Things That Make You Go Hmmm…A Barrel of Monkeys

By Grant Williams

"What's more fun than a Barrel of Monkeys?

Nothing!"

Not my words, but those of the Milton Bradley Co., which still produces under license a game first created by a gentleman named Leonard Marks, who sold the rights to his simple but addictive game to Lakeside Toys in 1965.

It would be difficult to imagine a simpler premise for a game than that of Barrel of Monkeys. The rules of the game, printed on the bottom of the plastic barrel in which the monkeys are contained, are simplicity itself:

Dump monkeys onto table. Pick up one monkey by an arm. Hook other arm through a second monkey's arm. Continue making a chain. Your turn is over when a monkey is dropped.

Easy!

Each barrel contains 12 monkeys but can accommodate, at a push, 24, which makes the game so much more enjoyable. What could be better than assembling a long chain of tangled monkeys, each reliant on those either side of it for purchase, with just the one person holding onto a single monkey's arm at the top end of the chain, responsible for all those monkeys dangling from his fingers.

Of course, with great power comes great responsibility; and that lone hand at the top of the chain of monkeys has to be careful — any slight mistake and the monkeys will tumble, and that, I am afraid, is the end of your turn. You don't get to go again because you screwed it up and the monkeys came crashing down.

On May 22nd of this year, Ben Bernanke's game of Barrel of Monkeys was in full swing. It had been his turn for several years, and he looked as though he'd be picking up monkeys for a long time to come. The chain of monkeys hanging from his hand was so long that he had no real idea where it ended.

That day, in prepared testimony before the Joint Economic Committee of Congress in Washington, DC, Bernanke stated that the Fed could increase or decrease its asset purchases depending on the weakness or strength of data:

The program relates the flow of asset purchases to the economic outlook. As the economic outlook — and particularly the outlook for the labor market — improves in a real and sustainable way, the committee will gradually reduce the flow of purchases.

To assuage any lingering doubt, he continued:

I want to be very clear that a step to reduce the flow of purchases would not be an automatic, mechanistic process of ending the program. Rather, any change in the flow of purchases would depend on the incoming data and our assessment of how the labor market and inflation are evolving.

Markets fluttered a little as they tend to do around these carefully stage-managed performances, but remained largely sanguine. However, in the Q&A session that followed his prepared remarks, Bernanke, in response to a fairly innocuous question, went a little off-piste, straying into some improv, making a suggestion that, within minutes, had given rise to a phenomenon which by the end of the day had earned its very own soubriquet: the "Taper Tantrum":

If we see continued improvement and we have confidence that that's going to be sustained then we could in the next few meetings ... take a step down in our pace of purchases. If we do that it would not mean that we are automatically aiming towards a complete wind down. Rather we would be looking beyond that to see how the economy evolves and we could either raise or lower our pace of purchases going forward.

The statement contained the usual bit about the Fed being open to both decreasing OR increasing bond purchases; but it added one, as it turned out vital, piece of information:

"... we could in the next few meetings ... take a step down in

 our pace of purchases."

Boom! That's all it took. The monkeys began to shiver, shake, and screech.

Now, I have been saying for the longest time that these days nothing matters to anybody until it matters to everybody, and that is largely down to the Fed themselves (and their peers across the various oceans and borders who are complicit in this era of free money). The proof of my statement is seen in the fact that as soon as Bernanke mentioned that the "taper" — which, let's face it, EVERYBODY knows has to happen sooner or later — would possibly begin before the end of 2013, markets began to crumble.

The S&P 500 dropped a quick 6% on the outlandish idea that free money by the trillion wasn't going to continue forever, and this came as something of a shock to investors who had watched the index levitate relentlessly as the stimulus being applied by the Fed to the tune of $85bn a month did its job — and by "did its job" I wish I were talking about lowering unemployment and stimulating growth; but, alas, I'm talking about bolstering bank balance sheets and driving equity prices to unsustainable and unfairly valued levels.
As you can see from the chart below, the market turned around and recovered its losses pretty quickly as a seemingly endless procession of Fed governors and "friendly" journalists were rolled out to explain — in increasingly panicked tones — that everything was OK and that the esteemed Chairman didn't actually say they would definitely be cutting off the easy money.

