodity Tracking, DBC
0.15% Emerging 50 BLDRS, ADRE
0.15% SmallCap Russell 2000, IWM
0.12% South Africa Index, EZA
0.11% Bond, TIPS, TIP
0.10% Bond, Corp, LQD
0.09% Value SmallCap Russell 2000, IWN
0.09% Value SmallCap S&P 600 B, IJS
0.09% Microcap Russell, IWC
0.08% REIT Wilshire, RWR
0.08% Value VIPERs, VTV
0.08% Singapore Index, EWS
0.07% Bond, Aggregate, AGG
0.03% LargeCap Blend Russell 3000, IWV
0.02% Value 1000 Russell, IWD
0.01% DIAMONDS (DJIA), DIA
0.00% Realty Cohen & Steers, ICF
0.00% LargeCap Blend S&P 100, OEF
0.00% Dividend High Yield Equity PS, PEY
-0.01% Bond, 1-3 Year Treasury, SHY
-0.02% Bond Treasury Short-Term iS, SHV
-0.03% Small Cap VIPERs, VB
-0.03% Industrial SPDR, XLI
-0.03% SmallCap S&P 600, IJR
-0.05% Growth MidCap 400 B, IJK
-0.06% Real Estate US DJ, IYR
-0.06% REIT VIPERs, VNQ
-0.06% MidCap S&P 400 SPDRs, MDY
-0.06% Dividend SPDR, SDY
-0.06% Homebuilders SPDR, XHB
-0.07% LargeCap VIPERs, VV
-0.08% Growth LargeCap NASDAQ 100, QQQQ
-0.10% Health Care SPDR, XLV
-0.10% Biotech SPDR, XBI
-0.11% Sweden Index, EWD
-0.15% Blend Total Market VIPERs, VTI
-0.15% Semiconductor iS IGW, SOXX
-0.16% Value SmallCap VIPERS, VBR
-0.16% Growth S&P 500/BARRA, IVW
-0.17% Value MidCap Russell, IWS
-0.17% Energy Global, IXC
-0.17% Value LargeCap Dynamic PS, PWV
-0.18% Consumer Staples SPDR, XLP
-0.18% Dividend Appreciation Vipers, VIG
-0.19% Growth VIPERs, VUG
-0.19% MidCap Russell, IWR
-0.19% Growth BARRA Small Cap 600, IJT
-0.19% Utilities SPDR, XLU
-0.21% MidCap S&P 400 iS, IJH
-0.22% Consumer Discretionary SPDR, XLY
-0.24% Value MidCap S&P 400 B, IJJ
-0.24% Growth SmallCap R 2000, IWO
-0.25% LargeCap Blend S&P=Weight R, RSP
-0.25% Technology SPDR, XLK
-0.28% Bond EmrgMkt JPM iS, EMB
-0.31% Preferred Stock iS, PFF
-0.31% Growth 1000 Russell, IWF
-0.31% Dividend DJ Select, DVY
-0.33% Growth SmallCap VIPERs, VBK
-0.34% Capital Markets KWB ST, KCE
-0.36% Utilities VIPERs, VPU
-0.42% Semiconductor SPDR, XSD
-0.44% Chile MSCI iS, ECH
-0.44% Growth MidCap Russell, IWP
-0.45% Bond Muni ATM-Free S&P iS, MUB
-0.52% Switzerland Index, EWL
-0.64% Technology DJ US, IYW
-0.65% Info Tech VIPERs, VGT
-0.69% Small Cap EAFE MSCI iS, SCZ
-0.70% Networking, IGN
-0.77% Telecom DJ US, IYZ
-0.79% Global ex US ACWI iS, ACWX
-0.81% WilderHill Clean Energy PS, PBW
-0.83% Growth EAFE MSCI, EFG
-0.87% Dividend International, PID
-0.88% Global 100, IOO
-0.89% EAFE Index, EFA
-0.89% Financial Preferred, PGF
-0.94% Water Resources, PHO
-0.96% Value EAFE MSCI, EFV
-1.20% Indonesia MV, IDX
-1.32% European VIPERs, VGK
-1.63% United Kingdom Index, EWU
-1.68% Europe 350 S&P Index, IEV
-1.70% Austria Index, EWO
-1.80% Bond Ex-US Treas, BWX
-2.17% EMU Europe Index, EZU
-2.17% Germany Index, EWG
-2.32% Netherlands Index, EWN
-2.50% France Index, EWQ
-2.61% Turkey MSCI iS, TUR
-2.63% Belgium Index, EWK
-2.76% Spain Index, EWP
-2.82% Italy Index, EWI

 

