Stock Market Flash Crash Risk Assets, Bears Are Gaining Traction

By: Chris_Ciovacco

Traders, money managers, and individual investors have numerous concerns relative to the ‘risk-on’ or inflation trade:

• QE2 is set to be completed in June.
• Spain’s credit rating was downgraded today.
• Unemployment remains high.
• Ongoing unrest in the Middle East.
• Surging oil prices threaten the economic recovery.
• Eye-popping budget and entitlement problems in the U.S.

In order to better understand the possible impact of the completion of QE2, we are in the process of studying the ‘flash crash’ period and the period following Ben Bernanke’s August 2010 Jackson Hole speech. Our work to date may help us better understand the risks of a continuing correction in today’s markets.  As outlined on March 3, the longer-term outlook for stocks remains favorable, but the short-term outlook is cloudy.

There were very few places to hide during the flash crash correction which kicked off on April 23, 2010. The pain for investors did not end until the S&P 500 had given back 13.20% before finding some footing on August 27, 2010. The table below shows a select list of ETFs that provided defensive cover during the dark days of 2010.

In the minds of market participants, the assets listed above were the safe havens of choice when the dial on the risk trade moved from “on” to “off”. On Valentine’s Day 2011, defensive assets began to show improving relative strength vs. the S&P 500. The flash crash winners highlighted in blue above have continued to draw increasing interest from buyers over the past four weeks (see relative strength charts below). The investments listed in the table above serve as a de facto shopping list should the current pullback morph into a full blown correction.

The relative strength lines of the VIX or the ‘fear index’ and utilities have moved higher in recent weeks, indicating increasing concerns about further downside in risk assets.

While relative strength is a term from technical analysis, the concept of buyers becoming more interested in defensive assets falls under the common sense category when it comes to risk management. Based on other concerns, we already hold the highest percentage of cash since late November 2010 as a way to reduce risk until the threat of continued downside subsides somewhat. In terms of current strategy, the increasing relative strength of defensive assets tells us:

• Market participants are becoming increasingly nervous.
• Further downside is possible.
• To continue to monitor defensive assets.
• To be open to raising more cash, based on the incremental approach, should conditions deteriorate further.

Increasing interest in bonds is not good news for stock and commodity investors.

For those not familiar with technical analysis, the green lines in the relative strength charts all have positive slopes, which highlight an increasing interest in defensive assets relative to the stock market in general.

Gold’s safe haven status appears to be intact.

It is not time to panic relative to the possible continuation of the current correction, but we are happy we have taken some profits off the table in recent weeks. The defensive assets shown above will continue to help us monitor the risk tolerance of market participants, who ultimately determine the value of our portfolios. 

Corporate bonds and stocks in Malaysia held up well during the 2010 flash crash correction. Buyers are again showing interest over the last few weeks.

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Commodity Snapshot

by Bespoke Investment Group

With oil surging into the $100s and then pulling back $3 today, we feel that now is as good of a time as any to publish our commodity trading range charts.  In each chart below, the green shading represents between two standard deviations above and below the 50-day moving average.  Moves above or below the green shading are considered overbought or oversold.

As shown, even after today's pullback, oil remains at the very top of its trading range.  Even a pullback to $90 would only put oil in the middle of its trading range.  The other energy commodity shown -- natural gas -- is at the bottom of its trading range, which is nothing new. 

Like oil, both gold and silver are down a bit today, but they are still right at the top of their trading ranges as well.  The other precious metal -- Platinum -- hasn't done nearly as well as gold and silver lately, and it is closer to the bottom of its range than the top.

Copper had been trading in a very nice uptrend, but just recently it has taken a big turn for the worse.  After forming a head and shoulders pattern, copper has now broken key support and is trading into oversold territory.  Wheat is also now trading into oversold territory.  Coffee, on the other hand, continues to soar.

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China inflation tops expectations, paves way for more

By Kevin Yao and Langi Chiang

(Reuters) - Chinese inflation topped expectations in February at 4.9 percent and looks set to climb further in coming months, adding to pressure for another dose of monetary tightening.
But data published on Friday also offered tentative signs that the government was making some headway in taming price rises without inflicting undue harm on growth in the world's second-largest economy.

Consumer inflation steadied in February at the same level as in January, the National Bureau of Statistics said. Although above forecasts for 4.7 percent, the 4.9 percent reading contrasted with dire warnings a few months ago of runaway prices. Core inflation, stripped of volatile food costs, slowed.

Though far too soon for Beijing to declare victory in its battle against inflation, the stabilization suggested that it was more than midway through a sustained tightening campaign launched nearly half a year ago.

People's Bank of China Governor Zhou Xiaochuan struck a guardedly optimistic note.

