S&P 500 Joins Global Bear Market

 

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Markets opened October with almost all assets declining everywhere. The S&P 500 entered bear territory on Tuesday.  Few assets other than treasuries and the U.S. dollar are doing well, as is typical during a credit crisis.

The big talk on Monday, the first trading day of October, was about the S&P 500 making a new closing low for the year. The intraday low was only slightly lower than the previous one in early August, so peak to trough the index was off 19.8%. The big drop on the opening on Tuesday created a 20% loss, putting the S&P 500 officially in a bear market.

The small cap Russell 2000 already entered bear territory on August 8th. The Russell had another mini-crash on Monday, dropping 5.4% on the day. That was its fourth mini-crash since August. Mini-crashes are common during credit crises, but not at other times.

The selling on Tuesday first showed up in Asia with the Hang Seng in Hong Kong losing 3.4% to close at 16,250 and South Korea's KOPSI dropping 3.6%.  The ugliness then spread to Europe with the German DAX, the French CAC-40 and the UK FTSE down more than 3% during the  trading day. U.S. stocks opened then opened lower with the Dow losing more than 200 points in early trading.

As usual in Europe, banks were at the epicenter of the market quake. Franco-Belgium bank Dexia was down 22% at one point. Deutsche Bank (DB) was down more than 6% in Frankfurt after announcing it would miss its profit target for the current year.  American banks have not avoided the carnage affecting financial stocks elsewhere; just take a look at Bank of America (BAC) and Morgan Stanley (MS), both trading at two-year lows.

While the behavior of banking stocks makes it clear that a credit crisis is taking place, falling commodity prices clearly indicate that the global economy is turning down. Copper prices fell as low as $3.01 a pound early Tuesday. Copper sold for well over $4.00 at its high in February and dropped sharply throughout September. Oil is also indicating weakness, with WTI crude closing at $77.61 on Monday. It traded as low as the $75 range on Tuesday. Oil is heading into a period of seasonal weakness and this is likely to exaggerate any price drops. Next strong support is around $70 a barrel.

Money continues to move into safe haven treasuries. The 10-year yield was as low as 1.725 before selling began in the bond market. The U.S. dollar index traded just under 80 at its high. The euro, which moves opposite to the dollar, hit a low of 1.31.62 Tuesday. Further weakness should be expected until there is some resolution to the debt crises in the EU.

 In bear markets, the bigger trend is down, but this is frequently accompanied by huge volatility. This is what has taken place since August and until there is a good reason that the trend should change, investors should expect that prices will be moving lower.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Silver Crashes; Gold Breaks Key Support

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

The silver market had a major crash on Friday -- there is simply no other way to put it. Spot prices were down as much as 17.1% or $6.18 an ounce. Gold was damaged as well, but not nearly as much. At its worst, it was down 6.3% or $108.60 an ounce. Both gold and silver traded below previous lows set earlier this year.

The drop in silver was truly spectacular. It was down by double digit amounts on Thursday and then by an even  greater amount today. The main silver ETF, SLV, has two huge gaps on its chart. The spot price low of $29.76 reached an area of major support. There is chart support, moving average support and a Fibonacci retracement at that level. A tradable bounce should take place soon and the gap in the chart from today is likely to be covered in that move. Those with a longer-term investing horizon might want to wait before buying. The next level to keep an eye on is around $26 where there is chart support and another Fibonacci retracement.

The silver selloff is much more advanced than is the one for gold. Silver peaked in April and had its first big selloff in May. It made a double bottom in May and July and didn't trade below those levels until today. Gold on the other hand made a double top in mid-August and early September. It confirmed that double top today by trading below its August low. Spot gold fell to $1628.60 an ounce at its worst point, breaking its support in the lower 1700s by quite a bit.

The precious metals charts are showing technical damage, with silver in much worse shape than gold. Gold broke its 50-day simple moving average yesterday for the first time since June. Today, silver pierced its 325-day simple moving average -- an important support level for any commodity. The DMI technical indicator gave a sell signal for SLV on the daily charts today and was about to do so for the major gold ETF, GLD. In the short term, both are very oversold however.

The huge price drops in silver and gold can only be explained by substantial hedge fund selling that smacks of credit crisis panic. Both of these markets have risen on highly leveraged buying. Once a few overextended funds are forced to sell because of the financial turmoil in Europe, things can go downhill pretty fast. Stops get taken out and this causes more selling, which in turn takes out more stops and leads to more selling. After this, a rally will follow and there should be a test of the low. If it holds, then a sustainable rally can take place. We are not nearly at the point yet. 