Commodity weekly: Dollar strength adversely impacting commodities

Ole S Hansen, Senior Manager, Saxo Bank

A trading week shortened by US Thanksgiving was driven by Euro woes, political tensions on the Korean peninsula and worries about China tightening monetary policy.
The winner on the back of these uncertainties has been the dollar and safe government bonds while riskier assets such as commodities and equities has been mixed with many investors refraining from adding risk with the US market almost absent for most of the week.
Risk sentiment suffered a setback last Monday as North Korea sent bombs onto a South Korean island. Although commentators described it as another round of “sabre-rattling” and the impact could prove to be temporary it nevertheless added to the general nervousness across financial markets. The Euro zone nations are fighting a hard battle to contain the spiraling debt mountain which so far has brought down Greece and Ireland and threatening to spread to other countries such as Portugal and very worryingly to Spain. Bond yields on Irish, Portuguese and Spanish government debt rose to their highest points since the launch of the Euro as investors scramble to reduce exposure of fear of what happens next.
China once again raised the reserves that commercial banks are required to hold. Given the uncomfortable high level of inflation further action, such as raising official interest rates, seems likely over the coming weeks and months. The Shanghai stock index as a consequence has lost ten percent during the past couple of weeks.
The dollar has been the main winner as short positions stemming from the QE2 euphoria has continued to be unwound with traders now much more worried about the near term outlook for the Euro rather than the dollar. The dollar index has now recovered by 5.5 percent in just three weeks while the Euro has slumped 6.6 percent during the same period.
Commodity markets have held up reasonably well despite this dollar strength showing only small losses across sectors. Natural gas has been the best performer as colder weather in the US have supported prices while cotton continues to suffer heavy losses after the vertical rally came to an abrupt halt two weeks ago.

 The price of WTI Crude has been range bound this past week having found support towards the 80 dollar level despite the stronger dollar. The fundamental outlook has continued to improve, as the global supply glut has been reduced significantly and this point towards higher prices over the coming months.  Hedge funds and money managers have shown their hand by continuing to add to existing record long speculative positions. 

 Cold weather across the northern hemisphere will keep prices supported. However until we have further clarification on the European debt situation and subsequent risk of a weaker euro and stronger dollar the upside seems limited. Further news on Chinese measures to curb rising inflation will also keep the market guessing. For now the market is confine to a range between 80 and 85 dollar.
Natural gas saw the first withdrawal from underground storage as the winter demand begins to reduce inventories. Forecast for seasonal colder weather over the coming period have supported prices over the past couple of weeks with natural gas for January delivery having rallied 17 percent during this period. Current inventory levels, which stands at 3,837 billion cubic feet, is still above the five year average so any change back towards the seasonal average could halt the recent rally.
Precious metals are caught between buyers who see it as a hedge against Korean tension and European sovereign debt problems while others has been selling it on the back of the continued dollar rally. The previous strong correlation between gold and dollar has evidently gone down recently highlighting gold and silvers ability to attract safe haven demand. 

Cold weather across the northern hemisphere will keep prices supported. However until we have further clarification on the European debt situation and subsequent risk of a weaker euro and stronger dollar the upside seems limited. Further news on Chinese measures to curb rising inflation will also keep the market guessing. For now the market is confine to a range between 80 and 85 dollar.
Natural gas saw the first withdrawal from underground storage as the winter demand begins to reduce inventories. Forecast for seasonal colder weather over the coming period have supported prices over the past couple of weeks with natural gas for January delivery having rallied 17 percent during this period. Current inventory levels, which stands at 3,837 billion cubic feet, is still above the five year average so any change back towards the seasonal average could halt the recent rally.
Precious metals are caught between buyers who see it as a hedge against Korean tension and European sovereign debt problems while others has been selling it on the back of the continued dollar rally. The previous strong correlation between gold and dollar has evidently gone down recently highlighting gold and silvers ability to attract safe haven demand.

Past week performances:

How the U.S. Government Guaranteed the Coming Food Crisis

By Porter Stansberry with Braden Copeland
Saturday, November 27, 2010

Over the last several years, I've written constantly on the growing likelihood of a global currency collapse.

 

The governments of Europe and the United States have accumulated debts so large they can't ever hope to repay them, except with currencies whose value will be inflated away by money-printing.

 

That's led me to recommend inflation hedges like railroads, gold, silver, and various forms of energy. Owning these "real assets" is the single best way to protect yourself from the inflationary crisis. But make sure you don't forget the most important inflation hedge of all: food.

 

If you've been reading the financial press for the past few months, you know the prices of vital food commodities are soaring. The price of corn is up 47% since this summer. Soybeans are up 30%. Wheat is up 43%.

 

I expect this trend of higher food prices to continue for years as the U.S government intentionally debases the dollar while lying to you the whole time about wanting a "strong currency." (Make sure to read our essay here about this great lie.) There's also a good supply/demand case to be made for owning agricultural assets. Let's start with the largest crop in the United States, corn...

