FX Options Update: Volatility lower in thin bank holiday trading

Michael Schmeja, Global Head of Derivatives Sales.

A quiet Asian session and a quiet morning in the spot and options market which isn’t surprising due to the UK bank holiday. Most volatility pairs extending Fridays lows and taking the risk reversals lower. Fitch’s cut of Spain’s credit rating took the market lower Friday but faded. 

The focus this week will remain on Europe, however the US holds some important numbers with the NFP’s on Friday. Bank of Canada will come up with a decision on their interest rate and the risk there is clearly if they don’t hike. Furthermore we have a lot of important Canadian data coming out the next two weeks. (see attached)

I will buy a strangle 1.0325/1.0725, roughly 25 delta, and will as usual try to trade spot around it. Expiry 14th of June, cost 100 CAD pips. Spot reference: 1.0490.

Otherwise not much to report, good luck with your trading, enjoy the bank holiday.

Short Term Trading ideas:

EURNOK

Comment:

Sold 50% of an 8.1500 EUR Call, expiry 1 month 28th of June paying me 500 NOK pips.

EURUSD

Comment:

Long EUR Put 1.2000, Expiry 1.1700 Expiry 17th of June

Short EUR Put 1.1700, Expiry 1.1700 Expiry 17th of June

Cost: 90 USD pips

Trend Trading Gold, Silver, Oil & SP500

Trend Trading Gold, Silver, Oil & SP500

Last week looked and felt like a pivotal week for both stocks and commodities. The past two weeks have had investors and traders in a panic as they try to find safe investments for their money. After watching and reviewing the panic selling in the market it looks as though the majority decided to sell everything and be in cash for the time being. This is bullish for the stock market.

I will admit it has been tougher to trade recently because of increased risk levels due to the large 2-4% sell offs and rallies happening within minutes… While this is amazing for disciplined and experienced traders who are able to pull the trigger getting in and out with quick profit in the matter of minutes, this same price action can blow up trading accounts of those who do not have a trading strategy, money management and the discipline to take profits and cut losses very quickly. The speed of the rallies and sell offs is the matter of being up or down thousand of dollars in the matter of 5-10 minutes… That is one of the reasons I have stepped back from being aggressive and into more of an observation mode playing with small amounts of money and focusing on the larger trends at.

My #1 goal is to make subscribers money with the least amount of risk and watching the market swing 2-4% in minutes makes it extremely difficult to get everyone in and out positions with a profit before the market changes directions. As much as I love trading, some times the best position is to have small ones or be in cash.

GLD – Gold ETF Trading

Here is my weekly updated chart of gold as it works its way through the correction from last year. The daily chart looks to be forming a larger Cup & Handle pattern which is extremely bullish. If this pattern does a text book move then we could see GLD reach $140 and spot gold would reach the $1400 area.

That being said this pattern still has to complete the handle portion which could easily last another 4 weeks, so I am not in a panic to add more to our position.

SLV – Silver ETF Trading

Silver is in much of the same situation. Because of the added volatility in silver the charts do not look quite the same but they are similar in many ways… Silver is used a lot for industrial purposes and because the economy which is very weak still (though it is getting better) we are not seeing silver demand rise much. If silver can break this large resistance level then we could see silver surge to $25 (25%) this year.

 

USO – Oil Fund Trading

USO (Oil) has held up really well in the past 12 months but the recent sell off has seriously damaged the bullish outlook I had not long ago. While it is oversold and looks to have started a bounce last week the chart is pointing to lower prices over the longer term… This USO fund does have contago which makes this fund under perform the actual price of oil. The current prices of oil are still trading at a key support level and could post nice bounce if not trigger a new rally. The problem with following some ETF’s which have contago is that you do not see the real price action of the commodity. But that is were I come in as I track the underlying commodity and relate it to ETFs for you.

SPY – SP500 ETF Trading

The Stock Market (SP500) sure has been a roller coaster. The chart below shows you what happened in January for the last correction and where we stand currently in comparison. If a setup is obvious in the financial market there is a very high chance it will not work out as planned and by knowing this it allows us to be cautious and take profits at key short term support and resistance levels.

Trend Trading Conclusion:

In short, I feel gold and silver will drift around to digest the recent move up and to form the handle portion. Oil looks to have put in a short term bottom and if we get a small pullback in the coming days to test the intraday chart breakout level and touch the support trend line we could look to take a position.

We tend to see the most price appreciation during the final stages of a trend and we could have seen that on the US Dollar over the past 6 weeks. It looks as though the dollar could have put in a double top. If the dollar rolls over it would help boost precious metals, oil and stocks… But we will not know it’s a top until there is a clear trend reversal which in any case will be weeks before that type of price action can unfold.

As for the SP500, we have seen the same level of selling as we did in Feb-March 2009. High volume panic selling has ruled the market since late April. There are equal arguments for saying the market has bottomed with all the panic selling and that we should start another large rally lasting 8-12 months or one could argue this is capitulation volume signaling massive distribution of shares and now every rally/bounce will be sold… Personally I am torn between the two… but lean more towards higher prices with a multi month grind up at slow rate…

Forex - Weekly Outlook : May 31-June 4

The week beginning May 31 follows one during which the euro hovered around a 4-year low against the U.S. dollar, bouncing slightly on Thursday only to fall again on Friday after Spain's credit rating was cut.

The downgrade by Fitch, which renewed fears over the euro zone sovereign debt crisis, came a day after Madrid adopted austerity measures.

Finance chiefs from the Group of Twenty, an organization representing the world's leading economies, are set to meet next week in South Korea. The leaders are likely to discuss the European debt crisis and declare their support for Europe's efforts to resolve it, financial news outlets reported.

Next week will also see the publication of key reports on the euro zone consumer price inflation, unemployment and retail sales. Data will also be released on the 16-nation region's services and manufacturing sectors, as well as on euro zone industrial producer prices, money supply and gross domestic product. The president of the European Central Bank, Jean-Claude Trichet, is also due to speak at a public engagement.

Meanwhile, important data will be released on U.S. nonfarm unemployment and initial jobless claims, as well as on the country's manufacturing sector and housing market. Reports will also be published on U.S. hourly earnings, construction spending, vehicle sales, factory orders and crude oil inventories. The Chairman of the Federal Reserve, Ben Bernanke, is also due to speak at a public engagement.

Elsewhere in the world, the central banks of Australia and Canada will make a key interest rate decisions; Australia will publish GDP data; Britain will publish important reports on its housing market and manufacturing sector; Japan will release a report on capital spending; and Switzerland will publish data on its GDP and retail sector.

Ahead of the coming week, Forex Pros has compiled a list of these and other significant events likely to affect the markets.

Sunday, May 30

The market research firm Markit will publish data on Japan's manufacturing sector based on a survey of purchasing managers. Japan will also release a monthly report on industrial production, a leading indicator of economic health.

Monday, May 31

Trichet and Bernanke are set to speak at an event in Seoul. Traders are likely to scrutinize their comments for clues to future shifts in monetary policy. The Bank of Japan governor, Masaaki Shirakawa, is due to speak later in the day at an engagement in Tokyo.

Meanwhile, Australia will release data on private sector credit in the country and on its current account, the difference in value between imported and exported goods, services, income flows, and unilateral transfers. An industry group is due to publish a report on new home sales in the country.

The European Union will later release monthly reports on consumer price inflation, money supply and private loans. Canada will later publish monthly GDP data, the broadest measure of economic activity.

Banks in Britain and the United States will be closed as the countries hold bank holidays.

Tuesday, June 1

Australia will publish a report on retail sales, a key gauge of consumer spending. The country will also release monthly data on the number of new building approvals issued.

The Reserve Bank of Australia, meanwhile, will make a key interest rate decision, which it will announce in a rate statement. In addition to relaying this information, the statement also offers commentary on the economic conditions that influenced the central bank's decision and the Australian economy's outlook.

Later Tuesday, Switzerland will publish GDP data. The Swiss SVME purchasing managers' association will also publish a monthly report on the country's manufacturing sector.

Germany will then publish its unemployment rate and a report on the change in its unemployment figures. The country will also release data on domestic retail sales. The EU will later publish data on the euro zone unemployment rate.

Also Tuesday, the Bank of Canada will make a key interest rate decision, which it too will announce in a statement. The U.S. will then publish a report on spending in the construction sector. An industry group, the Institute for Supply Management, will also publish an important report on the U.S. manufacturing sector.

Wednesday, June 2

Australia will publish key GDP data, after which Switzerland will release a report on retail sales.

The EU will then publish a Producer Price Index, which measures the change in the price of finished goods and services sold by producers.

Later in the day, an industry group will release a report on U.S. pending home sales, a leading indicator of economic health. The report, which excludes new construction, measures the change in the number of homes under contract to be sold but still awaiting the closing transaction.

Japan, meanwhile, will publish data on the total value of new capital expenditures by businesses.

Thursday, June 3

Australia will publish a report its trade balance, the difference in value between imported and exported goods. A U.K. industry group will then publish a report on British house prices.