Source: Bloomberg

In his own prepared remarks the following morning, Fed mouthpiece and Wall Street Journal reporter Jon Hilsenrath was quick to soothe:

(WSJ): The next step by the Fed could be especially tricky. One worry at the central bank is that a single small step to shrink the size of the program could be interpreted by investors as the first in a larger move to end it altogether. [Yesterday] Mr. Bernanke sought to dispel that view, part of a broader effort by Fed officials to manage market expectations.

If the Fed takes one step to reduce the bond buying, it won't mean the Fed is "automatically aiming towards a complete wind-down," Mr. Bernanke said. "Rather we would be looking beyond that to seeing how the economy evolves and we could either raise or lower our pace of purchases going forward. Again that is dependent on the data," he said.

It's OK, folks. Ben's got this. Calm down.

After the scrambling was over and the 6% air pocket was safely navigated, the S&P 500 first regained and then surpassed its previous high. At this point, the Punditocracy (as my buddy Scott calls it) declared that any "taper" had now been priced in.

And there the story should have ended. Nothing to see here folks, get back to your couches.
But of course it didn't end.

To continue reading this article from Things That Make You Go Hmmm… – a free weekly newsletter by Grant Williams, a highly respected financial expert and current portfolio and strategy advisor at Vulpes Investment Management in Singapore – please click here.

Weekly Precious Metals Market Recap with Mike Seery

The precious metals had one of the best weeks to the upside in quite some time because of statements from Ben Bernanke coming out basically stating he’s going to continue QE3 forever which put the fire under gold prices up 4 days in a row before Friday as profit taking set in down about $3 at 1,277 an ounce after settling last Friday 1,212 now trading at 1,278 above its 20 day moving average but below its 100 day moving average and now has started to form excellent chart structure with a possible bottom being formed in recent weeks hitting a 3 week high in yesterday’s trade.

I have been bearish gold and the precious metals for quite some time but I’m recommending to sit on the sidelines with a possible break out to the upside which is pretty amazing as I’ve been bearish forever but the trend can change very quickly so I’m looking at gold to the upside if it breaks out above 1300.

Silver futures for the September contract are right at their 20 day moving average but below their 100 day moving average also at a 3 week high also developing excellent chart structure settling last Friday at 18.73 up around $1.00 this week currently going out around 19.78 an ounce and if you’re looking to get long this market I would buy a futures mini contract and place a stop below the contract low risking around $1500 per contract.

Copper futures which I have been bearish for quite some time and now I’m neutral because it hit a 10 day high in yesterday’s trade also with excellent chart structure settling at 3.0650 last Friday currently going out around 3.17 a pound trading above its 20 day moving average with a possible short term bottom in place as the entire precious metal sector is starting to look bullish.

I’m still advising traders to sit on the sideline and wait for a 4 week high before entering and that could be next week especially if we have tighter trading ranges but the tide may have turned as Ben Bernanke refuses to let commodity, housing and stock prices to go down & he will do anything in is power to keep printing money and keep artificially inflating prices that should be much lower in my opinion.

This man has way too much power in my opinion there are 7 billion people on this planet with one person dictating everything & I think that is out of control & has never happened in the history of the world and I do believe one day this will end in a total disaster and I do mean total disaster.

Click here to check in with Mike on other weekly futures like the grains, sugar, orange juice, cotton, lumber and coffee.
 

How to Find Key Levels in Precious Metals to Take High Probability Trades

The Headline Data that Financial Media Ignored on Wednesday

Wednesday was a wild trading session where we saw the largest intraday selloff in the S&P 500 E-Mini futures that we have seen in some time. Intraday price action was driven largely by statements made by Chairman Bernanke and the release of the Federal Reserve Meeting Minutes which saw some monster intraday moves and a large spike in the Volatility Index (VIX).

While the world is focused on when the Federal Reserve is going to taper their Quantitative Easing program and the impact those actions will have on financial markets, I wanted to look at another divergence in the economic data which is supported by market action.

Instead of trying to determine how or when the Federal Reserve will taper or end their monetary experiment, I wanted to juxtapose statements that were made today with the actual facts. Readers can draw their own conclusions.