Read full article here

Follow The Leader: China Raises Commodity Margins As Well

China followed the CME with raising commodity margin maint to help stem the parabolic rise of commodity prices in their markets. i Guess it is a little bit 2 late if you ask me because the damage is done, the damage could be ever worse if North Korea does go to war.

(DowJones Writes) "The Dalian Commodities Exchange will raise the required margins for soybean, soymeal, soyoil, palm oil, corn, linear low-density polyethylene and polyvinyl chloride contracts to 10%, effective Monday, the bourse said in a statement on its website Friday.

The daily limit for price movements will be increased to 6%, it said.

 

FULL ARTICLE AFTER the JUMP 

On Thanksgiving, save some room for sex

Sharp holiday price drops seen for flat-panel TVs

Retailers hope holiday shoppers ready to trade up

European markets diverge on debt crisis concerns

North threatens additional attacks

'Gold is warm', says designer

 A party designer from New York has revealed that he rarely uses silver as part of his Christmas decorative schemes, preferring to use gold because of its warm tones.

In a recent interview with the New York Times, David Monn claimed that gold is something that makes people "feel good".

He detailed a recent shopping list to stock up in gold decorative items, which took him to a store in the West Village where he found a vintage Italian ceramic bowl that featured gold leaf.

Mr Monn explained that the piece could be used as a stand-alone item or as a vase, while he also spotted a handmade Christmas tree in gold wire to fit in with his colour palette.

Describing the tree from Nest Interiors, in Chelsea, he said he saw it as "an object of art on my coffee table or my dining table".

In the last year, Mr Monn has offered up his services for a state dinner at the White House, along with benefits at the Guggenheim Museum and New York Public Library.

He also designed the party for a Costume Institute Gala at the Metropolitan Museum of Art and the New York City Ballet's Spring Gala Benefit, where white butterflies and crystals were strung from the ceiling on wires.

source

We Are All German Jews Now

The introduction of so-called porno scanners at America’s airports and the egregious pat downs of airline travelers have turned every American into a German Jew. Instead of dehumanizing and demeaning one segment of the population in order to pave the way for the Holocaust, all airline travelers are being treated like German Jews by our government for our own good — to keep us safe from terrorists on airplanes.

The TSA now considers every American a potential “enemy of the state,” because any one of us may be carrying a bomb aboard an airplane, despite the fact that young men from the Middle East perpetrated the 9/11 attacks.

“Hold on,” say TSA officials and their lackeys in Congress and in the media, “Our federal government is not out to harm us let alone kill us like the Nazis did to the Jews; our government needs to conduct “aggressive measures” to “protect” us on all commercial flights from potential terrorists.” That is the party line.

I can understand objections to those who point to Nazi Germany and warn that this is what current day America is about. But I disagree with this objection.

The ultimate horrors in Nazi Germany were, indeed, much more terrible than anything close to what has occurred so far in America. But one should do more than only consider just the ultimate horrors of what went on in Nazi Germany. One must think about the road that was traveled by the Germans to get to that point.

I believe one of the most serious misunderstandings about totalitarianism is that it arrives as a full package that requires no assembly. That it is put on the people, like a winter coat. All at one time, and in full view for all to see.

This is a grave misunderstanding.

I often wondered why more Jews didn’t flee Nazi Germany. The answer did not come to me until I saw Roman Polanski’s important movie, The Pianist.

In the movie, Polanski demonstrates how many Jews were simply one step behind. When Nazi Germany limited how much money a Jew could have, instead of leaving the country, many Jews debated where they should hide their money. When Jews were required to move to certain parts of the city, many Jews simply focused on how to find the best place to live, instead of leaving the country. And then, of course, eventually it was too late to leave the country.

Would some Jews, perhaps a few, have listened and benefited from early warnings of ”fringe” voices about dangers? I think so. Would it have made sense to object to the Nazi limit on how much money a Jew could hold, and thus put at least a speed bump in the way of the Nazis? I think so.

No, they haven’t pulled up the trains in America, yet. But, when the trains do pull up, it is too late.

It’s clear what totalitarianism looks like and when I see it in America, I am going to object loud and clear. Whether it is groping TSA agents, or spying SEC agents. For it is those first steps where the battle needs to be won. Dehumanization in Germany, as Murray Sabrin points out, came step-by-step.

Dehumanization, whether it is groping or limiting how much money an ethnic group can hold, is still dehumanization. It’s the same road. We all know where that road led to in Nazi Germany. Maybe we can learn from history and stop the US from heading any further down that road.

Do my cries of warning put me on the fringe? Yes, they do. But it is a fringe group that I am proud to stand with.

Regards,

Robert Wenzel 

Euro-Zone Developments Remained Extremely Important

EUR/USD

The Euro found support below 1.3650 against the dollar in Europe on Friday and extended the recovery to test resistance above 1.37 ahead of the US open.