Later in the day, the EU will release two reports, the first detailing changes in the total value of inflation-adjusted sales at the retail level; the second, an index based on a survey of purchasing managers in the services industry, rating the relative level of business conditions.

Meanwhile, the U.S. Department of Labor will release data on labor efficiency when producing goods, excluding the farming industry. The data processing firm ADP will publish a closely watched report on U.S. nonfarm employment change.

The U.S. will then release key data on initial jobless claims, an important indicator of overall economic health. The U.S. will also publish a report on the cost of labor, again excluding the farming industry. Later in the day, Bernanke is scheduled to speak at an event in Detroit.

Friday, June 4

The EU will publish revised GDP for the euro zone. Canada will then publish three reports, the first two on employment and the third on the construction sector. The Richard Ivey School of Business will later release the results of a key survey of purchasing managers in Canada.

Also Friday, the U.S. will release key employment data in a report on nonfarm payrolls, a leading indicator of consumer spending and overall economic health, as well as on its unemployment rate.

Gasoline Demand to Rise as Driving Season Arrives - Weekly Fundamental Outlook for Energies and Metals

Global financial market weakened early last week as Bank of Spain's takeover of a savings bank called Cajasur and potential merge of 4 other banks unveiled problems in the country's banking system. Moreover, escalated tensions on the Korean Peninsula further weighed on market sentiment. US dollar, Japanese yen and gold surged while stocks, euro and energies slumped.

Things changed dramatically in the middle of the week as OECD upgraded its GDP growth forecasts for 2010 and 2011. OECD predicts GDP across 30 OECD countries will grow +2.7% in 2010 and +2.8% in 2011, compared with November's forecasts of +1.9% in 2010 and +2.5% in 2011. Taking China into account, world growth will be boosted higher to +4.6% and +4.5% in 2010 and 2011, respectively. The projections are higher than average growth of +3.7%. That said, OECD warned that 'instability in sovereign debt markets poses' poses a serious risk and the Eurozone has to 'strengthen its institutional and operational architecture' with bolder measures needed to 'ensure fiscal discipline'. The agency forecasts the Eurozone's economy will rise +1.2%, upwardly revised from November's estimate of +0.9%.

Although rumors that China was reviewing its holdings on Eurozone bonds triggered broad-based selloff in the market, the government's affirmation that Europe is 'one of the major markets for investing China's exchange reserves' boosted prices. Rallies were accelerated as US reported some strong economic data.

Concerns over sovereign crisis, however, returned on Friday as Fitch Ratings cut Spain's credit rate by one notch to AA+ from AAA, reflecting the assessment that 'the process of adjustment to a lower level of private sector and external indebtedness will materially reduce the rate of growth of the Spanish economy over the medium term'

Crude Oil

After rallying to a 2-week high at 75.72, crude oil price retreated more than -$1/bbl as US consumer confidence missed market expectations. The front-month WTI contract ended settled at 73.97, down -0.78%, on Friday. On weekly basis, the contract surged +5.61%, halting the severe selloff since May 3. In May, WTI futures slumped -14.1%.

Crude oil and product prices surged as OECD revised up its economic forecasts for 2010 and 2011. Rallies accelerated after release of the oil inventory report although the set of data was not exceptionally bullish. Indeed, recent price movements have been driven by macroeconomic and political issues, rather than fundamentals in the oil market.

According to the US Energy Department, crude stockpile rose more than forecast, by +2.46 mmb, to 365.1 mmb in the week ended May 21. Yet, Cushing stock recorded the first dip in 10 weeks. This greatly narrowed the spread between WTI and Brent crude as well as tightening WTI time spread.

Gasoline and distillate stockpiles dipped -0.2 mmb and -0.24 mmb, respectively. Drop in gasoline stockpile concentrated in West Coast where storage was down -1.5 mmb. In all 5 districts, production fell -2.38% but was partly offset by +31.8% increase in imports. Demand was largely flat at 9.099M bpd. Decline in distillate stockpile was seen most in Gulf Coast where storage was down -1.7 mmb. Production dipped -0.78% but was partly offset by +38.3% increase in imports. Demand also slid, by -1.59%, to 4.021M bpd.

As the US driving season begins, gasoline demand is expected to pick up. Recent decline in gasoline price should have further boosted driving interests. The US Energy Department estimated that retail gasoline price has dropped -3.92% to 2.842/gallon in the week ended May 24 from 2 weeks ago. According to AAA, the biggest motoring organization in the US pump price has plunged for 3 weeks to an average of 2.749/gallon as of May 26. While price has risen +12% from the same period last year, it's still -30% lower than 2008. The organization also forecast the number of people having road trips during the Memorial Day weekend will rise for the first time since 2005, by +5.8% y/y, this year.

However, uncertainty in economic outlook and high unemployment are lingering concerns which should limit demand growth. The US Energy Department anticipates motor gasoline demand will increase by around +0.9% this summer. 

Distillate price rebounded more strongly than gasoline price last week as investors focused on improved demand in the former in recent weeks. The chart below shows that distillate demand has been picking up since mid-April and has been growing from a year-ago basis since then, reversing the picture in the first quarter that distillate demand remained in contraction.

Natural Gas

Gas price rallied despite bigger-than-expected stock builds. The benchmark contract jumped +5.72% w/w and settled at 4.341 on Friday. Apart from the dramatic change in broad market sentiment, investors speculate the rapid rise in cooling demand and potential production disruption by hurricanes may slow down storage injections.

The US Energy Department reported that gas storage soared +104 bcf to 2269 bcf in the week ended May 21, slightly higher consensus of a +100 bcf increase but narrowed the surplus to the 5- year average to 16.3% from 16.6% in the prior week. Baker Hughes reported that the number of gas rigs slid -2 units to 967 in the week ended May 28.

The National Oceanic and Atmospheric Administration (NOAA) said that the hurricane season (June 1 to November 30) in the Atlantic in 2010 has an 85% probability of being above normal, with 3 to 7 major Category 3 hurricanes.

The US energy Department, based on NOAA's forecast of 1 to 3 major hurricanes in 2009, estimated production cuts of around 4.5 mmb of crude oil and 36 bcf of natural gas production in the Gulf of Mexico. Extrapolating the figures, crude and natural gas production may be reduced by 10-11 mmb and 90 bcf respectively, during the hurricane season this year.

Precious Metals

Gold moved steadily higher after finding support at 1166 on May 21. Settling as 1212.2, the benchmark Comex contract recovered +3.07% of the -4.21% decline in the prior week. In May, gold futures record an all time-high at 1249.7 and eventually gained +2.67%.

Demand for gold moderated last week as market panic stabilized and investors began to seek riskier assets. Although concerns over sovereign crisis in the Eurozone eased temporarily, its future developments and impact on global economy are still uncertain. Current sentiment is fragile and any bad news can cause selloff in the financial market. Therefore, investment demand for the yellow metal as a safe haven should remain resilient in coming months. Together with political tension on the Korean peninsula, risk is to the upside for gold.

OECD's optimism on global economic outlook did not only boost energies but also lifted silver and PGM prices.

Comex silver recaptured the 18-dollar level Wednesday and settled at 18.42 Friday. The contract soared +4.37% last week but remained down -1.16% in May. GFMS said silver price may outperform gold price this year as driven by economic growth. 'Silver's demand is a function of the economy, not of the price... Industrial demand has come back quite strongly this year from a low level'.

On the supply side, mine production is expected to increase further in 2010. However, this will be partly offset by further decline in scrap supply and stagnant government sales. On net, silver supply is expected to rise marginally this year. Whether the surplus will be absorbed depends on investment demand which exceeded jewelry usage for the first time since at least 1985. Investment demand, including in bars and coins, jumped +90% last year to 215.6M oz.

PGMs also recorded lucrative gains last week, after massive selloffs over the past 2 weeks, with platinum and palladium rising +3.21% and +5.46%, respectively. PGM prices may retreat next week as auto sales data from China and Europe may disappoint.

Base Metals

Base metals were in a consolidative mode amid uncertainty over Chinese tightening to contain property bubbles and curb inflation. Prices were generally lower earlier in the week but rebounded later as market sentiment recovered. Zinc, tin and copper managed to record weekly gains while aluminum dropped slightly. Nickel price was unchanged. The LMEX index edged higher, by +0.82%.

We are cautious in the base metals' outlook in the second half. While the Chinese government will likely delay tightening measures such as interest rate hike, RMB appreciation and introduction of property tax amid concerns over European sovereign crisis, the path of monetary policy is going to be tight rather than loose. This will sooner or later have impacts on demand for base metals.

Stocks vs. Gold

(NYSE Stocks are 100 times overvalued compared to Gold!)

May I explain for a moment why American stocks are so overvalued compared to gold?

Ok, let's start with the basic premise of stocks.

A stock is a fractional ownership of a business, the goal of which is to make money.  If the business can make money, then the stock might be worth something, in theory, if everything goes right. 

If money is defined by gold, then all the businesses in the world can never be worth more than all the gold that exists, because all the businesses in the world can never earn more than that which exists.