Recently, we have been told that the housing market is in the early stages of recovery. Unfortunately due to low interest rates housing has turned back into a speculative market. Consequently, a lot of so called fast money is flowing into housing which in many cases is either being purchased for rentals or by foreign investors as a speculative investment.

At present the housing market is not being driven by capital formation at the household level and data indicates that construction jobs are under pressure and affordability is reversing.

This first chart illustrates what has recently transpired in the 10 Year Treasury Yield.....Click here to read J.W. Jones' entire article and view his charts for "The Headline Data that Financial Media Ignored on Wednesday"


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Where is the Larger Bubble: the S&P 500 Index or U.S. Treasuries?

Today we have a plethora of companies reporting earnings and are moving through the 1st Quarter earnings season at a rapid pace. Thus far, earnings have been far from exciting and have made the previous 2013 forward earnings estimates laughable.

The only way we get to the proposed valuations is through multiple expansion which is simply going to require the Federal Reserve to continue to pump $85 billion into Treasury’s and MBS securities each month. I am confident they will comply.

There are a few analysts out there who are discussing the potential bubble forming in equities and other risk assets as Bernanke’s plan is working to the extent that asset prices are rising. However, even fewer analysts are pointing out that both retail and institutional money is constantly chasing yield at this point.

Simply take a look at the 2013 price action in high yield dividend paying stocks, high yield bonds, preferred stocks, and master limited partnerships. It is safe to say that a bubble has formed not just in equities, but in various fixed investments as well.

Consider the following chart of the S&P 500 Index (SPX) shown as the dotted trendline and Johnson & Johnson (JNJ) shown as the solid black line.....Read the entire article "Where is the Larger Bubble: the S&P 500 Index or U.S. Treasuries"


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Gold vs. S&P 500 – Where is the Value?

This past week we received the final 4th Quarter GDP number which came in at 0.39%. The total 4th Quarter growth was terrible, plain and simple. Based on the performance in the equity markets that we have seen thus far in the 1st Quarter of 2013 investors would expect strong GDP growth. However, the only thing spurring stock market growth is the constant humming of Ben Bernanke’s printing press.

The real economy and the stock market are no longer strongly correlated. Essentially, they are meaningless. How do you evaluate risk when Treasury linked interest rates are artificially being held down by the Federal Reserve? How do you evaluate earnings growth estimates when most government based statistics are manipulated or “smoothed” to perfection?

My final argument to anyone who is a true believer that the stock market is representative of the economy is a very simple premise. If the stock market is the economy, how does the stock market evaluate small business earnings growth when most small businesses are not publicly traded? It is a simple question, but I have yet to find a sell side analyst that can work around it with facts......Read More.



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The Spike in Oil Prices on QE3 Expectations Should be a Warning to the Fed

Crude Oil prices for WTI were just $78 dollars in July, a month later they are $93.40 with supplies well above their five year average range, China decelerating at a rate not seen since the financial crisis, and US gasoline demand down 4.2 percent year on year and distillates down 2.8 percent.

So what the heck is going on in the Oil Markets? Well, just look at the S&P for your answer: Capital has flowed into assets based upon the expectation that Bernanke and his cohorts at the Federal Reserve will print some more money out of thin air in the form of some monetary easing initiative falling under the heading of QE3.....See Chart and complete article

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Silver Suffers The Most From Bernanke And What Is Next

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While the exchange traded funds for gold and copper fell today due to investors expressing disappoint at the modest response of the Federal Reserve to declining economic growth, it was silver that was off the most.

SPDR Gold Shares (GLD) fell in trading today by 0.89%. IPath Dow Jones Copper (JJC) dropped 1.89%.  Plunging the deepest was iShares Silver Trust (SLV), off by 2.14%.

Traders were hoping for more aggressive action by Federal Reserve Chairman Ben Bernanke. But that will not come until after the November elections in the United States. Remember that Quantitative Easing 2 did not begin until November 2010, though it was announced at the Jackson Hole economic policy summit in August of 2010.

Silver is in what would seem to be the “sweet spot” between gold and copper.  Almost all of gold is used for investment or decorative purposes.  Almost all of The Red Metal goes for industrial needs.   For silver, it comes almost down right in the middle between commercial and a commodity for investments or jewelry.  The charts below show the trading relationship for each of the exchange traded funds when paired against each other.

