November OpEx Update

naufalsanaullah's picture

The S&P 500 remains in its downtrend from October 2007 and its rally from March is getting very extended, as the risk asset melt-up courtesy of the ubiquitous dollar-funded carry trade runs dry of dollar liquidity. Gold powered through to another new high today, breaking the $1148 level, while the Dollar Index rallied to 75.65, days after making a new 2009 low at 74.75. The S&P priced in gold is now back to April levels, having topped out in August at January highs.


The Advance/Decline line has been in a channel since March and after its most recent resistance touch, it has made a lower high, implying a reversal at hand.

The liquidity driving the rally, courtesy of the $300B in Treasury purchases by the Fed, has run dry, the last POMO occurring in October. This monetization liquidity has high correlation with the S&P's bullish march since March and with even Obama now considering the possibility of a double-dip, the mean reversion fundamentalists are looking for should be occurring soon.

Short-term T-bills have gone negative and bond yields have been in a steady downtrend since June, indicating the bond market is prognosticating deflation, at odds with equities and commodities markets. Fixed-income markets tend to be much better predictors than stock and commodity markets, supremely evidenced by the credit events since mid 2007, so this is a bad sign for stocks.

The S&P is showing lots of momentum divergences at these levels, indicative of a top/reversal, especially on the daily chart. After making a third consecutive higher high on the 11 (on decreasing volume), the S&P has sold off back below the 1100 resistance level, marking another failed breakout. This week showed unique fibonacci confluence with the S&P 500, as it sold off from its 50% price retracement (around 1120) and also has had a 50% time retracement of the 512 days from October 2007 highs to March 2009 lows, with November 17 (incidentally the closing high of the S&P this year) marking 256 days since the March bottom. The S&P has also completed its retest of the rising wedge trendline it broke down from in late October, and has reached the resistance trendline of the bear market channel that has defined its performance since its October 2007 top, in addition to the long-term resistance level at 1115-1140. This resistance "range", in my opinion, will mark the top of this rally, and with the market now touching the bottom part of that level, it is at risk for reversal.

A big reversal, at that. Liquidity chases beta, as has been overwhelmingly evidenced by the massive outperformance of high-beta names since March, as well as the beta-chasing, momo nature of the rally. Volume entering on the sell-side in these stocks (who have no "natural" or "organic" bid, but have been chased by excess liquidity) should send them tanking just as sharply as they rose.

There have been a lot of price divergences in between indexes and bellwether securities. The Dow powered on to new highs on this last move up and the S&P and Nazzy retested October highs, while the leading small-cap (and higher-beta) Russell 2000 printed a lower high with its early November lower low, confirming a downtrend in that index. Financials led the market into rally mode and seem to be leading it out, as well, as they suffer from significant price divergences from the overall market. The SPDR Financials ETF XLF has printed a lower high and seems to approaching a head & shoulders breakdown. The EUR/USD, one of the primary carry trade vehicles, has found huge resistance at the 1.500 level, with a recent retest of its October highs without breakout followed by selling.

Gold has been powering away since its September 2 breakout from its symmetrical triangle (which ShadowCap had been highlighting for months), but momentum indicators are showing overbought levels not seen since May 2006, which marked an important top in gold, after which gold prices based for several months before continuing higher. Frequent readers know I am both long (in coins, bullion, ETFs, and miner equities) and bullish in gold, although I expect a sharp selloff in precious metals short-term as the dollar rallies on deleveraging, risk aversion, and the unwind of the leveraged carry trade.


There's tons of talk of asset bubbles that has now even hit the media. Bill Gross, head of PIMCO, believes “the Fed is trying to reflate the U.S. economy,” while the prescient Professor Nouriel Roubini considered the market being run by the "mother of all carry trades," with the dollar primed for a "snap back" of 20% or more. Perhaps most ironically, the chairman of China's banking regulatory committee, Liu Mingkang, asserted United States monetary policy was fueling a "huge carry trade" that chases "speculative investments" and is having "massive impact on global asset prices".