All the gold that has ever been mined in all of human history is estimated at about 155,000 tonnes, or about 5 billion ounces of gold, which is less than 1 oz. of gold per person on the planet, as there are about 6.8 billion people, estimated, as of May, 2010.

With gold valued at about $1,200/oz., x 5 billion oz., then all the gold in the world is worth about $6 trillion.

The total value of all the businesses in the world should never be worth more than that.  Period.  Because they cannot all earn more than exists, and that's what exists.

The USA is only one nation on earth.  USA GDP is $14 trillion out of a world GDP of about $60 trillion.
http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)

The NYSE is only one stock exchange in the USA.  It does not include stocks listed on the Nasdaq, the Amex, the Pink Sheets, or the Over the Counter markets.

The NYSE is the world's largest stock exchange by market capitalization of its listed companies at US $28.5 trillion as of May 2008.

http://en.wikipedia.org/wiki/New_York_Stock_Exchange

Let's assume that the NYSE is a proxy for the American Economy.  Clearly, it is not, as there are many american companies that are not listed on the NYSE, but many companies make money overseas, so let's assume those balance out.

World gold, again, is worth only a paltry $6 trillion, at $1200/oz.

The American Economy (with the NYSE as a proxy for that) is 14/60th part of the world economy.

Thus, the American Economy (NYSE) should be worth no more than 14/60th parts of world gold valued at $6 trillion, which is only $1.4 trillion.

But companies have costs.  So not all of what they earn can flow as profit.  Let's assume the average business has 80% costs, and earn 20% of net revenues, and assum net revenues can acually be as high as "all the gold in the world" that they could earn, which is grossly over optimistic.

Then the American Economy, (NYSE) can only keep, or earn, 20% of the $1.4 trillion, which is $0.28 trillion.

It is said that companies can be worth a multiple of earnings.  Yes, but people also only spend a tiny fraction of savings each year. So that balances out.  So if people only spend 1/10th of world gold each year, and if companies are worth ten times annual earnings, then it balances out, and no math is needed to adjust.

The point is that the NYSE is currently valued at $28 trillion, and should be worth no more than $0.28 trillion.

The point is that American stocks are currently 100 times over valued compared to gold.

Or, conversely, gold is worth 100 times undervalued compared to American stocks.

How did this happen?

Stocks and paper money became an irrational mania, one fed off the other.

These manias can last a long time, in this case, well over a generation, since gold has not been common money anywhere in the world for multiple generations now.

Manias, like frauds, can end very swiftly, literally overnight.

This overvalued stock mania is close to ending, merely for the fact that the baby boomers, who bought into it, are holding stocks that they plan to sell off as they begin to try to live off the proceeds for retirement.   When that entire generation stops earning, and begins selling, who will be buying? 

Stock values must collapse; there is no way that any force anywhere is big enough to keep them propped up.  Gold will go up, as more and more people realize the value of scarce gold.  And silver, even moreso.

All the world's silver mined is only worth $10 billion, most consumed by industry, leaving a scant $2 billion for investment per year.  That's $0.002 Trillion.

The only way that a $28 trillion market, can flow into a $0.002 trillion market, is when the $28 trillion market collapses in value, and the tiny $0.002 trillion market explodes in value. 

Get silver. It's a race against time.  It's a race against all the other baby boomers who bought into a stock mania that is destined to collapse against the harsh reality of historic and trusted values.

While we are considering historic values, consider what life was like over 105 years ago, in San Francisco, in 1905, on Market Street, well before the Federal Reserve was founded in 1913.  Here is a movie that was found, and put on youtube.  The freedom on the streets is amazing; no rules of the road, nobody is hurt, people are dodging cars, driving the wrong way, it's just amazing.

http://www.youtube.com/watch?v=NINOxRxze9k

Life will go on, whether you make the right investment decisions or not.  Ownership will just accrue to those who take wise actions.

I strongly advise you to get real gold and silver.

Sincerely,
Jason Hommel  

How to Make Money in Gold Even if Gold Doesn't Spike to Over $7,000

How to Make Money in Gold
Even if Gold Doesn’t Spike to Over $7,000
When the proverbial fecal matter hit the fan during the week of May 3, one asset shined above all others. It was the humble yellow metal, gold, doing its part in times of panic and crisis. It held up. On May 7, gold closed above $1,200 for the first time in five months — up more than 2.5% during a week in which U.S. stocks endured a freefall. Just five days later, it hit an all-time high of $1,243.10. And the largest physical gold fund recorded its largest inflows since early 2009.

In what follows, we turn our eyes again to gold, that curious inert metal with the monetary heritage. The topic comes with baggage. It’s hard as an investor to look at it objectively. Many investors make a case for gold laden with ideological fury over the government’s printing press. These investors are always saying buy gold. Their arguments are timeless, but not timely.

Of course, buying gold all the time is not really an investment strategy. If you bought gold in the 1980s and 1990s, your return was abysmal. So, as with all assets, there are times when gold is a really good buy and there are times when it is not. Sounds obvious, but many people seem to want to think that gold is an exception to the order of things. It isn’t.

But how do you know if gold is cheap? Well, intelligent people usually advance a couple of arguments:

1) On an inflation-adjusted basis, gold is 30% less than its all-time high in 1980. Okay, that’s true, but it’s not particularly timely because by that measure gold has been cheap for three decades. And who’s to say that the 1980 gold price is a benchmark we should pay attention to, anyway? By that way of thinking, the NASDAQ is a bargain, too, because it trades at a big gap from its 2000 high. But is it? I think not.

2) The other point often advanced by the “gold is cheap” crowd is the old monetary base argument — that gold’s price tends to track the monetary base over long periods. The monetary base is essentially bank deposits and currency. It’s like the seedlings of inflation.

This second argument is a little more interesting. Yet, as the government has added huge piles to the monetary base in the last year or so, the gold price has responded in a muted way. This next chart shows what the gold price would have to be to “catch up” to the monetary base.

The hedge fund QB Partners really likes this argument. QB writes:

“True capital has already begun to flow where it is being treated best — to capital-producing economies and to global stores of wealth, from paper money and financial assets to hard money and hard assets...

“The graph shows visually how much U.S. dollar purchasing power has been lost. We think gold is cheap by a factor of almost 7 times.”

If a gold price of $7,000 an ounce doesn’t strike you as implausible or absurd, QB’s next comment might. QB says the chart “does not necessarily imply a target price for spot gold. The gold price could move higher than that if it experiences a blow off top, like all other bull markets tend to do before exhausting themselves.” So, $7,000 an ounce, you see, is just some kind of base case.

Maybe it’s not so implausible. Strange stuff happens all the time in markets. If I had told you on May 6 that Accenture — a $40 stock with a $29 billion market cap — would trade for a penny a share the next day, you would have thought I was nuts. Yet, on May 7 it did just that, if only for a second.

As investors, we tend to think too narrowly within the confines of what seems probable. Yet, the really big money lies in the outlying events. As QB puts it:

Most investors allocate to the markets by playing the odds, which by definition gravitates capital to the middle of a bell curve of possible outcomes. This fools the investor into thinking that the probability of future events is somewhat predictable. Of course, history is rife with startling social, economic and political tail events. Stuff happens — things like earthquakes, the bombing of Pearl Harbor, the 1980 U.S. Olympic hockey team, the demotion of Pluto, dot-com bubbles, liar loans and even periodic global economic failures and the re-assertion of gold as money.

This is essentially the familiar “black swan” argument made popular by Nassim Taleb. This is really the best argument for gold in my view. It is a hedge against really bad stuff happening. And when really bad stuff happens, gold holds up.

Of course, over the last decade, it has more than held up. Gold has been the best-performing asset class from December 1999 to December 2010.

People often invest by looking in the rearview mirror. They feel better investing in stuff that has done well. Even professionals feel this way. It’s easier to recommend gold to your clients; all you do is show its price chart. Money follows performance, which is why so many investors get mediocre results. They hop into the hot fund or sign up for the hot newsletter just as it is about to go cold. They abandon apparent losing strategies and sell poor-performing stocks just as they are about to turn up.

But the gold market is different because it’s so small. Even a small amount of interest in gold will send it up a lot. Just imagine if people decide a small sliver of that tall bar of financial assets should be in gold. We’re talking about some serious pressure on the gold price.

Frankly, the gold market is set up perfectly these days. You couldn’t design it better. Bad stuff is happening — see the crisis in Europe. And you can surely bet more bad stuff will happen, given all the debt and leverage that still remains in the system. Even if you don’t know exactly what will happen or when it will happen, you know a monetary crisis is good for gold.

As an added bonus, gold has a track record, which will attract fans soon enough. And when it does, it can’t really accommodate many buyers because the market is small. This means the chance of the gold price spiking upwards are pretty good. It’s like being in the lifeboat business on the Titanic. No price will seem too high!

