Equity Investors Hit the Panic Button, Gold Remains Inactive

Equity 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.

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.

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.

US Knocked Out, Equities Trying at Higher Low

US World Cup hopes crushed in OT against Ghana

The US lost in overtime to Ghana, a solid squad that moves on to play Uruguay. US players were apparently, once again, not prepared to play when the stepped on the field and gave up another goal just 4 minutes into the game. This follows giving up a goal in the 3rd minute to England and one in the 12th minute against Slovenia. It is tough to win the World Cup when you step on the field flat-footed in 3 of your first 4 games.

The Ghanans dominated the first half after Clark foolishly lost the ball while trying to beat a guy in midfield leading Howard to be beat on a weak shot to the near post. US players, many from the MLS, were not prepared to play at the pace Ghana set for the game. Ghana closed quickly and never allowed the American side more than a touch on the ball before feeling pressure. Though, the second half was won by the US in my book. We created a number of chances and Dempsey smartly drew a tackle in the box yielding a penalty kick which Donovan expertly put away.

The overtime goal was equally disappointing. A wild clearance from the Ghana defense was terribly defended and the Ghana striker was given time after a bump in the back to rip a full volley into the back of the net. I must say I place some blame on the coaching, Bob Bradley must be held accountable. Conceding three very early goals shows that the team was not ready to play. His choices of players and substitutions in the Ghana match were questionable at best.

Overall, a disappointing match but I was happy to see us exit the group stage. The tie against England almost makes it all worth it. Donovan proved to be a world-class player scoring 3 out of our 4 goals. Good luck to the remaining teams and until 2014...

Equities whacked last week, now what to do?

China's weekend announcement to unpeg the renminbi from the dollar and allow a slow appreciation marked the top of the bounce off the 1,040 level in the S&P. The 8.5% bounce from early June lows quickly evaporated last week with a 4.8% pull-in. There seems to be plenty of fervent bulls and bears out there arguing both sides of the coin. Clearly, there was buying at the 1,040 level but another test of that area seems likely to lead to a breakdown. Equities finally found a bid on Friday to close off lows.

I have some longs and I will be looking to the long side early this week while trying to judge the action and gauge the strength of the buying. Frankly, at this point I do not know but I am leaning long after the higher high was made and now possibly a higher low could be formed. The VIX remains high at just under 30% offering continued volatility. Doctor copper is offering us some bullish clues breaking the downtrend since April last week and regaining the $3 handle. Natural gas is also finally seeing increased demand rebounding from sub-$4 prices of May trading up to $4.75 now.

Gold testing all-time highs

Gold futures are sitting just under all-time highs seemingly awaiting any news item to spark buying through the level. I continue to think aggressive buying will eventually pick up in the shiny metal and now is not the time to sell. For now I am holding NYSE:GLD and awaiting an expected move to $130.

Twist in financial reform, Democratic Senator Robert Byrd dies

A wrench has been thrown into passage of the financial reform bill with Robert Byrd passing away this morning at age 92. If Senator Scott Brown decides to vote against closing debate, Democrats may be unable to secure the needed 60 votes to move the bill to final passage. Barry Ritholtz has an excellent analysis of the bill ultimately giving the bill a C- grade with F's given to the bill's addressing of too big to fail, leverage limits, credit ratings agencies and corporate pay. I could not agree more on the leverage front, how can there be no basic limits on leverage?


Disclosure: Long SPY, GLD.

Gold to Go Parabolic (NYSE:GLD)

Gold is shaping up for a parabolic move into new all-time highs. US gold futures closed just under previous all-time intraday highs of $1,253.90 for the highest all-time closing price. I am locked and loaded long GLD with an average price of $119.38 and a stop at the $118.80 area. I expect this to be an excellent swing trade as momentum will likely increase dramatically when gold clears previous highs. I will be looking for at least $1,300 to start taking profits. When momentum kicks in, gold has a historical tendency to take off with the excitement.

BUT, gold is a widowmaker and makes quick work of those that chase. I learned a tough lesson in December 2009 suffering through a dramatic drop with too much size. I had worked into the position very early and had a great average price around of around $97. But I did not take profits quickly enough and underestimated the level of pain a pull-in would put me through. I sold a quarter of my position at $112 and got lucky to sell another quarter just near the top at $118.50 but I held almost half my position as gold dropped over $150 from highs. I learned to never underestimate how tough it is to watch a lot of P&L evaporate before your eyes. So, this time around, I'll try to be very quick to exit when the bid disappears. Let's hope I recognize when that happens and accept the missed profits of not selling at the top. Let the games begin.

Disclosure: Long GLD.