"If we observe the CPI (consumer price index) figures for December, January and February, although they are high, inflationary expectations are currently relatively stable," he said at a news conference during China's annual session of parliament.

Nevertheless, worries that further increases of Chinese interest rates and reserve requirements were inevitable -- and potentially imminent -- weighed on global markets, which were already reeling because of weak U.S.

economic data and unrest in Saudi Arabia. Asian equities added a touch to losses on the day, and the Shanghai stock market had dipped 0.2 percent as of 0515 GMT.

"Clearly, the consumer price index is stabilizing, but the risk is still significantly on the upside," said Wei Yao, economist with Societe Generale in Hong Kong. "It means the central bank will probably stay on the course of tightening," she added.

INFLATION A PRIORITY

Industrial output in the first two months of 2011 rose 14.1 percent year-on-year, picking up from a 13.5 percent pace in December and vaulting past market expectations of a 13.3 percent increase.

Investment was also robust, up 24.9 percent year-on-year in the first two months, topping forecasts for a 23.3 percent rise.

The broad strength reflected Beijing's balancing act in managing the economy this year. While restricting the flow of cash with monetary policy, the government is once again spending lavishly on infrastructure projects and, especially, the construction of public housing to keep growth humming along.

China's top leaders have declared that their priority this year is to control inflation. So far, complaints about rising prices have amounted to little more than grumbles, but serious inflation has sparked social unrest in China in the past.

To meet the official goal of keeping inflation to a 4 percent average this year, the government has raised interest rates three times and banks' reserve requirements five times since October, while also using a series of direct controls to cap price rises.

The next round of tightening may be just around the corner.

"The higher-than-expected CPI may push the government to raise interest rates or the reserve requirement ratio in March," said Liu Dongliang, analyst with China Merchants Bank in Shenzhen.

Reflecting the surge in global commodity costs earlier this year, producer price inflation jumped in February to 7.2 percent from 6.6 percent a month earlier.

LENDING CONTROLS

The most important part of Beijing's tightening efforts has been reining in banks, which unleashed a torrent of credit over the past two years, swamping the economy in cash.

Reports in official media have said that new loans in February were slightly above 500 billion yuan ($76 billion), a steep drop from January and considerably less than expected. If confirmed, that would suggest that China has finally gained traction in controlling the excesses of banks.

In a statement on Friday, the Chinese central bank said it would ensure that there is an "appropriate" amount of liquidity in the economy this year, guiding credit growth at a reasonable pace.

Zhou, the central bank governor, poured cold water on the suggestion that faster currency appreciation would help China control inflation. At the margins, it would be useful, but China is a continent-sized economy and so the exchange rate plays a more minor role than in small, open economies, he said.

For all the signs of progress in taming inflation, it is notoriously difficult to interpret Chinese economic data at the start of the year. Many businesses shut their doors or run at half speed for weeks because of the Lunar New Year, which fell in early February this year.

A reminder of the distortions this causes came on Thursday, when data showed that China had recorded its largest trade deficit in seven years in February. That helped fuel a sell-off in global markets, but economists said the country was likely to return to a chunky surplus over the rest of the year.

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BILL GROSS SELLS US GOVERNMENT BONDS – DOES IT MATTER?

by Cullen Roche

Bill Gross, the founder of PIMCO, made waves this week by selling his holdings of US Treasuries.  Bloomberg reported on the dramatic news:

“Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., told PBS this week that yields are too low. His $237 billion Total Return Fund held no government-related debt as of Feb. 28, according to a report on the Pimco website.”

That’s dramatic.  After all, Mr. Gross says the Fed is now helping the US government implement a ponzi scheme.  He also believes QE is helping to dramatically reduce rates.  He says the end of QE2 will be a “d-day” for the bond market.  Those are comments that you’d certainly want to take notice of considering this is the largest bond manager in the world, right?  Not necessarily.  Unfortunately, this isn’t the first time Bill Gross has sounded the alarm for the U.S. bond market.

In early 2010 he was interviewed by TIME magazine about the economic outlook.  Mr. Gross was asked about the end of QE1 and how it would impact rates.  He answered:

Won’t that (the end of QE1) put upward pressure on interest rates?
“I think it will. I mean, the mortgage market would be your first place to look, in terms of something that’s overvalued that would become normalized. Nobody knows what the Fed’s buying is worth — we think about half a percentage point on rates, but we don’t know.”