Regards,
Chris Mayer

The New Secret of Getting Rich in the Next 5 Years

China Govt's Secret  New Gold investment could pay  500% over next 2 Years 

FX Update: USDJPY at key inflection point once again

FX Update: USDJPY at key inflection point once again

The risk rally from yesterday carried through into today, though it has lost all momentum ahead of the US trading session. EURUSD had a go at the weekly pivot area just above 1.2450, but couldn't maintain altitude, especially after German officials were out discussing the desire to permanently ban the naked short-selling of certain EuroZone securities. That latter announcement saw the pair well back below yesterday's US session high of 1.2395. Other risk pairs saw new highs overnight, but were also pushed back lower in the early US hours. Bonds are also firm this morning, which is working against a continuation of yesterday's developments and pressuring the rally in JPY crosses. As for European bank stress levels and sovereign debt spreads, the situation appears marginally better this morning than yesterday's level.

Japanese Data
The data out of Japan overnight was particularly gruesome, with signs of deepening deflation and an ugly drop in household spending and a rise in the jobless rate. It is tough to see how Japan is going to dig itself out of its problems, which are aggravated by one of the world's scariest "population pyramids", or demographics that show an accelerating percentage of the population moving into retirement age, while the percentage of the population entering the workforce shrinks. One wonders if the government could eventually reach for radical measures to tackle the incredible debt burden and sluggishness of economic activity. Such ideas have been discussed already by lawmakers, though nothing is on the table.

While in the short term, the JPY crosses seem happy to follow the wiles of the major government bond markets, remember that the new Democratic government is far more likely to do something "out of the box" than the old-guard LDP. This is something to tuck into the back of our minds for the longer term, as Japan is the extreme example of a country facing an unbearable sovereign debt load. Japan's CDS prices are the highest for any G-10 currency (though, of course, the EuroZone periphery have much higher prices in many cases, though the core countries don't - an obvious reflection of the turmoil the EuroZone faces). At some point, to see a further indication that this situation is getting Japan into trouble, we should look for an acceleration in sovereign debt worries and/or signs that the long end of the bond curve is showing a lack of faith in long Japanese bonds. Any unwind could be incredibly rapid once a loss of confidence is felt in this market and the fallout unimaginable.

Chart: USDJPY
USDJPY is at a technical crossroads at the moment, having closed yesterday right at the 200-day moving average (at the same time the S&P500 in the US closed at the same moving average - you can't make this stuff up. Today the pair tried to follow through and has so far topped out at the bottom of the daily Ichimoku shadow - a key resistance point. Whether we see follow through higher or a reversal back into the lower range will likely hinge on activity in the US bond market and risk in general today. This is a critical are for the pair to decide whether a rally i is on or whether the risk is greater for an eventual test of the multi-year lows down below 85.00 .

Looking ahead
This is a confusing month-end fixing situation, as some of yesterday's rally in risk may have at least been partially driven by the obvious potential for fixing flows when equity and bond market moves have been so enormous over the past month. As well, while US and UK markets are closed on Monday, some end of month fixing may take place on Monday instead. Basically, we need to get to Tuesday next week before we can feel that these end-of-month considerations are fully behind us.

Next week offers quite the gauntlet of event risks that will tell us whether the market is moving out of general hope/fear mode and beginning to ponder the fundamentals. The RBA and BoC are both out with rate decision on Tuesday, with the former expected to pause (but market will be highly tuned to guidance) and the BoC expected to hike, though that expectation may yet be dashed if equity markets drop back toward their recent lows. In addition, we have the US ISM reports on Tuesday and Thursday and the Employment report on Friday, which also sees a Canada employment report

For the risk bulls to really make a statement here in the shortest term, we need to see a second strong day of rallying in risk to firmly establish they have the upper hand. Anything less than that would appear to mean that the bears are still in control here.

As ever, stay careful out there.

Economic Data Highlights

• New Zealand Apr. Building Permits rose 8.5% MoM
• UK May GfK Consumer Confidence Survey fell to -18 vs. -16 expected and -16 in Apr.
• Japan Apr. Overall Household Spending fell -0.7% YoY vs. +2.5% expected and 4.4% YoY in Mar.
• Japan Apr. Jobless Rate rose to 5.1% vs. 5.0% expected and 5.0% in Mar.
• Japan May Tokyo CPI ex Fresh Food & Energy out at -1.4% YoY vs. -1.3% expected and -1.4% in Apr.
• Japan Apr. National CPI out at -1.2% YoY vs. -1.1% expected and vs. -1.1% in Mar.
• Japan Apr. National CPI ex Fresh Food & Energy out at -1.6% YoY vs. -1.4% expected and -1.1% in Mar.
• Japan Apr. Retail Trade out at +0.5% MoM and +4.9% YoY vs. -1.0%/+3.8% expected, respectively
• Switzerland Apr. Trade Balance out at 2.02B vs. 1.69B in Mar.
• Norway May Unemployment Rate fell to 2.7% vs. 2.8% expected and 3.0% in Apr.
• Sweden Q1 GDP rose 1.4% QoQ and 3.0% YoY vs. 1.0%/1.5% expected, respectively
• Sweden Apr. Household Lending rose 9.2% YoY vs. 9.3% in Mar.
• Sweden Apr. Retail Sales fell -0.2% MoM and -1.2% YoY vs. +0.6%/+1.5% expected, respectively
• Switzerland May KOF Swiss Leading Indicator out at 2.16 vs. 2.02 expected and 2.05 in Apr.
• Canada Q1 Current Account out at -$7.8B vs. -$7.5B expected and -$10.2B in Q4
• US Apr. Personal Income rose +0.4% as expected
• US Apr. Personal Spending out at 0.0% MoM vs. +0.3% expected
• US Apr. PCE Core out at +0.1% MoM and +1.2% YoY vs. +0.1%/1.1% expected, respectively

Upcoming Economic Calendar Highlights

• US May Chicago Purchasing Manager Index (1345)
• US May Final University of Michigan Confidence (1355)
• US May NAPM Milwaukee (1400)
• UK May Hometrack Housing Survey (Sun 2301)
• Japan May Nomura/JMMA Manufacturing PMI (Sun 2315)
• Japan Apr. Industrial Production (Sun 2350)
• US Fed's Bernanke to Speak in Korea (Mon 0025)
• EuroZone ECB's Trichet to Speak in Korea (Mon 0025)
• Australia Apr. HIA New Home Sales (Mon 0100)
• US Fed's Evans to Speak in Korea (Mon 0110)
• Australia Q1 Current Account Balance (Mon 0130)
• Japan Apr. Labor Cash Earnings (Mon 0130)
• Australia May Rimark Australia Median House Price Index (Mon 0200)
• New Zealand May NBNZ Business Confidence (Mon 0300)
• Japan BoJ's Shirakawa to Speak (Mon 0320)
• Japan Apr. Housing Starts (Mon 0500)

FX Closing Note: This market is taunting us....

A final flourish at the finish today takes the S&P500 sharply higher into the close and just a hair's breadth above the 200-day moving average. The moves in FX were all in line with the usual risk appetite correlations and JPY/US treasury correlations one would expect.

There was no real news flow during the day except for a depressing weekly claims number from the US and no signs of a resolution from the EuroZone in terms of the pressure on spreads - though at least we didn't see an acceleration today, an optimist might add. One has to wonder what factors are generating this crazy action. We suggest it is a combination of a market that has gone a bit "mental" on all of the latest volatility and perhaps more importantly an early start to end of month portfolio adjustments as many portfolios out there must be feeling their ratios of equity holdings to bond holdings are more than a bit out of whack after a crazy month that saw the US t-bond future price rise as much as 4 full figures from the April closing price while the S&P500 had fallen as much as 12% and more for the month of May heading into today. Volume was very light in the equity markets on today's enormous rally - is that cautionary?

Regardless, it feels like this market is taunting both the bulls and the bears as we head into the last trading day of the month (because of Monday's US holiday). Tomorrow is likely to be a three-ring circus as all of the end-of-month fixing flows not seen today will inevitably come into play at the same time as we just closed today's action  at a key technical inflection point. Our short term crystal ball is fairly useless at present as the zany back and forth in the market has proven in recent days, but it feels like there is an awful lot of heavy lifting that must be done in risk indications before we can believe that any rally in risk will hold beyond a mere few days.

Let's see where markets settle tomorrow and how we are doing at the end of the day on Tuesday next week if we don't already get yet another reversal in the action tomorrow. Our favorite scenario from a technical perspective for tomorrow is another follow through in risk tonight and into perhaps late Europe/early US hours which is then strongly reversed in the US session - this is the "maximum pain" path - the path that will cause the most pain to the highest number of market participants. This is the path the market mistress seems to like to take in these kinds of situations. In this scenario - the bears are mercilessly squeezed a bit more and forced out of their positions while the bulls get their hopes up and put on significant new positions that are then subsequently rejected. Everyone is hurt except for the order front-running algo traders, one supposes...

USDCAD is of course also closing right on the 200-day moving average and has been a mirror image of the equity markets as we discussed this morning. Remember that next Tuesday is Bank of Canada meeting day and that everyone was expecting a hike before the latest market turmoil - whether they hike could depend on whether this rally in risk is able to hold water. Stay tuned!