Even though silver has a much higher industrial usage, the SLV moves along with the GLD.   As a result, it soared during Quantitative Easing 2.  Obviously, the charts reveal that most of the trading is from speculators as the JJC should move in an inverse relationship with the GLD.  That is due to gold being used almost entirely for non-industrial end uses while copper is used almost industrial for industrial uses.

Up slightly for the week as traders thought more dramatic economic stimulus efforts would result from the Federal Open Market Committee meeting  other than an extension until the end of the year for Operation Twist, the SLV is down for the last month, quarter, six months and 52 weeks of market action.  Year to date, the SLV is off by 1.48%.

For the last year, however, the SLV is down 33.35%.  Volume was up today, with the SLV below its 20 day, 50 day and 200 day moving averages.  In the most obvious trend, it is trading much lower under its 200 day day moving average at 11.67% down than underneath the 20 day moving average, beneath it by only 0.17%.  The only move worth noting in the technical indicators for silver were the long engulfing green bodies last week after Treasury Secretary Geithner’s  gloomy testimony on The Hill and more bad economic news from the US peaked buying as traders thought Quantitative Easing 3 was coming.

If traders long on silver are looking for help from Bernanke, it will not be coming until after the November election, though it could be announced when he speaks later this month at Jackson Hole.

Chris Vermeulen


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How To Position Yourself for a 10 Year Pattern Breakout

As mentioned last Friday just before things took a dive on the weekend, a look at the major market indices did not look promising. If we take an even longer term look and examine the monthly charts we can see that The S&P 500 as well as the Dow Jones have been approaching multi decade rising channel resistance lines. Further, they also appear to be forming bearish rising wedge patterns.

Monthly Long Term Chart Analysis & Thoughts....

As many of my longer term subscribers can attest to, I always preach that technical analysis is one part art and one part science: you can never be completely certain on what the outcome of a pattern is going to be. However, we can use historical analysis to make better investments. The great American Novelist Mark Twain probably said it best in that “history does not repeat itself, but it rhymes”. Regarding a rising wedge pattern, we know that roughly two thirds of the time they will break to the downside. This also means that one third of the time they break to the upside.

In accomplishing our goal of capital growth we must do a number of things. We must make returns on our investments, we must protect our investments, and we must limit our losses. While all three aspects work in tandem with each other, there are times when focus must be allocated to one specific approach.

Regarding the current technical setup, I’m not so focused on the 67% chance that these wedges will break to the downside, but more so the impact of each outcome on the average Joe’s portfolio and mom and pop businesses. The S&P 500 and the Dow are approaching long term resistance lines that have been in place for decades. If we do break to the downside, which I suspect we will, there could be a very significant sell off with consequences that no one can predict at this point though I mention some things in the chart above. Alternatively, there is significant overhead resistance in the various indices, and I don’t believe an upside break would be too monumental.

That being said, I always like to keep an open outlook and wait for the right opportunity. I’m trying to think of scenarios that would prelude further upside action and I really am not coming up with much. As evidenced by the completion of the recent 5 wave uptrend on the S&P that coincided nicely with the various quantitative easing policies, Ben Bernanke and the fed have had less and less impact. I truly can’t see many fiscal developments that would prompt any significant bullish action.

The only scenario I really think that could pump up equities is a series of positive earnings announcements. A lot of expectations, earnings numbers, guidance, etc… have been revised downwards over the last couple of quarters, so there is the opportunity for some positive surprises that could lead to some bullish price action. In absence of such a scenario, I really can’t think of much else that would prompt a run up.

Look at these charts of positive and negative earnings surprises… and the dates and remember what happened following this negative data....

Positive Earnings Surprise

Negative Earnings Surprise

That being said, I am recommending two courses of action. For those steadfast bulls, lock in some profits and/or buy some protection. Missing out on some of the upside is a lot better than losing some of the gains you have fought so hard for over the past couple of years. For the more aggressive traders and investors, start following my updates a little more regularly as I foresee many shorting opportunities coming up in the future. As many of you know, sell offs are often quick and abrupt, and timing is extremely important when playing the downside.