Euro-zone developments remained extremely important and there were further expectations that Ireland was very close to securing a support package for the banking sector. Discussions continued throughout the day with expectations of an agreement over the weekend with Ireland also due to announce further measures to curb the budget deficit.

An easing of immediate fears surrounding Ireland will help underpin Euro sentiment to some extent, but there will still be a high degree of unease over the medium-term outlook, especially as there is still an important contagion risk. So far, there does not appear to have been heavy investment outflows from the Euro area which should maintain the potential for solid buying support on dips.

There were no major US economic data releases during Friday. Fed Chairman Bernanke defended the Fed’s economic policies and his comments do not suggest that the central bank is looking to move back from the quantitative easing process and this will tend to limit dollar support.

Risk appetite was initially weaker following the Chinese move to increase reserve requirements and the Euro also hit tough resistance above 1.37 which helped trigger a move back towards 1.3650 later in the US session. There will be the risk of choppy trading over the forthcoming week with liquidity curbed by the US Thanksgiving holiday. Media reports suggested that a deal worth at least EUR70bn would be announced and the Euro pushed back above 1.37 in Asia on Monday.

Yen

The dollar was blocked in the 83.80 region against the yen during Friday, but still found solid buying support on dips towards the 83.20 area as the underlying technical outlook remained more encouraging for the US currency.

The yen advanced following the Chinese announcement that reserve requirements for the major banks would be increased again at the end of November, although the impact was offset to some extent by the fact that there was less speculation over a near-term increase in interest rates.

Risk conditions also held relatively steady with US equity markets on solid ground and the dollar consolidated in the 83.50 area with the Japanese currency slightly weaker on the crosses.

Sterling

Sterling tested resistance above 1.6060 against the US dollar on Friday, but was unable to break through and weakened to re-test support below the 1.60 level during the US session before finding support near 1.5950.

The UK currency lost support against the Euro as markets continued to anticipate an Irish support package with the Euro advancing to the 0.8550 area. Selling pressure on Sterling should be contained to some extent by the fact that any deal for Ireland will also lessen market fears that there would be a contagion effect of bad loans on the UK banking sector.

Bank of England MPC member Tucker stated that he wanted to be extremely vigilant over inflation expectations and this should boost market expectations that the central bank will resist further near-term quantitative easing. Underlying confidence is still liable to be fragile and frequent shifts in expectations will remain an important market feature with Sterling moving slightly higher against the dollar on Monday. 

Swiss franc

The franc remained generally on the defensive against the Euro during Friday, but did find some support weaker than 1.3620. The franc also secured support close to parity against the dollar with the US currency weakening back to the 0.9920 area later in the US session.

Immediate defensive demand for the franc remained lower as markets remained confident that a support package for the Irish banking sector would be agreed. It may still prove more difficult for the Euro to gain sustained relief given underlying fears surrounding the region.

Confidence in the Swiss economy is likely to remain slightly weaker in the short term following subdued growth indicators which will tend to curb franc demand.

Australian dollar

The Australian dollar hit resistance above 0.99 against the US currency on Friday and had a weaker tone for the session, although it recovered from its worst levels below 0.9850.

The Australian dollar was undermined by the increase in reserve requirements for Chinese banks as it maintained fears that the Chinese economy would have to be cooled further which would dampen regional demand.

There were also doubts surrounding the domestic economy and fears that consumer spending and growth could slow more substantially than expected over the next few months.

FX Tools: AUD weakness and EURJPY outlook

We’ve noticed a divergently weak Aussie since yesterday – possibly on the Chinese clampdown measures. What’s the evidence say about Aussie valuation? Also – which way EURJPY at big inflection point?

Aussie looks relatively fairly valued versus interest rate spreads and other indicators like the copper price and risk appetite in general. It is interesting to note that AUDUSD is tracking the emerging market equity markets far more closely than the US S&P500 (which has rallied more than EM equity indices.). It is also interesting that emerging market equities and gold are in very tight correlation and one wonders if there really is any asset diversification to be had. On a completely different note, with all asset classes so hyper-correlated, is there a better measure of something “real” that can tell us what is going on. One possibility: China electricity production, which is generally considered a better measure than the official GDP figures out of China, which are more likely to be created by decree. The latest data for October suggests that electricity production growth has slowed dramatically over the last few months – far more sharply than the official industrial production data, for example. See charts below.