Let's all stay particularly careful out there.

FX Update: FX tries to find encouragement in China's reassurance

One of the triggers of yesterday's late sell-off in risk was an FT article suggesting that China was reviewing its holding of EuroZone assets. Overnight, China issued a broadside rejecting this story and trying to reassure markets that it considers Europe a key market for its investments. The effect of this pronouncement was immediate and large in the world's equity markets and in FX, where the Euro zipped back higher north of 1.2300 after closing yesterday below 1.2200. The commodity currencies rallied even more sharply in response per the usual pattern we have come to expect.

Looking around elsewhere for support for this move, however, and we get a mixed impression at best on whether this rally can hold. First, sovereign spreads within Europe took no heart at all in this rhetoric, thus underlining that the fundamental pressure is still in place at least on the Euro (and therefore supposedly on risk in general per recent patterns) regardless of China's good intentions. Second, German bunds seem to be fairly stable considering moves elsewhere, trading only slightly lower on the day. Other risk measures have improved slightly, but the spreads related to counterparty risk in the banking system are still widening, something that is likely to remain the case as long as the sovereign spreads don't come in.

US Jobless Claims a Downer
The latest weekly jobless claims number out of the US continues to show an amazing stickiness in high claims numbers that suggest the employment situation is not improving at all, even as commentators are tossing around number like 500k for next week's US nonfarm payrolls number. That would actually be one of the highest payrolls gains in the history of the history of the data series. It's interesting to think that the last time we saw particularly high peaks in unemployment in the US, the unemployment rate had fallen by -0.7% by six months after the peak. Here we are six months after the peak and the rate has only dropped -0.3% and jobless claims are still rolling in well above 400k per week. The latter needs to drop way below 400k, and perhaps 350k, for at least two weeks running to expect any real momentum in job recovery. The claims numbers tend to be the leading indicator.

Chart: USDCAD
Correlations, anyone? The chart of USDCAD (shown as CADUSD in green) shows how this pair has been a pure expression of risk lately, and that markets often dance in lock-step when market volatility accelerates. Looking at the support levels in USDCAD, it would appear that 200-day moving average test in the USDCAD would approximately coincide with the same MA in the S&P500 - so watch the two markets for divergence/confirmation.

Looking ahead
The market is trying to find encouragement from this latest "development", which hardly seems a development at all. But who knows - maybe hot air from China can lift the market balloon for a while. The question for us remains when the pull of gravity is re-established until we see real reason for encouragement. As to whether this rally has shorter or longer term legs, we continue to watch the 200-day moving average in the US S&P500 (just above 1100 on the cash index) as the key indicator. A solid break back higher and maybe we get a few weeks of dithering and attempts to head higher and think that we have the all-clear. The renewed bear potential would seem to be more immediate, however, as long as we're not seeing strong follow-through higher in risk trades in the short term.

On the calendar for the rest of the week, we have lots of data out of Japan tonight.  Tomorrow we have a look at Norway's May unemployment rate, Sweden's Q1 GDP and Apr. Retail Sales and US Apr. PCE Data, May Chicago PMI, and final May University of Michigan Confidence (the preliminary reading did not show the surge higher seen in the Conference Board number...)

The most important factor in the market tomorrow will inevitably be the end-of-month fixing, which could see unpredictable action (broken correlations, for example) and large trading ranges, especially since May was an extremely volatility month for all major asset classes with significant changes from the month ago levels. Remember that tomorrow's action comes before a three-day weekend in the US.

Stay careful out there

Economic Data Highlights

• New Zealand Apr. Trade Balance out at 656M vs. 455M expected and 590M in Mar.
• Japan Apr. Adjusted Merchandise Trade Balance out at ¥729B vs. ¥688B expected and ¥768B in Mar.
• Australia Q1 Private Capital Expenditure fell -0.2% QoQ vs. +2.5% expected
• Switzerland Q1 Employment Level rose +0.1% YoY vs. -0.1% in Q4
• Sweden Apr. PPI out at -0.2% MoM and -1.0% YoY vs. -0.3%/-1.2% expected, respectively
• UK May CBI Distributive Trades Survey saw volume of sales fall to -18 from +13 in May
• Germany May CPI out at +0.1% MoM and +1.2% YoY as expected
• US Q1 GDP revised to 3.0% vs. 3.4% expected and the original 3.2% estimate
• US Weekly Initial Jobless Claims out at 460k vs. 455k expected and 474k last week
• US Weekly Continuing Claims out at 4607k vs. 4613k expected and 4656k last week

Upcoming Economic Calendar Highlights

• New Zealand Apr. Building Permits (2245)
• UK May GfK Consumer Confidence Survey (2301)
• Japan Apr. Overall Household Spending (2330)
• Japan Apr. Jobless Rate (2330)
• Japan May Tokyo CPI (2330)
• Japan Apr. National CPI (2330)
• Japan Apr. Retail Trade (2350)

FX Closing Note: Key Reversal?

Today saw risk making another attempt at a comeback. Friday's attempt at a risk comeback was a red herring and looked a bit fishy anyway since it was only a flurry of trading at the close of the US equity session that created the impression of a reversal. Today's reversal in risk has far more technical credibility because of the way in which equities gapped lower and traded at new lows for the cycles before seeing a long rally from almost the open of trading and then all the way into a very strong close, with a closing level slightly above yesterday's close. The Dow closed back above the psychologically critical 10,000 level that gave way during the day. Another boost came in the form of a strong surge in the May US Consumer Confidence survey, certainly a surprise considering the developments in markets this week and the ongoing tragedy of the Gulf of Mexico oil spill.

Looking at other risk indicators, however, we see little or no improvement in the likes of risk spreads and signs of accelerating interbank stress levels and we wonder if equities and currencies are playing some crazy little reflexive game based on short term trading flows.  Still, one important market that at least partially supported the risk-on stance today in the US was the bond market, where a somewhat weakish 2-yr. note auction (yield about 1 bp. higher than expected and bid to cover at 2.93 vs. 3.06 six-month average, though one still has to note that the yield at the auction was a record low), so this also took the pressure of the JPY crosses after EURJPY had crossed below 109 briefly earlier in the day.

USDCAD
The chart we showed this morning showed USDCAD breaking above key 1.0750/80 resistance, but the developments by today's close leave the chart about as ambiguous as it gets: the CAD bulls will point out that the pair failed to close above the recent high in the 1.0750 area an the more strategic 1.0780 resistance level, though the close is not quite low enough to create a solid shooting star pattern. The next important level lower is the 200-day moving average just below 1.0500, which provided some resistance on the way up. Bulls will want to see a close back above 1.0780 to suggest that the pair can make a move to the 1.1100+ target next. The direction for USDCAD will inevitably be determined by whether risk can make a stand here or whether today's action only offers false hope. 

Looking ahead
Last week, we suspected we might see a trading low this week and the action today in certain markets has certainly tried to take some of the momentum out of the bear, though still very elevated worry levels in various other indicators suggest we should be very cautious in shouting out the all clear for now. For now, we have compelling technical patterns suggesting a trading reversal, so for the bears to regain the upper hand we need an immediate momentum shift in the next day or two. The end of this week could get a bit chaotic as well as we effectively have the end of month fixing on Friday since Monday the 31st is the US Memorial Day holiday with market closures. We have seen tremendous moves in equities and bonds this month, so the portfolio shifts might be massive and may have to take place in less than ideal liquidity conditions - all a recipe for plenty of volatility.

After the US close, we get the latest weekly ABC consumer confidence survey. Let's see if this market turmoil is getting in the way of the increase in the ABC weekly confidence readings (still within the previous range while we have seen a decided breakout now in the May US conference board number), or if there really is enough momentum building in the job market to see a continued recovery of confidence for now.

Stay careful out there.

Gold Strengthens amid Fresh Sovereign Concerns

Precious metals rebounded strongly yesterday but only gold managed to maintain the strength in Asian session today. Renewed selling pressure in the euro and tensions on the Korean Peninsula have been supportive for price. The benchmark contract for gold soared to as high as 1197.3 before settling at 1194, up +1.52%, yesterday. The yellow metal remains firm in Asia today. Silver rose +1.98% to 18 yesterday. However, price retreated to 17.8 Tuesday amid fresh concerns about economic recovery. PGM also surged with platinum and palladium adding +2.22% and +3.21% respectively. However, most of the gains were erased as prices retreat today.

WTI crude oil edged higher but ended Monday only slightly at 70.21, up +0.24%. Price drops towards 69 in Asian session today. Brent crude closed +0.72% lower yesterday with price continues drifting low towards 70 in Asian session today.

The market was dominated by weakness in Spanish banking system and EU leaders' diverse opinions on revising the European Union treaty. The euro was badly hurt while US bourses tumbled.

After the Bank of Spain's takeover of Cordoba-based CajaSur, 4 Spanish savings banks plan to combine to form the nation's fifth-largest banking group with more than 135 billion euro in assets. The move deepened worries about the health of banking system in the country as the it's considered as the government's bailout effort help the 'weakest' of Spain's mutually owned banks that account for about half the country's loans.