Markets Slide Again, Gold Mounts Strong Reversal

Stocks recovered half of their losses after opening over 100 points lower. The Dow closed down 60 points (-0.55%) as the euro was pummeled across the pond. The euro slid 1.3% to $1.28 as riots across Greece spooked the markets. Three people died as the protests turned violent with tens of thousands taking to the streets to show their objections to the austerity measures in the Greek bailout package that includes wage cuts and 3-year salary freezes for public employees. Moody's placed Portugal under ratings review for a possible downgrade adding steam to the contagion engine of fear.

Gold mounted a stunning comeback after early selling hammered the metal through the previous breakout level. Gold hit $1,155 before reversing course and rallying over $21 back up to $1,176 by the New York equity close. I continue to look for upside in NYSE:GLD.

Markets Dive on Fears of Eurozone Contagion

After a full day of trading in a volatile stock market and several hours of CFA studying this evening, my brain power is quickly deteriorating but after today's bruising, I would be remiss not to have a post up.

The bears were chasing investors today as the Dow saw a high volume, 225-point (-2%) tumble after Europe was rocked overnight. London fell 2.6% and the Madrid Stock Exchange (IGBM) cascaded 5.5% after rumors swirled that Spain is rapidly crumbling and is also now looking for a bailout from the IMF. Spanish Prime Minister Jose Luis Rodriguez Zapatero dismissed these rumors as "complete madness" and the IMF denied these speculations but they did little to buoy concerns.

The primary worry relates to the size of Spain's economy relative to Greece and its implications for eurozone contagion. Spain has a population of 46 million and a GDP of $1.46 trillion versus Greece's population of 11 million and GDP of $331 billion. Spain is the 9th largest economy in the world currently suffering from a 20% unemployment rate (double Greece's rate) and a 54% ratio of debt-to-GDP (a ratio that doubled in the last year as Daryl G. Jones reports). Spain binged on the global real estate boom and now sits with a staggering private sector debt-to-GDP ratio of 178%. These problems are clearly not to be taken lightly and investors are selling as more downgrades and steeper borrowing costs seem likely for the PIIGS. Massive protests are planned in Greece tomorrow which could easily dominate headlines and add to the selling pressure.

The VIX spiked over 25% today before settling at 23.8% on the close. A VIX back over 20% signals increased volatility and indicates a possible topping pattern in equity markets. The flight to safety is on. The dollar jumped over 1% as the euro has fallen below $1.30 and Treasuries found plenty of buyers today with yields on the 10-year falling to 3.59% from 3.688%. Gold ended the day lower by about 1% after making new highs on the year. Luckily, I was smart enough to take some profits (via NYSE:GLD) in the $1,180s but I still have over half my position now back below the breakout area of $1,170. I would be surprised to see gold trade back below $1,150.

On the plus side, attempted terrorist, Faisal Shahzad, was caught at JFK airport just before his plane took off for Dubai today. He is charged with five felony charges and faces possible life in prison if convicted. Good work, FBI!

Equities Dive as Greece Downgraded to Junk, Gold Surges

The stock market took a dive today dropping 213 points (1.9%) as Standard & Poor's downgraded the sovereign debt of Portugal two steps to A- and then soon followed with a cut of Greek debt to junk status at BB+. S&P warned that investors in Greece's government notes could recoup as little as 30% of their initial investment should Greece restructure its debt. The euro crashed to new lows on the year now trading at $1.316. The VIX, commonly referred to as the fear gauge, vaulted 30% to close at 22.81, now well off the lows of earlier this month at 15.23. Executives from Goldman Sachs spent the day on Capital Hill being grilled by Senators. I didn't hear much that was unexpected.

The downgrade of American International Group (NYSE:AIG) by Keefe, Bruyette & Woods that I highlighted this morning hit shares hard. AIG dropped 16% for the day taking out any short-term support level. AIG was a classic momo play and typically these plays collapse when the momentum stalls. There is very little fundamental justification for even the $37 price shares are trading at after today's fall.

Gold had a strong day today gaining 1.25% fueling a 1.68% jump in GLD (NYSE:GLD). I doubled my initial position early this morning and then doubled it again in the early afternoon. Yet, I sold 1/3 into the NYSE close because the electronic futures market failed to hold new highs when the GLD ETF was closing for trade at 4:00PM. While GLD looks excellent on a chart closing above prior resistance levels, I took some caution given the lack of confirmation from the futures market. Below are the charts highlighting my thought process. I am looking for a move to new highs in this market and now have a solid cost basis to hold for a move.

There was a great documentary released in early March titled "Quants: The Alchemists of Wall Street". Even with its strangely morose overtones it is well worth watching if you are curious about financialization of our economy. This short film hits on the several decade wave of securitization that we have seen from our banking system and the recent rise of high frequency trading.