Chart: China Electricity Production vs. Industrial Production
Note that Chinese Electricity Production actually dipped strongly into negative territory (almost -15% YoY), while Industrial Production supposedly never dipped below a growth rate of 5-6% a year. Creative accounting is a wonderful thing, isn’t it? It’s also what is keeping the largest US banks afloat and able to hand out huge bonuses even as the risk of eventual bankruptcy grows by the day. See this great article (sorry - full article is for paying WSJ subscribers) about the real reasons behind Bernanke’s QE2 move. In it, Mr. Kessler suggests that the risks of further problems in real estate are the main drive behind the Fed’s QE2 move and that everything else being said is just a cover to distract us from the systemic nature of the problem and avoid shaking confidence. Thanks to Mr. J for the link.

 Chart: China Electricity and AUDCAD
Even away from AUDUSD, which more or less followed the dip and recovery in Chinese economic activity, the Aussie has also outperformed other commodity currencies like CAD due to its more significant exposure to Asia. But a stronger Chinese slowdown is nowhere near priced into the AUDCAD cross, which continues to focus almost exclusively on interest rate spreads.

Rate spread watch: EURJPY
Interesting to note the current state of EURJPY, as rates have backed up so much in Europe relative to Japan,  but the currency pair has failed to take note. EURCHF is several figures higher now despite the ongoing PIGs crisis, why not EURJPY? Another leg down in bonds and the least bit of a relief rally in the Euro on a possible Irish bailout reaction would really put the EURJPY bears’ feet to the fire.

Chart: EURJPY vs. 2-year rate spreads

 Chart: Weekly EURJPY
The EURJPY chart shows a bit of an upside down head and shoulders formation – a bit interesting if we get above this 115 area from a technical perspective. 

FX Update: Ugly US data good or bad for USD?

Weak US inflation and housing starts data makes Fed puff out its chest in satisfaction on recent QE launch. But will the ugly data mean a renewal of the QE-driven speculative bubble or are those days behind us?

UK joins the Ireland debt crisis fray
As IMF representatives are set to arrive in Dublin tomorrow, the UK has declared its intention to do what it can to help Ireland work its way through the Irish debt crisis, an announcement that curiously saw little correction in the pound versus the broader market. If risk aversion remains at the fore here, one would expect GBP to underperform the greenback on this news. Still, the risks for the UK are relatively small, as it is only choosing to help Ireland because of the proximity and integration of its economy with Britain’s. Irish GDP is only a tiny fraction of the UK’s, though the estimated price tag on a Irish bailout, at EUR 50 billion, is some one-third of Irish GDP. The risk from Ireland remains far larger for the EuroZone, where we must follow the market’s pricing of contagion risk. On that account, most intra-Europe sovereign spreads are off their recent highs from a few days ago, but still very elevated.

Fed on the defensive
The Wall Street Journal’ “Fed insider” Hilsenrath  discusses a number of Fed officials who were out defending the most recent QE2 decision. No surprises that it was the dovish quartet of Yellen, Dudley, outgoing Evans and incoming Rosengren that have spoken up most strongly in favor of the decision. The latter two suggested that QE could be expanded if conditions warrant. These seemed to be little fallout for the dollar on this news. Also, FOMC board of governors nominee Peter Diamond’s nomination was finally approved yesterday, despite the strenuous objections of Republican senator Shelby. There was no public spectacle made of his nomination vote, and little is known about the Nobel-prize winning economist in terms of his thoughts on monetary policy. It is important to look for clues from every FOMC voting member these days.

Miserable US Data

The US headline CPI was weaker than expected and the core number saw the lowest year-on-year inflation on record, as the runup in raw materials prices has apparently failed to feed through to core inflation so far. This and the absurdly weak housing starts data from October must be making the Fed doves feel more comfortable with their recent decision to launch the next round of quantitative easing. It’s tempting to believe that this bad US data might trigger the awful QE-logic of the cycle that led us to such heights in risk appetite starting in early September, namely that this means the unending Fed gravy train is guaranteed and therefore we should all speculate in risk again at the expense of the greenback. While this may be the case for a short time, the recent deterioration in the technicals for the pro-risk/anti-USD trade suggests that any such impulse will quickly fade in the days or weeks ahead, if it even gets started in the first place.

Looking ahead
Interesting data up tomorrow again with the latest weekly jobless claims number from the US. We seem to have a positive trend developing there and it would be interesting to see how the market would react to another drop in the claims data after last week’s data was close to the post-Lehman bankruptcy low. We also have the Philly Fed out, which will be closely watched after the Empire data mysteriously dove over a cliff this month.
Also interesting is the strong technical rejection of the rise in yields yesterday at the longest end of the US yield curve. What will this mean for JPY crosses?

Chart: AUDJPY
AUDJPY at an interesting inflection point here, deciding whether it is comfortable above this old 81.25 resistance area. We’ll watch the bond market with interest here – it would seem that bonds might find further buyers after the strong reversal in the US 30-year yesterday. The JPY’s traditional sweet spot is certainly a world of falling yields and risk aversion – and those conditions are anathema to the high-flying Aussie. Of course, if bonds don’t take a more definitive stand here, we probably just get more churning in this cross.