In a report, the IMF said Spain's banking sector 'remains under pressure' as 'Consolidation needs to accelerate to reduce overcapacity and produce more robust institutions' has been 'too slow'. Concerning the economy, Spain is faces severe challenges including 'a dysfunctional labor market, the deflating property bubble, a large fiscal deficit, heavy private sector and external indebtedness, anemic productivity growth, weak competitiveness, and a banking sector with pockets of weakness'. The IMF advised the country to have 'far-reaching and comprehensive reforms'.

The euro tumbled further as European Commission President Jose Manuel Barroso commented Germany's aim to modify the European Union treaty as 'naive'. At an interview with a German newspaper, Barroso said that 'we will not propose treaty modifications even though we are open to good ideas…It would also be naive to think one can reform the treaty only in areas Germany considers important'. The comments were in response to German Chancellor Angela Merkel's urge for a modification of the treaty.

Catching up with US' fall, Asian stock market tumble with the MSCI Asia Pacific Index sliding -2.3% to a 10-month low. Major regional indices decline with Japan's Nikkei 225 Stock Average, Australia's S&P/ASX 200 Index and South Korea's Kospi losing -3%, -25 and -4% respectively. Apart from Eurozone's sovereign crisis woes, the market is hurt as Korean tensions intensified.

Yonhap News Agency reported that North Korean leader Kim Jong Il last week ordered its military to get ready for combat after the country was accused of firing a torpedo to split apart the 1200-ton Cheonan. Yesterday, South Korea announced that it will push for UN's censure against North Korea for the torpedoing a naval ship, which killed 46 sailors on March 26. At the same time, the news agency said South Korea plans to define North Korea as its 'main enemy'. The tension on the Korean Peninsula adds uncertainty to the market.

How to Trade Market Bottoms for SP500 & Gold

It does not get much more exciting than what we have seen in the past 2 months with the market topping in April and the May 6th mini market crash. This Thursday we saw panic selling which pushed the market below the May 6th low washing the market of weak positions.

For those of you who have been following me closely this year I am sure you have noticed trading has been a little slower than normal. This is due to the fact that the market corrected at the beginning of the year and we went long Feb 5th and again on Feb 25th. Since then the market rallied for 2 months and never provided another low risk entry point. In April the market became choppy and toppy and we eventually took a short position to ride the market down. Now were we are looking at another possible reversal to the upside.

Only a few trades this year which I know frustrates some individuals but if you step back and look at my trading strategy you will learn that we only need to trade a few trades a year to make some solid returns. I don’t know about you but I would rather trade a few times a month and live life between trades… not trade all day every day getting bug eyed in front of the computer.

Ok enough of the boring stuff let’s get into the charts…

SP500 – Stock Market Index Trading ETFs & Futures
The pullback in the broad market was expected but the mini crash on May 6th really through a wrench into things for us technical analysts. We don’t really know the truth about what happened that day… was it just a simple error or was it a planned error for the US government to take a massive short position to move something in their favor quickly to generate MASSIVE gains? It leaves us technicians hanging wondering if that was a shift in trend from up (accumulation) to down (distribution)?

My thoughts are if the crash was truly an error then we will see months if not another year of higher prices… But if it was a planned sell off with banks moving to the sidelines then we are most likely headed into another bear market. Personally it does not matter what happens as big money will be made in either direction. Problem is if we do go into another bear market then the majority of individuals will lose capital as investor’s portfolios get smaller and smaller. That will lead to a lot of depressed people…

In short, I am neutral on the stock market for the intermediate and long term. Once we have a few more months of price action only then will I have a plan for longer term investments. But on the short term time frame the market is screaming at me with extreme sentiment levels lining up on the stock market and gold.

The daily chart of the SPY – SP500 Index shows several important points which help me time market bottoms. We have prices trading at a support zone. Buyers step back into the game here and should provide a decent bounce which started Friday Morning.

Next we have the panic selling spikes from an indicator I created. Generally the day after we see panic in the market like we did on Thursday we will see a big bounce and many times a large rally.

Down at the bottom you can see my custom market cycles which are both starting to bottom. During times like this the market has a natural tendency to move higher.

VIX – Market Volatility Daily Chart
The VIX has an old saying “When the VIX is high its time to buy, When the VIX is low, its time to go”. Simple analysis clearly shows the VIX trading high and at a resistance zone.

Put/Call Ratio – Daily Trading Chart
This chart measures the amount of put and call options traded each day. When it is trading over 1.00 then we know for every 1 call option traded (wanting the market to go up) there is 1 put option traded (wanting the market to go down). Over 1.00 is extreme and when that many people are bearish and using leverage to profit from a drop in price then in my opinion it means everyone has already sold and the selling pressure is about to end.

Actually if you go back in time and review SP500 and this ratio you will notice 2-3 days after this ratio reaches 1.00 or higher the market bounces/bottoms.

NYSE Advance/Decline Line for Equities – Daily Chart
This chart shows us how many stocks are advancing or declining on any given day. When extremes are reached look for a short term bounce or bottom 1-3 days following.

How to Identify Stock Market Bottoms with Simple Analysis:
In short, I feel the market is forming a bottom here. How big of a rally will we get? I don’t know because of the mixed signals from the May 6th EXTREME heavy volume selling session. As usual I focus on trading with the trend, trading the low risk setups and I manage my money/positions scaling in and out of those positions as I see fit.

Chris Vermeulen

Stocks tested and held previous lows. Shakeout over?

Summary: Stocks tested and held previous lows. Shakeout over?
Although it is too soon to be sure, Friday might have been a successful test of the 2010 lows.

The stock market still looks oversold for the short term, and Friday’s upside reversal suggests that stocks may have found an area of demand just above the lows of the year.

Upside follow-through next week should offer necessary confirming clues.

Sentiment has become bearish. This is a major change from last month. On 4/26/10, I wrote: “Investors Intelligence survey of stock market newsletter advisors, Call/Put Volume Ratios, and implied option volatility have shown bullish complacency in recent weeks. Excessive bullish sentiment sometimes precedes a shakeout to the downside.” We got that shakeout. And now it may be over—or the worst of it, at least.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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
9.63% , CPWR , COMPUWARE
3.66% , EWO , Austria Index, EWO
2.62% , ACWX , Global ex US ACWI iS, ACWX
3.67% , THC , TENET HEALTHCARE
5.40% , MTB , M&T BANK
1.50% , PSI , Semiconductors, PSI
3.03% , KCE , Capital Markets KWB ST, KCE
1.70% , IWW , Value LargeCap Russell 3000, IWW
2.42% , PXE , Energy Exploration & Prod, PXE
4.66% , LMT , LOCKHEED MARTIN
8.31% , TLAB , TELLABS
1.41% , PMR , Retail, PMR
1.83% , RPG , Growth S&P 500, RPG
2.71% , HHH , Internet H, HHH
2.85% , PXJ , Oil & Gas, PXJ
2.22% , IDX , Indonesia MV, IDX
1.91% , TUR , Turkey MSCI iS, TUR
7.75% , MI , MARSHAL & ILSLEY
4.47% , EOG , EOG RESOURCES
1.21% , DSG , Growth Small Cap DJ, DSG
3.55% , NTRS , NORTHERN TRUST
3.90% , IYG , Financial Services DJ, IYG
1.42% , IYC , Consumer Cyclical DJ, IYC
3.32% , GS , GOLDMAN SACHS
5.44% , FITB , FIFTH THIRD BANC
4.13% , TROW , T ROWE PRICE GP
5.19% , RDC , ROWAN COMPANIES
2.07% , LM , LEGG MASON
4.44% , EWA , Australia Index, EWA
2.37% , EZA , South Africa Index, EZA
5.34% , CTSH , Cognizant Technology Solutions
1.23% , IXP , Telecommunications Global, IXP
3.88% , CSC , COMPUTER SCIENCE
5.98% , TXT , TEXTRON
2.33% , MDP , MEREDITH
1.30% , JKK , Growth SmallCap iS M, JKK
4.25% , AFL , AFLAC
3.81% , PX , PRAXAIR
2.16% , VPL , Pacific VIPERs, VPL
0.96% , JKG , MidCap Blend Core iS M, JKG