What happened when QE1 ended?  Rates did the exact opposite of what Mr. Gross expected.  In fact, they went into a tailspin.  He top ticked it to the day:

I am not sure there is much, if anything, that we can read into this move by Mr. Gross.  He has been talking about some form of bear market in bonds for over 10 years now.  In 2004 PIMCO declared: “We are at the end of the secular bull market in bonds.”  In a 2001 letter Gross declared the bull in bonds over, but said opportunities would continue.  In a 2007 interview he referred to himself as a “bear market manager”. Inbetween these calls he has consistently maintained a very healthy holding in fixed income and US Treasury correlated assets.

So, do the current opinions about “d-day” and the end of the bond bull market matter?  Yes, as much as the (ever changing) headline grabbing opinions of the last 10 years….

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Buy Low And Sell High? Our Super Commodity System Do This!

Qui sotto riportiamo gli screenshot relativi ai trades attualmente aperti dal nostro Super Commodity System su alcune valute e sul Cotton, che esemplificano chiaramente come il system esegua i suoi set-up di vendita sui massimi e quelli di acquisto sui minimi. Il system consente di prendere posizione sui mercati con largo anticipo rispetto ai metodi tradizionali e avvantaggia notevolmente l’investitore nella successiva gestione delle posizioni aperte. Super Commodity lavora su regole semplici ed efficaci e con parametri fissi e non ottimizzati. I risultati storici di Super Commodity sono a disposizione ai seguenti link: http://www.box.net/shared/static/xybqf6etyc.xls, http://www.box.net/shared/g6z56itu42. I risultati di alcuni altri nostri trading systems sono a disposizione al seguente link: http://www.box.net/shared/5vajnzc4cp.

Prova Gratuita / Free trial

Below are screenshots relating to the trades that are currently open to our Super Commodity System on some currencies and Cotton markets, which clearly illustrate how our system completed his sell set-up on the high and the buy set-up on the low. The system allows to take position on the market well in advance of traditional methods and greatly benefit the investor in the subsequent management of the open positions. Super Commodity works with simple and effective rules and with fixed and not optimized parameters. Historical results of Super Commodity are available at the following links: http://www.box.net/shared/static/xybqf6etyc.xls, http://www.box.net/shared/g6z56itu42. Historical results of our some other trading systems are available at the following link: http://www.box.net/shared/5vajnzc4cp.

Material in this post does not constitute investment advice or a recommendation and do not constitute solicitation to public savings. Operate with any financial instrument is safe, even higher if working on derivatives. Be sure to operate only with capital that you can lose. Past performance of the methods described on this blog do not constitute any guarantee for future earnings. The reader should be held responsible for the risks of their investments and for making use of the information contained in the pages of this blog. Trading Weeks should not be considered in any way responsible for any financial losses suffered by the user of the information contained on this blog.

The Coming Global Commodities Crisis

By: Clif_Droke

The last few weeks has seen a startling rise in fuel and food prices. This has been a key contributor to the political and economic instability overseas; it’s also paving the way for an even bigger crisis for the U.S. and the world economy by 2012.

Indeed, the oil price has been on a rip-and-tear largely owing to the Middle East crisis. The fear and uncertainty overhanging North Africa and the Middle East has also benefited the gold price. Our favorite gold proxy for instance, the SPDR Gold Trust ETF (GLD), recently made a new high and is still above its key immediate-term trend line.

The recent fuel price spike was a consequence of the political turmoil in the North African and Middle Eastern region. This in turn was caused by high food prices…which is mainly a consequence of a weak U.S. dollar since commodities are priced in dollars. Ever since the Bernanke’s Fed decided to pursue its second quantitative easing strategy (QE2) beginning last November, the dollar has been weakening while commodities prices have strengthened. This has put tremendous pressure on developing economies, particularly in the Middle East. Thus it could be argued, as some economists have, that the Fed’s QE2 program has been a major contributor to the Middle East revolutions as well as the rising cost of fuel.

The news media is trying to dismiss the high food prices by blaming it on weather related supply shortages. As Steve Forbes recently observed, “Droughts and floods have hurt the food supply, but at best these are only partial explanations and are about as convincing as North Korea’s blaming famines on the weather. Such acts of God were routinely trotted out to excuse food shortages in the old Soviet Union and Ma Zedong’s China.”

The stated reason behind QE2 was to stimulate the U.S. economy and help bring down the unemployment rate. While the Fed’s stimulus program has had a definite impact in terms of improving the financial market and in at least stabilizing the economy, it has done little to improve the structural condition of the economy or to bring down unemployment. What Bernanke & Co. have succeeded in doing with their super aggressive monetary stance is to create something akin to the 2006-2008 commodities bubble. The Fed has succeeded in pushing the oil price to an unsustainably high level and have also made food prices inaccessibly high for hundreds of millions of underprivileged people in the developing worlds.