Further, trading could get very volatile in the near future. Historically, and even more so looking forward as August and September have been very costly for the average investor. Our focus will be in taking the highest probability trades that offer the best risk to reward scenarios. There will be times when we miss trades, and times when they’re not timed perfectly. But, as those who have been with me for a while can attest to, patience pays off in the long run....

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Chris Vermeulen

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Crude Oil Price Rises on Hopes Fed will Boost U.S. Economy

The price of crude oil is rising on hopes that the Federal Reserve will announce new measures to stimulate the U.S. economy.

U.S. West Texas Intermediate crude rose by 79 cents to $84.06 per barrel. Brent crude, which helps set the price for oil imported into the U.S., added 4 cents to $96.09.

The Fed holds a two day meeting that ends Wednesday, and in the past it has taken action to encourage Americans to spend and borrow. Many analysts think the struggles of the U.S. economy and Europe’s debt crisis will compel the Fed to say or unveil something to try to boost confidence.

Any sign that the Fed is willing to take action could lift oil prices, which have fallen sharply during the past six weeks over fears that growth in the global economy will stall.

“The market is building on a little optimism that they’ll do something,” said Peter Donovan, an oil broker with Vantage Trading in New York.....Read the entire post.

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Bloomberg: Crude Oil Heads for Longest Weekly Losing Streak Since 1998

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Crude oil fell, heading for the longest run of weekly losses in more than 13 years, on concern that an economic slowdown in the U.S. and Europe will worsen and curb fuel demand.

Crude dropped as much as 3.3 percent after German exports decreased for the first time this year as Europe’s debt crisis and weaker global growth reduced consumption. Federal Reserve officials need to assess the risk from Europe and U.S. budget cuts before deciding on stimulus measures, Federal Reserve Chairman Ben S. Bernanke said yesterday.

“Germany is the lynchpin of the whole euro zone, and if they are slowing, that’s going to add more negative news to the markets,” said Rich Ilczyszyn, chief market strategist and founder of Iitrader.com in Chicago. “It’s basically a letdown after Bernanke’s comments yesterday. There is no growth right now, no oil demand”.....Read the entire Bloomberg article.

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Crude Oil Trades Near Highs of the Week as Fed Says it's Ready to Protect Growth

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Crude oil traded near the highest level in more than a week after Federal Reserve Chairman Ben S. Bernanke said that while further stimulus is unlikely, central banks “remain prepared to do more” to protect the economy.

Futures were little changed, paring an earlier gain after more Americans than forecast filed applications for unemployment benefits last week. Economic growth is expected to “remain moderate over coming quarters and then to pick up gradually,” the Federal Open Market Committee said in a statement. U.S. crude supplies gained more than estimated last week, and Iran’s envoy in Moscow said his country may halt the expansion of its atomic program to avert new Western sanctions.

“Bernanke will do something if things don’t get better,” said Hakan Kocayusufpasaoglu, chief investment officer at Archbridge Capital in Zug, Switzerland. “And when Bernanke says he’ll do whatever it takes to get the economic growth rate improving, that means the economic trajectory rises and oil demand increases over time. And his methods for doing something increase money supply, causing the dollar to depreciate and that lifts all commodities”

Read the entire Bloomberg article

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Gold Prices Are Set for Further Decline

In the not so distant past arguing that precious metals prices were setup to fall generally elicited a response which was not real pleasant. In fact, during gold’s infamous bull market rally on several occasions I called for pullbacks which regardless of the accuracy of my call generated hate mail that seemingly never ended.

Fast forward to the present and hardcore gold bugs remain transfixed on the idea that precious metals must rise. The gold bull market has ended, at least for now and those still holding the bag are looking at large losses from the all time highs set back in 2011.

These same gold bugs will cite a litany of reasons why gold should be moving higher from the unprecedented printing of money by global central banks to the deficit spending and eventual fiscal day of reckoning facing most Western nations. I do not disagree with the gold bugs that in the long run gold prices will rally above the all time highs, but in the short to intermediate term there are several forces which have the potential to drive gold prices lower.

Gold prices cannot rise continually,regardless of the macro-economic backdrop. Nothing, not even Apple Computer (AAPL) or Priceline.com (PCLN) will rise forever. Eventually prices will come back down to earth and revert to the long term mean. It has happened in gold and it will happen to Apple Computer and Priceline.com at some point in the future, it is simply a matter of time.

