Equity Investors Hit the Panic Button, Gold Remains Inactive

Wednesday, June 30, 2010

panic buttonEquity market looks ugly, S&P loses 5.4% for June

Following the 8.2% decline in May, the S&P 500 ended the month of June registering a 5.4% loss closing at new lows for the current correction. The S&P is now 15.5% off the April highs with seemingly no buyers to be found. Dumping my remaining longs at yesterday's open proved to be a wise move and allowed me the clarity of thought to short the NYSE:SPY into today's close as sellers came in with a vengeance to break the $1,040 level. Rather than the typical window-dressing at quarter end we saw what Brian Shannon of Alpha Trends dubbed "end of quarter window-smashing". After trying to hold on all day in the green, volume picked up into the close as investors threw in the towel.

We closed today well below the much talked about $1,040 level that every technician is eying as the neckline of a broad head and shoulders pattern, considered to be the most reliable reversal pattern in technical analysis. Now that everyone sees it, the debate in the blogosphere is whether everyone seeing it (even Goldman Sachs and CNBC pundits) will make it not happen. Yikes, I'll sit that one out!

Just by watching the price action the market seems easily headed for more downside with some nerve-testing bounces along the way for the shorts. We are getting deeper into the summer which are historically poor months for market performance. After the 80%+ rally off lows, a 20-25% correction would be neither disastrous nor unexpected.

chart of spx 06-30

Gold still hanging onto the trendline but surprisingly inactive

All right gold, I've had enough of this, just go! Anyone else thinking this? Gold has apparently lost its risk-aversion trade characteristics failing to budge even as equity markets disintegrate. I continue to be long NYSE:GLD but payment has not visited me yet. Two Mondays in a row provided vicious stop-triggering moves to the downside but both were met with buying in front of previous pivot lows.

There is certainly demand for the metal but the trade is also certainly crowded. While it does not mean that the trade will not work just because it is crowded, it means that attention to detail on price is of extreme importance. Very good risk/reward prices are essential in order to hold onto shares when weak holders panic out. Let's hope I'm a strong enough buyer to stay with the move.

chart of gold 06-30

Treasuries gather buyers from everywhere

What a flight to safety over the last few days! The yield curve has flattened aggressively, typically not a great sign for economic expectations. The 2-year will get you a whopping 0.61% in yield while the 10-year offers 2.97%. 10-year yields have dropped from April highs of 3.99% to today's levels showing the movement of money into risk-free assets and out of risky equity markets.

What a dirty move copper made yesterday! After breaking the multi-month downtrend and strongly reclaiming the $3 handle on Friday, copper dropped 5.3% back below $3 and now sits at $2.91. Doctor copper is often a leading indicator and the reversal does not bode well for equity markets.

Entering the New Normal

Bill Gross' Alphabet Soup investment outlook for July 2010 is out highlighting that, basically, things haven't changed much. He does note the lack of acceptance of his views: "Our 'New Normal' two-word duality seems to resonate more on the 'normal' than the 'new' to economists whose last names aren’t Roubini, Reinhart, Rogoff, or Rosenberg. It’s as if 'R' has been eliminated from the financial alphabet, and 'new' from investors’ dictionaries worldwide."

My name is Rowley...perhaps that is why I agree with him! Though please do not confuse me with the others, Roubini in particular. I think the PIMCO guys missed the initial reflation trade and now we have reached the time to expect lowered returns due to "deleveraging, reregulation, and deglobalization". Gross' prescription is right on: "If policymakers could act in unison and smoothly transition maxed-out indebted consumer nations into future producers, while simultaneously convincing lightly indebted developing nations to consume more, then our predicament would be manageable." Yet, he follows with the succinct realization that: "They cannot."

Disclosure: Long GLD.
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