Economic Data Highlights

• US Weekly ABC Consumer Confidence out at -47 vs. -46 last week
• Australia Sep. Westpac Leading Index out at 0.0% vs. -0.1% in Aug.
• Australia Q3 Wage Cost Index rose 1.1% QoQ and 3.5% YoY vs. 1.1%/3.3% expected, respectively, and vs. +3.0% in Q2
• Sweden Oct. Average House Prices out at 1.952M vs. 1.902M in Sep.
• UK Bank of England voted 7-2 on most recent monetary policy statement
• UK Oct. Oct. Jobless Claims Change fell -3.7k vs. +6k expected
• UK Sep. Average Weekly Earnings ex Bonus rose 2.2% 3M/YoY vs. 2.3% expected and 2.0% in Aug.
• EuroZone Sep. Construction Output fell -2.1% MoM and -8.1% YoY vs. -7.3% YoY in Aug.
• US Oct. CPI out at +0.2% MoM and +1.2% YoY vs. +0.3%/+1.3% expected, respectively
• US Oct. CPI ex Food and Energy out at 0.0% MoM and +0.6% YoY vs. +0.1%/0.7% expected, respectively and vs. +0.8% YoY in Sep.
• US Oct. Housing Starts out at 519k vs. 598k expected and 588k in Sep.
• US Oct. Building Permits out at 550k vs. 568k expected and 547k in Sep.

Upcoming Economic Calendar Highlights

• US Fed’s Bullard to Speak (1415)
• US Weekly DoE Crude Oil and Product Inventories (1530)
• New Zealand Producer Prices Inputs/Outputs (2145)
• Australia Aug. Average Weekly Wages (0030)
• New Zealand ANZ Consumer Confidence (0200)
• Australia RBA’s Battellino to Speak (0505)

Real estate insider: Housing crash will surpass the Great Depression

From Pragmatic Capitalism:

More bad news out of the housing market today as Zillow, a leading online real estate marketplace, released its third quarter report and it largely echos what we saw in yesterday's Clear Capital report – the housing market is double dipping. Home values fell an average 4.3% in the third quarter.

Stan Humphries, the Chief Economist at Zillow, says the housing market decline is likely to surpass the Great Depression's decline and that prices are unlikely to recover before...

Read full article...

The long-awaited gold correction could be starting now

From Gold Stock Trades:

... As I wrote in my buy signal in gold in late July, the conditions were ideal for a major move to the upside. Now, the conditions are reaching the extreme opposite: it’s overbought, and surpassing measured moves and upper resistance lines, which mark prior turning points.

The majority of traders become reckless at extremely overbought levels and are often stuck when markets correct to find support. They abandon their methods as their accounts grow in value and don’t factor in how events may change.

Right now, gold is the easy trade, as most of the reports from the media outlets are bullish for gold and silver in light of the second round of quantitative easing (QE2), but is it the prudent trade?

Read full article...

FX Tech Update: Interesting close this week

This week has seen an interesting close that could have important near term implications. One of the interesting developments today was the strong bounce in the Euro in some of the crosses. What are the charts telling us?

The charts for today’s and the weekly close suggest a further confirmation of the overall USD reversal back to more strength, a reversal that could at least see the USD carving out a range of consolidation now, as it is too early to suggest anything more at this time.  The case for a stronger USD was underlined by today’s follow up move to the downside in AUDUSD on weakness in risk appetite and also in metals both precious and industrial, which solf off very steeply today.

Chart: AUDUSD daily
The rejection of the move above parity looks rather strong after today’s action. Resistance is now that parity line and then the 0.618 Fibo line that comes in from wherever the pair finds a significant low. The support focus shifts to the 09650 area support and then back to the previous salient high just above 0.9415.

 Chart: AUDUSD weekly
The weekly candlestick also shows a strong rejection of almost the entirety of the previous week’s upside. Note that today’s close is very close to the old 2008 high.

Euro resurgent?
An interesting day for the Euro, which even managed to keep up with the USD rally as the PIGS risk spreads eased today.  Some of the closes today suggest that the Euro could continue to perform well in places if this new wave of risk aversion extends – if not versus the USD, then in other places, like..

Chart: EURAUD
A tremendous move off the double bottom here – suggests that the Euro is still somewhat of a safe haven currency when times get tough, PIGS or no PIGS.

 Chart: EURCHF
Even more interesting is to see the strong engulfing bullish candlestick in EURCHF today despite the risk aversion. Is the CHF rally of late overdone? The rally off the lows occurred right at the key 55-day moving average and if the pair is able to work its way back toward the 200-day moving average (black line) in the weeks to come, there  is also a very big upside down head and shoulders formation in play.