Bearish Stocks: Falling Price and Rising Volume
Ranked by Price Change * Volume Change
% Price Change, Symbol, Name
-6.77% , DELL , DELL
-1.66% , UPS , UNITED PARCEL STK B
-1.48% , MYY , Short 100% MidCap 400, MYY
-1.34% , PSQ , Short 100% QQQ, PSQ
-2.12% , BAX , BAXTER INTL
-1.58% , BSX , BOSTON SCIENT
-2.25% , DXD , Short 200% Dow 30 PS, DXD
-0.88% , CL , COLGATE
-0.62% , GOOG , Google
-0.79% , DRI , DARDEN REST
-1.85% , PTE , Telecommunications & Wireless, PTE
-1.21% , TBH , Telebras HOLDRS, TBH
-1.17% , FDV , Value 40 Large Low P/E FT DB, FDV
-0.84% , ORCL , ORACLE
-0.94% , AMGN , AMGEN
-1.16% , TUP , TUPPERWARE
-2.02% , GCI , GANNETT
-0.28% , GPC , GENUINE PARTS
-0.59% , STJ , ST JUDE MEDICAL
-0.80% , PEY , Dividend High Yield Equity PS, PEY
-2.19% , SYK , STRYKER
-1.16% , KR , KROGER
-1.00% , MSFT , MICROSOFT
-1.07% , AET , AETNA
-0.60% , HAS , HASBRO
-0.83% , BBH , Biotech H, BBH
-0.43% , ZMH , ZIMMER HLDGS
-0.17% , PST , 200% Short Bond 7-10 Yr T, PST
-0.60% , AGN , ALLERGAN
-0.73% , EFX , EQUIFAX
-0.27% , LNC , LINCOLN NATL
-0.55% , BIIB , BIOGEN IDEC
-0.19% , SLM , SLM CORP
-0.44% , T , AT&T Corp., T
-0.17% , LQD , Bond, Corp, LQD
-0.60% , KBH , KB HOME
-0.44% , PEP , PEPSICO
-0.65% , PM , Philip Morris, PM
-0.90% , UNH , UNITEDHEALTH GRP
-0.19% , ETR , ENTERGY

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

Consumer Discretionary (XLY) Bullish, Overweight. The Relative Strength Ratio (XLY/SPY) rose above 12-year highs on 4/26/10 and remains bullish. Absolute price of XLY fell below its 50-day SMA on 5/14/10 and is now neutral. Support 30.34. Resistance 34.39, 36.13, 38.25 and 39.09.

Industrial (XLI) Bullish, Overweight. The Relative Strength Ratio (XLI/SPY) rose above 18-month highs on 4/29/10 and remains bullish. Absolute price of XLI fell below its 50-day SMA on 5/14/10 and is now neutral. Support 28.39 and 28.15. Resistance 32.41, 33.46, 34.24, 34.50, and 35.00.

Consumer Staples (XLP) Neutral, Market Weight. The Relative Strength Ratio (XLP/SPY) rose to a 7-month high on 5/20/10 and remains neutral. Absolute price of XLP fell below its 200-day SMA on 5/20/10 and remains neutral. Support 26.09 and 24.95. Resistance 27.83, 27.95, 28.20, 28.75, 29.29 and 30.29.

Technology (XLK) Neutral, Market Weight. The Relative Strength Ratio (XLK/SPY) has been trading sideways and remains neutral. Absolute price fell below its 200-day SMA on 5/20/10 and remains neutral. Support 20.86 and 20.64. Resistance 23.27, 24.16, 24.68, and 25.69.

Financial (XLF) Neutral, Market Weight. The Relative Strength Ratio (XLF/SPY) fell further below its 2-month lows 5/20/10 and remains neutral. Absolute price of XLF fell below its 2-month lows 5/20/10 and remains neutral. Support 13.95 and 13.51. Resistance 15.67, 16.13, 16.90, 17.12, 17.16, and 17.87.

Materials (XLB) Neutral, Market Weight. The Relative Strength Ratio (XLB/SPY) fell below 10-month lows on 5/20/10 and remains bearish. Absolute price of XLB crossed below the 200-day SMA on 5/14/10 and remains neutral. Support 29.10. Resistance 33.06, 35.47, and 37.56.

Health Care (XLV) Neutral, Market Weight. The Relative Strength Ratio (XLV/SPY) fell below 18-month lows on 4/26/10 and remains bearish. Absolute price of XLV fell below its 200-day SMA on 5/14/10 and remains neutral. Support 28.25 and 27.96. Resistance 30.83, 32.05, 32.18, 32.42, 32.69, 33.16, 33.37 and 33.74.

Utilities (XLU) Neutral, Market Weight. The Relative Strength Ratio (XLU/SPY) rose above 2-month highs 5/20/10 and remains neutral. Absolute price of XLU fell back below its 200-day SMA on 5/18/10 and remains neutral. Support 28.00, 25.76. Resistance 30.59, 30.91, 31.64 and 32.08.

Energy (XLE) Neutral, Market Weight. The Relative Strength Ratio (XLE/SPY) fell below 7-week lows on 5/20/10 and remains bearish. Absolute price of XLE fell below 10-month lows on 5/20/10 and remains neutral. Support 51.01. Resistance 58.11, 59.84, 62.30, 62.73, 69.95, and 78.10.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Emerging Markets Stocks ETF (EEM) Relative Strength Ratio (EEM/SPY) fell to a 12-month low on 5/20/10. EEM/SPY trend turned bearish on 4/16/10, according to strict moving average analysis. Absolute price of EEM fell to a 8-month low on 5/20/10.

Foreign Stocks ETF (EFA) Relative Strength Ratio (EFA/SPY) fell below 5-year lows on 5/18/10 and remains bearish. Absolute price of EFA fell below 10-month lows on 5/20/10 and is below both 50- and 200-day simple moving averages.

NASDAQ Composite/S&P 500 Relative Strength Ratio crossed below its 50-day simple moving average on 5/19/10 thereby turning neutral again. Absolute price of the NASDAQ flipped back above its 200-day SMA on 5/21/10 and remains neutral.

Growth Stock/Value Stock Relative Strength Ratio (IWF/IWD) rose above 2-month highs on 5/20/10 and remains neutral. Absolute price of IWF fell below its 200-day SMA on 5/20/10 and remains neutral.

Russell 1000 Value ETF Relative Strength Ratio (IWD/SPY) rose back above its 200-day SMA on 5/21/10 and remains neutral. Absolute price of IWD fell below its 200-day SMA on 5/20/10 and remains neutral.

The S&P 500 Equally Weighted ETF Relative Strength Ratio (RSP/SPY) lost a little upside momentum since 5/13/10 but remains bullish. Absolute price of RSP lost upside momentum since 4/26/10 and remains neutral.

The Largest Cap S&P 100/S&P 500 Relative Strength Ratio (OEX/SPX) fell below the lows of the previous 22 months on 5/12/10 and remains bearish. Absolute price of OEX fell below its 200-day SMAs on 5/19/10 and remains neutral.

The Small Cap Russell 2000 Index/Large Cap Relative Strength Ratio (IWM/SPY) remains bullish. Absolute price of IWM fell below its 50-day SMA on 5/14/10 and is now neutral.

The S&P MidCap 400/Large Cap Relative Strength Ratio (MDY/SPY) lost a upside momentum since 4/26/10 but remains bullish. Absolute price of MDY also lost upside momentum since 4/26/10 and remains neutral.

Crude Oil nearest futures contract price fell below 8-month lows on 5/20/10 but still remains neutral for the intermediate-term trend. The short-term trend is down but oversold. Support 67.90 and 65.05. Resistance 78.81, 81.29, 87.15, 90.51, 98.65, and 102.84.

Gold nearest futures contract price pulled back after setting a new all-time high at 1249.7 on 5/14/10. Support 1156.2, 1124.3, 1084.8, 1045.2, 1026.9 and 989.3. Resistance: 1249.7.

Gold Mining Stocks ETF (GDX) Relative Strength Ratio (relative to the Gold bullion ETF, GDX/GLD) fell below 2-month lows and both 50 & 200 SMAs on 5/20/10 and is now bearish. Absolute price fell below 3-week lows on 5/20/10 and is neutral.

Silver/Gold Ratio turned bearish on 5/17/10 when it crossed below both 50- and 200-day SMAs, with the 50-day SMA below the 200-day SMA.

Copper nearest futures price fell below the lows of the previous 3 months on 5/17/10, again confirming a bearish trend for the short-term. Copper entered a correction phase since peaking at 3.68 on 4/12/10. Longer term, Copper remains bullish. Strength in Copper suggests renewed hope about prospects for the world economy, while weakness suggests doubts. Support 2.8525 and 2.811. Resistance 3.2675, 3.3225, 3.795 and 4.27.

U.S. Treasury Bond nearest futures contract price jumped up to a new 13-month high of 126.01 on 5/21/10 and remains bullish. Support 119.26, 118.24, 118.12, 115.15, 114.06. 113.04 and 112.15. Resistance 130.31.

Junk/Investment-Grade Corporate Bonds Relative Strength Ratio (JNK/LQD) fell below 8-month lows on 5/20/10 and remains neutral.

U.S. Treasury Inflation Protected / U.S. Treasury 7-10 Year Relative Strength Ratio (TIP/IEF) fell below 6-month lows on 5/20/10 but still remains neutral for the intermediate-term trend. This implies that investors are choosing somewhat less inflation protection. Absolute price of TIP remains bullish.

The U.S. dollar nearest futures contract price moved further above 12-month highs on 5/18/10 and remains bullish. Support 85.46, 83.07, 81.74, 80.14, 79.73, 79.61, 78.83, 78.20, 76.74 and 75.90. Resistance 89.71 and 92.53.