There remains little volume in equities markets and even less liquidity, and sell-side volume (which has been coming in droves during recent selloffs) poses significant risk to stocks and commodities. The Dollar Index remains in its downtrend, but there is significant momentum divergence with implicit bullishness, and increasing (substantially buy-side) volume in /DX futures and dollar ETFs like UUP & UDN. I have been pointing out on my Twitter I am closely watching /DX's 50DMA as a heavy short trigger on the S&P 500, and a close above it will result in big new short positions to add to the select, targeted shorts already in my personal trading accounts. The Vix and Dollar Index have been important corollaries in this market advance sine March, and the Vix ETF VXX's 50DMA serves as an identical trigger as the Dollar Index 50DMA, as well.


The liquidity-fueled, momo, IBD-nature to this run-up has caused market leaders being overwhelmingly high-beta. Lots of high-beta leaders with huge run-ups since March, like DTG X PWRD CFSG EJ STEC YONG, have started showing massive distribution, selloffs, and reversals, also adding confluence to the market top argument. Many of these are Chinese issues, which makes sense with China's massive monetary expansion leading to new equity and property bubbles there.

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Anonymous's picture

Agreed. S+P 500 and gold both retreat to 875 short term. Gold first hit $875 in January 1980. I think it hits that again exactly 30 years later, in January 2010. Where does it go from there? If Congress puts the Federal Reserve out of business it goes to $100. If they let Banana Ben keep experimenting up in the lab I think it goes to $15,000.

Anonymous's picture

I'll respond to your "gold goes to $100" comment as soon as I stop laughing.

Anonymous's picture

Sir, without any offense, what does current gold price tell you which direction the Congress will take?

JamesBrrando's picture

im looking for a 20% gold correction at 920 from 1150

-230.00 off the top and basing there for 1-2mo

primus's picture

You have one part right.

If they let Banana Ben (or any other central banking minions) keep experimenting up in the lab I think it goes to $15,000.

Convection Fry List's picture

Put this in your gold pipe and smoke it on the ride down:

"This has been a speculative fund-driven futures rally," says Jon Nadler, a veteran analyst at Kitco Metals Inc. in Montreal. In other words, traders who play in the futures markets are betting on higher gold prices. But they aren’t interested in owning the actual metal."

We know how this ends...

Shiznit Diggity's picture

Physical demand just needs time to adjust to the new normal of quadruple-digit gold prices.

Anonymous's picture

If that is an inverted head-and-shoulders pattern in gold, then gold needs to go to at least $1300 to complete the pattern. The inverted head was at $700 and the shoulder-line was at $1000.

Chopshop's picture

Other than being a crap 'pattern' to begin with, a H&S formation is distinctly reversal in nature ... H&S is NOT a continuation pattern !  

Moreover, after rising over 400% in a decade while every other commodity/ asset class has crashed, there is no reversal (up) to speak of. 

Anonymous's picture

The End is Near

Ned Zeppelin's picture

"as the risk asset melt-up courtesy of the ubiquitous dollar-funded carry trade runs dry of dollar liquidity"

Help me understand. How do we arrive at a "liquidity crisis"?  What is the path the freshly printed dollars take? Do they go to equities and other speculative ventures, presumably on leveraged basis?  At some point the free dollars are all committed into less liquid assets and therefore dollar liquidity begins to dry up? To acquire liquidity one must borrow or sell. Time to cash in the chips and move elsewhere.  We cannot all cash in our chips at the same time, correct?  What are market measures of adequate liquidity?

We know there are inaccessible pools of liquidity locked up inside the vaults of the banks, and, I'm guessing, not really available, not committed to loans or unborrowed lines of credit, but rather serving as transfusions for dollars still trapped inside toxic assets.  How do "trapped" dollars help liquidity?