CHF no safe haven
Also interesting today is the emphatic rejection of the Swiss franc as a safe haven when risk appetite is having a very negative day. EURCHF was sharply higher, as we pointed out above, and GBPCHF saw a follow up move higher as well.  USDCHF has closed higher six days in a row now – see below.

Chart: USDCHF
Note that today was the sixth day in a row of higher closes and also note the 55-day moving average (red line) quickly approaching.

Nice weekend and stay careful out there!

Commodity weekly: Clouds appearing on the horizon.

Profit taking has set in across the major markets as the dollar has regained some lost ground. Speculation grows the Bank of China will raise interest rates again.

Sovereign debt worries came back to haunt the eurozone with the peripheral nations suffering huge losses on their government bonds as yield spreads over German government bonds rose strongly. The credit worthiness of Irish government bonds plunged with the ten year yield rising strongly before falling again Friday amid talk of a European Union led bailout like the one Greece received earlier this year. These worries weighed on the euro resulting in a comeback for the dollar which had been sold ahead of the quantitative easing announcement from the US Federal Reserve.

The stronger dollar initially failed to halt the commodity rally seen up until and after QE2. What changed this sentiment, at least for now, was another strong reading on Chinese inflation. On Friday this resulted in a 5.2 percent tumble in the Shanghai stock index as speculation grew that the Bank of China wouldl raise interest rates again. This would be in order to cool the economy and prevent a bubble like situation in certain sectors to develop further.

Another factor to impact commodities this week was a round of margin increases imposed by US exchanges with the most dramatic impact being on Silver and Sugar where margins were raised by 30 and 65 percent respectively. Silver dropped 11 percent on the news while Sugar plunged 14 percent as speculative long positions where scaled back in order to meet the increased margin payments.

Whether these events will lead to an end of year risk off scenario is too early to tell. It may, however, change the investor’s views on individual markets where some have been driven by the overall eagerness to diverge and place hedges against a falling dollar. Some commodities have seen price rises that fundamentals do not support and they could suffer as consequence. Others will find support relatively quickly and will be give investors another chance to join the longer term trend higher.

At the time of writing the Reuters Jefferies CRB index was 0.7 pct lower on the week as the agricultural sector ran into profit-taking, led by Sugar, Rice and Corn. The energy sector showed strength early on but succumbed to profit taking despite another draw in US inventories. Copper had a good week despite worries about the Chinese rate hike which could dampen demand among the world’s largest consumer.

Gold and silver made new highs, reaching 1,425 and 29.36 before the above mentioned factors triggered a round of profit-taking. The week has generally been characterized by increased intraday volatility with the reversal on Tuesday being particular brutal. Whether this increased volatility is the early signs of end of year position squaring remains to be seen. For now we have not seen any major support levels give way but will keep a close eye on support at 1,350 followed by 1,315 on gold. 

Crude oil rose to 88.63, a two year high, continuing the rally that began last week when Saudi Arabia shifted their upper comfortable price level to 90 from 80 dollars previously. Total speculative long positions in crude held by money managers such as hedge funds, commodity pools and commodity trading advisors reached a new record high as of last week and is set to increase further this week.

The dollar strength, combined with the Chinese applying the economic brake further, comes at a tricky time as it increases the risk of positions being scaled back. Fundamental news has been supportive as the inventory overhang in the US has begun to shrink leading the way for potentially higher prices next year as the global economic outlook continues to improve.

No major position adjustments are expected unless we break back below 84.50 which could signal a return to the October range between 80 and 85.  Resistance is called at 90 which represents a 50 percent retracement of the 2008/09 sell-off.

US grain markets also ran into profit taking this week. This came despite a USDA report earlier in the week which once again revised down output expectations. The rally in Corn stopped at 6.17 per bushel as profit taking surfaced. Apart from the dollar impact it was also helped by the belief that US farmers may boost planting next year thereby easing global supply concerns. The USDA forecast a global production deficit of 18.8 million tons this year. The biggest threat to current prices is the continued large speculative position which is holding above 2 billion bushels and could trigger a sell off should longs decide to exit ahead of year end.

Technically, the corn contract for March delivery should find support down towards 5.40 which would close out the gab from when the market spiked higher back in October.

The vertical ascent seen in sugar over the past few months came to a halt Thursday as the US futures exchange raised the margin for holding a sugar future by 65 percent. This comes after a 130 percent rally from May brought prices up to a new record high at 33.40 cents per pound. Robust consumer demand combined with uncertainty about India’s export intentions had buyers running scared triggering ever higher prices. The 17 percent reversal over a few hours reminded investors once again about the liquidity concerns that goes with investing in such markets.

EM currencies telling us something?

No sign of panic in the major equity markets today, but the USD has made a fairly significant move here and our EM risk indicators are showing some divergence from the complacency elsewhere. Will the G20 encourage this trend or reject it?