Before I discuss my reasoning as to why gold and silver are likely to pullback in the intermediate term, I need to remind readers that I remain long term bullish of precious metals. While the long term remains bright, the short term is especially murky and dark.

The first primary concern for gold bugs should be the price behavior of the U.S. Dollar Index recently. The Dollar has rallied sharply higher after carving out a higher low on the daily chart (bullish). The Dollar is on the verge of breaking out above a major descending trendline on the daily chart. Once that breakout to the upside has occurred it will become likely that the recent highs will be tested and possibly taken out. The daily chart of the Dollar Index is shown below.

Dollar Index Daily Chart

The U.S. Dollar’s price action shown above is not indicative of bearish expectations. In fact, I would argue that the Dollar is, and likely will remain in a bull market in the short and intermediate time frames. However, it is important to recognize that strong periods of volatility will persist as Ben Bernanke and the Federal Reserve will continue to try to break the Dollar’s rally as it tries to grind higher.

The Federal Reserve hates deflation, and a stronger Dollar will push risk assets like equities lower and right now that is not part of the Federal Reserve’s election playbook. QE III will likely be announced at some point in the future as an attempt to break the Dollar’s rally and to put a floor underneath stock prices.

The Federal Reserve has used QE I and QE II to help prevent economic disaster. Recently “Operation Twist” has also been used to increase liquidity while keeping the bullish game going. Low interest rates and additional easing adjustments have staved off disaster before and they will likely be utilized again by the Federal Reserve.

Ultimately the free market and cycles will exert their will and the Federal Reserve will be left helpless. The day where monetary easing has no major impact is coming, but we are not quite there just yet.

In addition to the strength in the Dollar Index, the gold miners have been under major selling pressure. In fact, the gold miners have recently broken down out of a major consolidation zone that will likely lead to lower prices in the near term.

Unless gold miners can regain the breakdown level on a major reversal this coming week, the most we can hope for is a backtest of the support trendline sometime in the near future once the miner’s become significantly oversold. The weakness in the miners is just another example as to why lower prices for gold appear to be likely in the short to intermediate time frames. The weekly chart of the gold miners ETF is shown below.

Gold Miner’s (GDX) Weekly Chart

The gold miners are likely to lead equity markets lower in the near term, but lower prices for gold miners is certainly not positive for gold either. Obviously there are several economic factors which could still see gold prices working higher such as a collapse of the Eurozone, however at this moment the likelihood of that outcome in the short to intermediate term is not likely.

The European Central Bank and the Federal Reserve are not going to give up that easily. The process of admitting defeat will take time and global central banks will print money until they feel they have papered over the issue. It is the culmination of either QE III or other monetary easing around the world that will eventually move gold back above the all time highs. Unfortunately the short term price action of gold will most certainly remain under selling pressure barring any major unexpected announcements. The daily chart of gold futures is shown below.

Gold Futures Daily Chart

As shown above, I believe that short term targets to the downside are likely somewhere in the 1,475 – 1,525 price range. I think gold will find a major bottom near these levels and a strong bounce will play out. For long term buyers, I would take advantage of the forthcoming pullback. However, I would be mindful that further selling is quite possible before gold finds a major bottom.

As I said before, the longer term is bright for gold. However, the short to intermediate term will likely see more selling pressure. Until either the Dollar tops or some form of major quantitative easing is announced, I would anticipate lower prices in the yellow metal.

In the near term gold does not look attractive, but the longer term the catalysts for a major move above recent highs are present. The real question has become when and where will the Dollar top? When the Dollar tops and gold finds a major bottom, the potential for a monster move higher will become likely.

Until then, risk remains high.

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The Federal Reserve, Gold, the S&P 500, & the Retail Mindset

The recent rally has been breathtaking, however the majority of investors have missed out on a large portion of these gains as significant levels of cash have been either moved to bond funds or taken out of equity markets consistently during this rally. Let’s face it, financial markets around the world are not what they once were.

U.S. equity markets in particular are manipulated by high frequency trading which is wreaking havoc in the marketplace in terms of potential short term volatility expansions and “flash crashes” that can be isolated to one underlying stock.