The Art of Contrary Thinking: The various surveys of investor sentiment are best considered as background factors. The majority of investors can be right for a long time before a major trend finally changes course. The Art of Contrary Thinking is best used together with more precise market timing tools.

Advisory Service Sentiment: There were 43.8% Bulls versus 24.7% Bears as of 5/192/10, according to the weekly Investors Intelligence survey of stock market newsletter advisors. The Bull/Bear ratio fell to 1.77, down from 1.91 the previous week. The current Bull/Bear ratio has fallen substantially from its peak at 3.36 set on 1/13/10, which was the highest bullish sentiment in 6 years. The 20-year range is 0.41 to 3.74, the median is 1.51, and the mean is 1.57.

VIX Fear Index rose to a 14-month high of 48.20 on 5/21/10. A high and rising VIX suggests increasing bearish sentiment. 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.

VXN Fear Index rose to a 14-month high of 48.89 on 5/21/10. A high and rising VIX suggests increasing bearish sentiment. VXN measures NASDAQ Volatility using a method comparable to that used for VIX.

ISEE Call/Put Ratio fell to .059 on 5/7/10, a low level that indicates bearish sentiment. Its 2-year mean is 1.20, and its typical range is 0.69 to 1.71, which represents two standard deviations from the mean.

CBOE Put/Call Ratio rose to 0.96 on 5/20/10, its highest level of the year. A high level indicates bearish sentiment. The 2-year mean is 0.70, and the typical range is 0.44 to 0.96, which represents two standard deviations from the mean.

The Dow Theory again confirmed a Bullish Major Trend on 4/26/10, when both the Dow-Jones Industrial Average and the Dow-Jones Transportation Average closed above their closing price highs of the previous 18 months. The Dow Theory 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. That 7/23/09 bullish signal reversed the previous bearish signal: the two Averages signaled a Primary Tide Bear Market on 11/21/07, when both Averages closed below their closing price lows of August 2007.

S&P 500 Composite (SPX) absolute price fell below its 200-day SMA on 5/20/10. SPX is still looking oversold for the short term. The S&P fell 12% from its peak on 4/23/10 at 1217.28 to its low on 5/20/10 at 1071.56, based on closing prices. Support 1055.90, 1044.50, 1029.38, 1019.95, 1012.42, and 1008.55. Resistance 1173.57, 1219.80, 1220.03 and 1228.74.

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
1220.03, high of 9/25/2008
1219.80, high of 4/26/2010
1173.57, high of 5/13/2010

S&P 500 Cash Index Potential Support
1055.90, low of 5/21/2010
1044.50, low of 2/5/2010
1029.38, low of 11/2/2009
1019.95, low of 10/2/2009
1012.42, Gann 37.5% of 2009-2010 range
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

5.57% Spain Index, EWP
4.93% Italy Index, EWI
4.82% Sweden Index, EWD
4.44% Australia Index, EWA
4.32% Brazil Index, EWZ
4.12% Pacific ex-Japan, EPP
3.90% Financial Services DJ, IYG
3.73% Belgium Index, EWK
3.66% Austria Index, EWO
3.62% Metals & Mining SPDR, XME
3.55% Financial SPDR, XLF
3.53% Latin Am 40, ILF
3.41% India PS, PIN
3.38% REIT Wilshire, RWR
3.36% REIT VIPERs, VNQ
3.33% Financials VIPERs, VFH
3.32% Russia MV, RSX
3.30% Realty Cohen & Steers, ICF
3.25% Emerging Markets, EEM
3.24% Financial DJ US, IYF
3.24% Real Estate US DJ, IYR
3.21% China 25 iS, FXI
3.16% China LargeCap Growth G D H USX PS, PGJ
3.16% EMU Europe Index, EZU
3.13% Emerging 50 BLDRS, ADRE
3.04% Basic Materials DJ US, IYM
3.03% Capital Markets KWB ST, KCE
2.90% India Earnings WTree, EPI
2.79% Mexico Index, EWW
2.75% Financial Preferred, PGF
2.75% Netherlands Index, EWN
2.72% Emerging VIPERs, VWO
2.69% Small Cap EAFE MSCI iS, SCZ
2.65% United Kingdom Index, EWU
2.62% Global ex US ACWI iS, ACWX
2.46% Materials SPDR, XLB
2.46% Value EAFE MSCI, EFV
2.44% EAFE Index, EFA
2.39% European VIPERs, VGK
2.38% Thailand MSCI iS, THD
2.37% South Africa Index, EZA
2.33% Growth EAFE MSCI, EFG
2.25% WilderHill Clean Energy PS, PBW
2.22% Indonesia MV, IDX
2.21% France Index, EWQ
2.16% Pacific VIPERs, VPL
2.01% Bond, High-Yield Corporate, HYG
2.00% Europe 350 S&P Index, IEV
1.96% Hong Kong Index, EWH
1.94% Natural Resource iS GS, IGE
1.92% MidCap Russell, IWR
1.91% Turkey MSCI iS, TUR
1.90% Canada Index, EWC
1.87% Value MidCap Russell, IWS
1.86% Chile MSCI iS, ECH
1.85% South Korea Index, EWY
1.81% Energy VIPERs, VDE
1.78% Value 1000 Russell, IWD
1.76% Consumer Discretionary SPDR, XLY
1.76% Small Cap VIPERs, VB
1.74% Energy SPDR, XLE
1.70% Growth MidCap 400 B, IJK
1.69% Value SmallCap Russell 2000, IWN
1.66% Dividend International, PID
1.66% Growth MidCap Russell, IWP
1.66% Energy DJ, IYE
1.65% Value S&P 500 B, IVE
1.65% LargeCap Blend S&P=Weight R, RSP
1.63% Global 100, IOO
1.62% Value SmallCap VIPERS, VBR
1.61% Value VIPERs, VTV
1.58% Transportation Av DJ, IYT
1.56% Semiconductor SPDR, XSD
1.55% Value SmallCap S&P 600, RZV
1.53% MidCap S&P 400 SPDRs, MDY
1.52% MidCap S&P 400 iS, IJH
1.51% LargeCap VIPERs, VV
1.51% Semiconductor iS GS, IGW
1.51% LargeCap Blend Russell 3000, IWV
1.51% Value MidCap S&P 400 B, IJJ
1.51% Water Resources, PHO
1.50% Networking, IGN
1.48% SmallCap Russell 2000, IWM
1.46% S&P 500 SPDRs LargeCap Blend, SPY
1.46% Blend Total Market VIPERs, VTI
1.43% Preferred Stock iS, PFF
1.41% Industrial SPDR, XLI
1.40% SmallCap S&P 600, IJR
1.38% Microcap Russell, IWC
1.37% Growth BARRA Small Cap 600, IJT
1.36% S&P 500 iS LargeCap Blend, IVV
1.35% Growth SmallCap VIPERs, VBK
1.35% LargeCap Blend S&P 100, OEF
1.31% LargeCap 1000 R, IWB
1.27% Agriculture DB PS, DBA
1.26% Value SmallCap S&P 600 B, IJS
1.25% Taiwan Index, EWT
1.20% Singapore Index, EWS
1.20% Growth VIPERs, VUG
1.19% Energy Global, IXC
1.17% Growth S&P 500/BARRA, IVW
1.10% Growth LargeCap NASDAQ 100, QQQQ
1.09% Switzerland Index, EWL
1.07% Info Tech VIPERs, VGT
1.04% Growth SmallCap R 2000, IWO
1.03% Commodity Tracking, DBC
1.00% Dividend Appreciation Vipers, VIG
0.98% Japan Index, EWJ
0.96% Technology DJ US, IYW
0.91% Value LargeCap Dynamic PS, PWV
0.86% Growth 1000 Russell, IWF
0.79% Telecom DJ US, IYZ
0.79% Germany Index, EWG
0.77% Bond EmrgMkt JPM iS, EMB
0.75% Technology SPDR, XLK
0.72% Homebuilders SPDR, XHB
0.72% DIAMONDS (DJIA), DIA
0.64% Dividend SPDR, SDY
0.53% Dividend DJ Select, DVY
0.46% Utilities SPDR, XLU
0.43% Bond, Aggregate, AGG
0.40% Utilities VIPERs, VPU
0.38% Consumer Staples SPDR, XLP
0.36% Malaysia Index, EWM
0.34% Biotech SPDR, XBI
0.32% Bond Ex-US Treas, BWX
0.24% Health Care SPDR, XLV
0.22% Oil, Crude, U.S. Oil Fund, USO
0.10% Bond, 20+ Years Treasury, TLT
0.06% Bond, TIPS, TIP
0.05% Bond, 10 Year Treasury, IEF
0.00% Bond Muni ATM-Free S&P iS, MUB
-0.07% Bond, 1-3 Year Treasury, SHY
-0.17% Bond, Corp, LQD
-0.35% Silver Trust iS, SLV
-0.54% Gold Shares S.T., GLD
-0.80% Dividend High Yield Equity PS, PEY