Carry Trade Model – all things normal?

A look at our carry trade risk model shows very close correlation of the model with a sample US dollar trade as, on the surface of things, at least, correlation across markets remain very tight. Note that the sample USD carry basket is now trading back below its previous high – an interesting technical reversal, though we’d like to see it hold on the other side of the G20 meeting here.

 However…if we zoom in on one of the indicators showing the most divergence lately – emerging market bond spreads and currencies – we can see that there are signs of a bottom in place on the EM rally as far as underlying risk appetite goes in EM bond spreads and currencies goes, while EM equities have continued to spike further. Is this an overshoot?

And is the stronger USD a risk to the excessive complacency in risk…as we chart EM equities versus the USD/G10?

And vs. ZAR (can anyone spot the correlation here?), is the stronger USD leading the way for broader risk appetite here?

If risk is overdone here, then the currencies most at risk should be those currencies that performed best on the upside of the recent QE liquidity speculation bubble– a classic high beta behavior. In the G-10, the high beta currencies are AUD and NZD. Those not willing to look at buying the USD might consider piggy-backing the greenback via CAD, which has shown some signs of perking up lately, i.e., short AUDCAD and short NZDCAD trades might be a popular way to express a reversal in the very stretched valuation in the antipodeans.

Commodity prices boosted as Fed returns to the printing press

The US Federal Reserve returned to the money pump Wednesday and the market reacted accordingly by sending the dollar lower while stocks and commodities rose strongly.
The amount of US 600 billion that will be spent buying US treasuries over the next eight months was on the high side of expectations hence the subsequent reaction. In a statement the Fed committee once again reiterated their commitment to keep an exceptionally low fed funds rate over an extended period.
The purchase will primarily be directed towards government bonds in the five to ten year maturity range. This should provide the best support for mortgage bonds thereby keeping borrowing cost for homeowners under control. The flipside is the emergence of the US Federal Reserve as the speculators best friend as his attempt to drive the dollar lower will help to drive commodity prices higher. Whether this eventually will lead to another bubble remains to be seen.
Below is illustrated how different sectors performed in the months before and after the now famous speech by Fed chairman Ben Bernanke at Jackson Hole on August 22. This speech kicked off the expectations for additional quantitative easing. The rally in commodities and stocks accelerated after August as the dollar came under increased pressure. It is also worth noting that future inflation expectations had been falling before the speech only to increase strongly up until today.

 The S&P 500 index has returned to levels not seen since September 2008 as a prolonged period of low interest rates increases the attractiveness of stocks and commodities. Meanwhile the dollar has now lost more than 14 percent versus a basket of currencies and is getting close to the previous low point recorded in November last year.
In Europe the government debt problems have re emerged with yield spreads between the safe haven of German government bond and especially Ireland and Greece widening again. This is one of the short term clouds on the Euro horizon which could potentially reverse some of the recent gains versus the dollar.
The month long rally in commodities went into a higher gear after the Fed announcement. The Reuters Jefferies CRB index gained four percent on the week from a broad based rally with the index heavy energy sector (minus natural gas)  rallying strongly on the back of Saudi comments combined with the weaker dollar. Adverse weather also continues to support the already strong rally among agricultural products.

 Crude oil shifted up a gear this week leaving the recent trading range behind and setting out on a journey towards 90 dollars per barrel. The rally which began before the Fed announcement came about as the Saudi oil minister shifted the upper limit off their comfort zone from 80 to 90 dollars. The announcement was probably in response to the weaker dollar seen these past few months but also a belief that the global economic recovery can be sustained despite higher prices at the pump.
For now though the US Federal Reserve will not stand in the way of further price appreciations as they attempt to drive the dollar lower.
The Fed announcement and subsequent dollar sell off triggered the move above 85 dollar with 90 now being the target, this level represents a 50 percent retracement of the 2008 to 2009 sell off.

Natural gas had another bad week after the rally the previous week as the weekly storage data surprised to the upside sending prices lower. The complete lack of good news continues to haunt this beleaguered product and the only support seems to stem from the relentless buying associated with long-only indices and exchange traded funds. Unless we see a change in the whether forecast for the approaching winter record storage levels will cap any major rallies.
Gold climbed to a new record high Friday and silver reached a 30 year high after the resumption of quantitative easing. Some profit taking was seen Wednesday ahead of the announcement which left both markets in a better position to react to the news. The combination of weak dollar and continued increased inflation projections brought investors back in droves and the speculative long positions through futures and ETF’s will have risen as a consequence.

 The psychological level at 1,400 on gold should provide some near term resistance while the market decide whether the dollar should be sold even lower at this stage. Looming uncertainties about sovereign debt in Europe has the potential of keeping the market supported even if a dollar correction materializes.