Anonymous's picture

Gov't manipulation/PD involvement in markets for debt IOUs and equities have driven many investors away.
Municipal and federal debt cannot be adequately serviced now due to collapsing tax revenue and increased deficit spending. Sovereign debt auction, instead of being allowed to find an equilibrium interest rate are being gamed by the Fed who purchases any issue left wanting. This artificially suppresses the interest true investors would normally demand. The low interest supports the mortgage market and keeps RealEstate from abject collapse. But it also drives away the purchasers of US Debt. Unable to fund auctions means only option is printing.

Printing doesn't go unnoticed. Currency holders seek to flee dilutional money and paper fiat is debauched.
Since it is the unit of account which most transactions are initiated and settled in, whatever nominal return is to be gained must be weighed against loss in purchasing power of currency.

Fall in USDollar exceeds all interest enticements in debt auctions.

Stocks, Bonds, derivatives, commodity contracts are all experiencing purchase power volatility unacceptable to most investors. Prudent investors are expecting a currency collapse.

Fed will NOT raise rates to reward investment and preserve USD$. Monetization will incrementally ruin all USD$ holders.

Only precious metals will hold intrinsic value and restrain depredation by their natural scarcity and universal acceptance as alternative money.

Salted gold bars have defiled the assumed stockpiled supply within the gold market. Scarcity is even greater than expected therefore. Assaying quality will easily overcome whatever loss of confidence the counterfeits induced, but those short PMs must now compete to cover positions from an even scarcer pool of the commodity.

Add to this the fact that the USA liquid money supply approximates 1.5 trillion only, and that the foreign reserves of China exceed that by another 1/2 trillion. They are losing purchasing power through dollar devaluation, surpluses are waning, and the FED-Treasonry have passed salted tungsten bars. They have lost confidence in the currency, and feel betrayed by dishonesty in metals markets.

They can slowly dump their dollars into gold, the Primary Dealers who hold short positions against gold (and are henchmen for currency management by FED-Treasonry) will be forced to cover, or to default, or to blowup, or to suspend the markets. Either currency or the Gold market will explode. Chinese have shown they will honor derivative contracts on case-by-case basis and that also throws turmoil into markets.

Breakdown is imminent. Equities, Bonds, derivatives, currency. Unless China is completely suborned into the conspiracy which acts against their immediate interests, and unless that conspiracy is seamless and without revolt, there must be a currency crisis soon.

Anonymous's picture

Nice write-up and I agree...but, you're a 19-year old student and you're already wearing a dress shirt and tie and you're studying, what, macroeconomics probably?

You're too young to be messing with this nonsense. This is the time of your life when you should be reading Walden Pond by Thoreau and Moby Dick by Melville and the poetry of Emily Dickinson, etc.

Save the bullshit stock market stuff for your 30's or 40's. You're only young once.

Anonymous's picture

Financial "engineering"? Plus, that sounds like a pretty big portfolio for a 19-year-old. Family money? Genius? GS, JPM, or C employee?

Anonymous's picture

For the last couple of months I have heared that statement from the bears(ironically,I became one just as the market was shifting gear back in FEB,and only because of disgst with the whole plan that I forsaw coming). But for some reason,those statements areasuming that we are in a fair market situation,and yet you read in the same blogs about all the fed intervention that is manipulating the market. The question then becomes:how can you asume that the bond market know better than equity market,while acknowledging that markets are manipulated(not necessarily this post,but general observation)?. Logic implies the following:If in most of those blogs that I frequent the basic asumption is that markets are manipulated and not fairly priced(which I also happen to buy in that asumption),then what follows is "nobody knows better than anybody". All buyers are blind and they are buying equities or bonds based on hopes and not real market information. The second asumprtion is:That markets are operating effecietly,and we simply know that this is not true because of what we know(and what we don't know,but suspect that it is taking place),so in that case we have to go back to the first asumption...

Psquared's picture

inquiring minds would like to know ....