In his latest Special Edition, entitled “Crisis High,” Samuel J. Kress makes the following pertinent observation: “Since the Great Depression of the ‘30s, the federal government has increasingly intervened in the economy thereby increasing the national debt to astronomical levels with the numerous social entitlement programs. Will the government’s addiction to OPiuM, squanderous spending of Other People’s Money, ever end? Recent QEs defy logic and reason – how can incurring additional debt cure the ills of excessive debt? Is this not equivalent to giving an alcoholic with sclerosis of the liver a case of scotch for the holidays and wishing him a healthy new year?”

By persisting in its loose monetary policy, which should have been slowed down last year when the recovery had achieved a sustainable momentum level, the Fed is also sowing the seeds of the next major financial crisis. The next crisis will likely be global and could rival the credit crisis in terms of its severity. The fact that the 6-year cycle is up until later this year should help stave off this crisis until perhaps 2012, but the path toward another crisis has been paved and the Fed isn’t likely to reverse course at this juncture. If Bernanke is true to his word in continuing QE2 until spring, the Fed will very likely have gone too far in its loose money policy, just as it went too far in its tight money policy heading into the credit crisis. By the time the Fed recognizes its mistake the damage will have been done and the consequences will have to be paid.

History, it seems, always repeats when it comes to the Fed.

Turning our attention to the metals and mining stock market, the fear and uncertainty concerning North Africa and the Middle East has definitely benefited oil but has also been of some benefit to the gold price. Our favorite gold proxy, the SPDR Gold Trust ETF (GLD), recently made a new high and is still above its key immediate-term trend line.

Gold stocks are in a less strong position than the metal itself, however. As we examined in last week’s commentary, many of the larger cap gold stocks have badly lagged the high-flying silver stocks and smaller cap gold shares in recent weeks. High profile examples of this relative weakness include Newmont Mining (NEM), Freeport Copper & Gold (FCX), Kinross Gold (KGC) and Agnico-Eagle Mines (AEM), all of which are closer to new lows for the year-to-date than new highs.

For a gold stock bull market to be considered strong and healthy, it should be joined by all segments of the market: small-cap, mid-cap and large-cap. When the bigger capitalized mining companies are badly lagging the rest of the group it means the market isn’t firing on all cylinders. If the large cap gold stocks don’t soon reverse their declines it will eventually compromise the broader market’s uptrend. For this reason we’ll need to watch our remaining long positions closely for signs of potential weakness in the near term and hold off on making new purchases until these negative internal divergences have been reversed. As of Mar. 9, both the XAU and HUI indices are below their dominant immediate-term moving averages as we await an improvement in the gold stock internals.

Gold & Gold Stock Trading Simplified

With the long-term bull market in gold and mining stocks in full swing, there exist several fantastic opportunities for capturing profits and maximizing gains in the precious metals arena. Yet a common complaint is that small-to-medium sized traders have a hard time knowing when to buy and when to take profits. It doesn’t matter when so many pundits dispense conflicting advice in the financial media. This amounts to “analysis into paralysis” and results in the typical investor being unable to “pull the trigger” on a trade when the right time comes to buy.

Not surprisingly, many traders and investors are looking for a reliable and easy-to-follow system for participating in the precious metals bull market. They want a system that allows them to enter without guesswork and one that gets them out at the appropriate time and without any undue risks. They also want a system that automatically takes profits at precise points along the way while adjusting the stop loss continuously so as to lock in gains and minimize potential losses from whipsaws.

In my latest book, “Gold & Gold Stock Trading Simplified,” I remove the mystique behind gold and gold stock trading and reveal a completely simple and reliable system that allows the small-to-mid-size trader to profit from both up and down moves in the mining stock market. It’s the same system that I use each day in the Gold & Silver Stock Report – the same system which has consistently generated profits for my subscribers and has kept them on the correct side of the gold and mining stock market for years. You won’t find a more straight forward and easy-to-follow system that actually works than the one explained in “Gold & Gold Stock Trading Simplified.”

The technical trading system revealed in “Gold & Gold Stock Trading Simplified” by itself is worth its weight in gold. Additionally, the book reveals several useful indicators that will increase your chances of scoring big profits in the mining stock sector. You’ll learn when to use reliable leading indicators for predicting when the mining stocks are about o break out. After all, nothing beats being on the right side of a market move before the move gets underway.

The methods revealed in “Gold & Gold Stock Trading Simplified” are the product of several year’s worth of writing, research and real time market trading/testing. It also contains the benefit of my 14 years worth of experience as a professional in the precious metals and PM mining share sector. The trading techniques discussed in the book have been carefully calibrated to match today’s fast moving and volatile market environment. You won’t find a more timely and useful book than this for capturing profits in today’s gold and gold stock market.

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