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Stocks and Commodities Setting Up for a Major Breakdown

 

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Global markets were acting like they were on the verge of a collapse on Thursday, the day after the Federal Reserve's Operation Twist announcement. The selling was ugly and is likely to get even worse in October.

In Asian trading last night, the Hang Seng in Hong Kong barely avoided a mini-crash, falling 4.9% (5.0% is the cutoff) or 912 points. The Sensex in India shed 704 points and was down approximately 4.0%. The market is attempting to cover a gap on the charts made two years ago. The chronically- bearish Nikkei in Japan was down only 2.1%.

In Europe, both the FTSE in the UK and the DAX in Germany also almost closed in mini-crash territory. The FTSE was down more than 5.0% at one point, but managed to rally toward the end of day. The DAX closed down 4.96%, just a whisker less than a mini-crash. The CAC-40 in Paris wasn't as fortunate. It closed down 5.3%. European banks were in the forefront of the selling with French banks being particularly hard hit. French banks are heavily exposed to Greek government and corporate debt. UK banks were also down considerably because of problems left over from the 2008 Credit Crisis.

The U.S. markets opened down and got worse as the trading day proceeded.  The Dow closed down 391 points or 3.5%, the S&P 500 39 points of 3.3%, the Nasdaq 83 points or 3.3%, and the small cap Russell 2000 21 points or 3.2%. Banks stocks in the U.S. received bad news with Moody's downgrading the credit ratings of Bank of America, Wells Fargo and Citigroup. Moody's indicated that it believes bailouts will be less likely in the future.

Commodities were not immune to the selling with gold, silver, oil and copper experiencing significant downside action. Spot gold traded as low as $1722.30 in New York. December futures were down as much as $78.50 at one point. Spot silver traded as low as $35.41. Both gold and silver had some recovery from their lows. Crude Oil (West Texas Intermediate) fell to $80.89 and was down $5.03. Economically-sensitive copper was crushed falling as low as $3.46 a pound. It was down 8.6%. Copper has fallen more than 20% from its all-time high in February and is technically in a bear market. The price behavior of copper is supposedly the best indication of global economic activity.

The key levels for investors to watch are the August lows for stocks and commodities. These were tested today on the Dow Industrials and the Russell 2000. If these get taken out, things should really start to get interesting.  These levels have already been broken in France and the major emerging markets. Technical analysts should note that the Dow Industrials, the S&P 500 and the Russell 2000 all formed  a very clear head and shoulders topping pattern in August and September.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Questionable Oil Statistics More Accurate than Other Government Numbers

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


If it's Wednesday, it oil inventory report today. At 10:30AM New York time, the EIA (Energy Information Agency) releases it weekly statistics on the amount of crude oil, gasoline and distillates in U.S. storage. The price of oil can move sharply up or down based on this information. Unfortunately, the numbers in the inventory reports are not reliable.

An article in the March 18th edition of the Wall Street Journal entitled "DOE Documents Cite Outdated Methodology, Errors in EIA's Weekly Survey" revealed why the weekly oil data could not be trusted. The Journal stated that the process utilized by the EIA to determine inventory levels hadn't kept up with important changes over the years. It went on to mention a litany of problems with data collection at the EIA including old technology and out-of-date methodology. It specifically cited an inaccurate report in September that caused an unjustified big move up in oil prices.

Knowing that there are problems with the statistics being published by the EIA, investors should immediately wonder how accurate the other numbers are that the U.S. government publishes. There are more than enough reasons to question the GDP reports, inflation statistics and employment reports. Unlike the EIA reports, which are inaccurate because of neglect, these other reports are inaccurate because of lack of neglect. Government statisticians have gone out of their way to introduce 'improvements' over the past thirty years in the how the numbers are determined in these other reports. These 'improvements' seem to have only made the numbers more and more favorable looking. When statistical adjustments only produce better numbers, they are more accurately referred to as manipulation.

The oil report today indicated that crude oil inventories went up by 2.9 million barrels last week and gasoline inventories were up 300,000 barrels. U.S. crude oil inventories and gasoline were above the upper limit of
the average range for this time of year according to the EIA.  While these numbers don't look good, who knows whether or not they are even close to the actual ones.

Problems with the EIA notwithstanding, investors should be watching oil at this point and paying attention to the stock charts. The price of oil is determined globally, not just by what happens in the U.S. Oil is entering a seasonal strong period that will last until the summer. Light sweet crude has been in a trading range from 70 to 83 for many months now.  A breakout above that range would be bullish and could happen at any time. ETFs/ETNs that investors can use to go long on oil include OIL, DBO, USO and USL.

Disclosure: None

NEXT: Agricultural Prices Weaken on Ample Supplies

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.