Technical Analysis

Why do commercial investment advisers always tell you that gold (& silver) and PM assets are all massively risky? Here's the one chart that explains everything.

An overview of the key factors and events that are shaping the investment climate in the week ahead.  It looks at some emerging market developments as well.  These are the main talking points and considerations that ought to be on your radar screen as investors or pundits.  

Because there are still some traders who adhere to such old normal traditions as charting and technical analysis (because apparently the FOMC committee sits down each month and observes Ichimoku clouds, RSI indicators and Bollinger bands), it is probably notable that one of the most respected chartists, Steve Cohen's favorite technician Tom DeMark, is now uniformly bearish on virtually all markets around the world which have triggered a sell signal in his studies, and is about to drop the axe on the US as well where a "Daily 13" signal is imminent. The caveat, of course, is that in a world in which fundamentals haven't mattered in years, why should technicals?

Reuters report that Asia's physical market has picked up so far this year, with buyers tempted by last week's big drop in prices -- when prices retreated to as low as 1,626 per ounce -- and on demand ahead of the Lunar New Year, traders said. The trading volume on the Shanghai Gold Exchange's 99.99 gold physical contract shot through the roof on Monday, hitting a record of 19,504.8 kilograms, after double-counting transactions in both directions.  "Physical demand is very strong," said a Beijing-based trader. "It's a combination of the attraction of lower prices as well as pre-holiday demand." But such appetite could waver if prices recover towards $1,700, he added.

One of the most important decisions participants in the foreign exchange must make is whether to view the dramatic pullback in most of the major foreign currencies seen in the early days of the new year as a reversal of the trend or as simply an overdue correction.   Our technical analysis sides with the latter and we anticipate renewed dollar weakness in the period ahead. 

We would be forced to reconsider if the euro fell through the $1.2980 area or if sterling fell below $1.60.  Although the dollar's sharp gains against the yen have left it over-extended, we see no compelling technical sign that a reversal is at hand.  Just like ECB's Draghi wielding Outright Market Transaction scheme drove down Spanish and Italian yields, Japan's Abe's rhetoric has been sufficient to drive the yen down without lifting a finger or spending cent.

Gold fell $20.20 or 1.2% in New York yesterday and closed at $1,664.50/oz. Silver slipped to as low as $29.972 and finished with a loss of 2.55%.

Gold in US Dollars (1 Month) – (Bloomberg)

Update 2: MLNX down 22%. Earnings, and cash flows, matter. And now, time to ramp some other stock only to see it implode when it announces earnings or guides down.

Update: MLNX, a $2.6 billion market cap company, was up 3% today before being halted after hours and crushing guidance by preannouncing horrible revenues. Expect many other S&P 500 companies to be forced to do the same now that their market value, driven almost exclusively by "someone's" ceaseless selling of VIX futures and by correlation engines which assume every company has to rise (and sometimes even fall) by the same amount as the biggest synthetic indicator, the E-Mini, is so disconnected from any cash-flow reality, that only the Fed can possibly assume there is fair value for the stock market at current levels.

The drop in VIX in the last two days is the biggest percentage drop on record (based on Bloomberg's data) as the S&P 500 futures (ES) have managed a 70-point rally. The exuberance at today's open ebbed through the middle of the day but then resurged into the close as the day-session range was actually quite narrow (sub-10pts). High-yield credit surged (leading the way) coupled with VXX (huge odd volume spike) as pain trades were everywhere. FX markets were decidedly unimpressed even as Treasuries tracked along with stocks for most of the day (though lagged the late-day surge as 10Y yields stalled out at the 12/187 highs). Commodities held on to gains even as the USD turned positive on the week. On the bright side, all those who have been invested in the S&P since March 2000 can exit at (nominal) breakeven and all it took was a 400% increase in the size of the Fed's balance sheet. This feels very delicate and all anchored on a massive protection unwind (as volumes and blocks were dumped into the late-day ripfest).

You have all heard of "Birinyi's Ruler" before (and if you haven't, today for some inexplicable reason Bloomberg decided to once again give exposure to the man who made all technical analysis into an absolute farce). Well, step aside Birinyi Ruler, and make way for Birinyi's Parabola. Why? Because back in January 2011, the pitchy Hungarian fearlessly declared his closing price target for the S&P 500 on September 4th, (not 3th, not 5th) 2013 at 2,854. This is just over 100% from where the S&P will close today. The resulting ramp is no longer a ruler, not even a hockeystick, but quite simply a parabola. As shown below...

Presenting Dave Collum's now ubiquitous and all-encompassing annual review of markets and much, much more. From Baptists, Bankers, and Bootleggers to Capitalism, Corporate Debt, Government Corruption, and the Constitution, Dave provides a one-stop-shop summary of everything relevant this year (and how it will affect next year and beyond).

If the Mayans are correct, the world has just over a week before it goes poof. But, the hard-core chartists will say, is there any technical analysis suggestion they may be right? Let's take a look: the chart below shows all the 450 MunichRe-documented natural disasters that have taken place in the first half of the year, running at at annualized pace of a near record-setting 900 in 2012 alone. Is this enough to set off the most terminal selling event in the history of the world in 8 short days? You decide.

Amidst all the "fiscal cliff" talk of raising tax rates, few dare to ask: have tax revenues topped out? How could tax revenues decline as rates go up? Easy: people modify their behavior in response to whatever incentives and disincentives are present. Make mortgage interest deductible and people will rack up huge mortgages. Reduce the yield on savings to near-zero (thank you, Federal Reserve) and people will save less. Raise tax rates and people will lower their income or move to low-tax locales. As the saying has it, "Money goes where it is treated well." Supporters of higher rates tout studies that find upper-income taxpayers shrug off higher rates, staying put in high-tax states: Do High Taxes Chase Out The Rich? and Superrich stay put in high-tax states like California. On the other side of the ledger is this study from Britain: Two-thirds of millionaires left Britain to avoid 50% tax rate. Which view is correct? Both, as a result of different dynamics. There are at least four separate dynamics in play.

Three visualizations describe the breakdown of PSMs--previously successful models: S-Curves, Supernovas and Rising Wedges. A successful model traps those within it; escape becomes impossible.  We see the immense power of previously successful models. Straying from the previously successful trajectory looks needlessly risky, even as the trajectory has rolled over and is heading for unpleasant impact. Anyone who questions the previously successful model (PSM) is suppressed, fired or sent to Siberia as a "threat" to the enterprise's success. Anyone who realizes the Titanic will inevitably sink and abandons ship leaves behind all their sunk capital: they leave with the figurative clothes on their back.

Thomson Reuters GFMS has published research that says they project silver prices to rise 38% in 2013 from current levels, as a sluggish global economy increases safe haven demand. The bullish silver GFMS forecast was published on the Silver Institute website yesterday and is unusual as the GFMS have been quiet bearish on silver in recent years despite rising prices. Philip Klapwijk of GFMS said that “a rebound in investment demand stemming from continuing loose monetary policies is expected to drive silver prices towards and possibly over $50 during 2013.”  Spot silver has risen over 17% this year overtaking gold’s 10% gain, and paving the way for its third consecutive rise in four years. "Strong investment demand, higher gold prices on the back of monetary easing, rising inflation expectations and the persistence of ultra-low interest rates," are among the factors that will lure buyers to the safety of silver,” said Philip Klapwijk of GFMS. "We are thinking prices will trend higher next year. I'm not convinced that we are going to $50. I think we will definitely see $40 to $45 prices."

By blaming this week's sell off on the coming fiscal cliff is another belief by market participants that Washington can fix our economy and our markets.