In addition to the high frequency trading robots, the Federal Reserve is equally involved in the direct manipulation of financial markets through record easing adjustments. The Federal Reserve has unleashed massive amounts of liquidity while keeping interest rates incredibly low which has produced an environment where the risk-on attitude permeates the landscape.

As a basic example of the failure of recent Federal Reserve policies and their impact generally on the valuation of various underlying assets, I submit for consideration to readers a 20 year price chart of the U.S. Dollar Index.

 20 Year U.S. Dollar Index Chart

It boggles the mind to consider that Chairman Bernanke routinely denies that the Federal Reserve has failed to maintainwhat he calls “price stability.” When looking at the chart of the valuation of the U.S. Dollar against a basket of foreign currencies, most 5^th graders if given the context would proclaim that the Federal Reserve has failed in their objective to maintain price stability.

As time passes and the financial crisis moves further into the rear view mirror, average Americans have varied views about the economy, the stock market, and trust in their government. For most Americans, the stock market does not make sense because they view the stock market and the economy as the same thing. Sophisticated investors understand that stocks and the economy are two totally separate issues, particularly with the amount of manipulation that has been taken place since 2007.

This manipulation has not gone unnoticed by the average American. Now more than ever regular people are not only distrustful of domestic financial markets, but they do not trust Wall Street, and for good reason. In light of this, data compiled during the recent uptrend suggests that retail investors have been pulling money out of equities for weeks even though prices continue to move higher. The chart shown below courtesy of ZeroHedge.com illustrates the recent trend.

U.S. Domestic Mutual Fund Flows

The chart above shows the price of SPY represented as the black line and equity fund inflows/outflows as the red area. As can be seen above, retail investors have been pulling massive amounts of capital out of equity based mutual funds over the past few months as equity prices have rallied. The retail crowd, commonly referred to as sheep or courtesy of Goldman Sachs “muppets,” are selling into the rally.

So why is the retail crowd selling? They do not believe that this rally will last because the real world around them is arguing in the face of everything that this rally stands for. Gasoline prices are crippling the lower and middle classes further reducing their disposable income. Higher food and energy prices paired with job scarcity and serious concerns have begun to mount.

The average retail investor believes the game is rigged at this point and the everyday investor is only helping Wall Street bankers fund their lavish lifestyles. Ultimately, the retail crowd likelybelieves that the only way to win the game is to simply not play.

Will time prove the supposed sheep wrong? Statistically one would think so, but in this case the retail folks may just be right. Headwinds surround the global macroeconomic landscape. Europe is moving into a recession which is being exacerbated by austerity measures. Data came out yesterday (Thursday) that the PMI in several European countries and China contracted. Ireland missed growth targets and central banks around the world continue to print unprecedented levels of fiat currency as if printing money and creating more debt will solve a debt problem.

All of these issues are concerns, but ultimately price is the final arbiter in the world of flickering ticks. From these eyes there are two possible outcomes for the price action in the S&P 500. The first outcome which I believe is more likely is a test of the 2011 highs which results in a snap-back rally that takes us deeper into the 1,420 – 1,440 resistance zone. The chart below demonstrates the bullish potential outcome.

SPX Bullish Outcome

Price action at some point will backtest the 2011 highs and the reaction at that point will be critical. Generally speaking price action does not break a key support or resistance level on the first attempt. Usually the 2^nd or 3^rd attempt will result in a break of a key support / resistance level.

In this case, a test in coming days would likely result in a bounce and reversion to the previous trend. A possible, albeit unlikely outcome would be a break below the 2011 support zone which would then come close to triggering a trend change. The daily chart below demonstrates the bearish potential outcome.

SPX Bearish Outcome

I do firmly believe that the U.S. Dollar Index will hold clues about the future for the price action of equities. According to cycle analysis, the Dollar should come into is daily cycle low sometime in the next few weeks, if not sooner.

From that low, we should see another move higher for the Dollar Index which I anticipate will test the recent highs near 81. The daily chart of the U.S. Dollar Index futures is shown below.

U.S. Dollar Index Futures Daily Chart

If my expectations are somewhat accurate, the short term weakness in the Dollar will assist stocks and risk assets in a move above recent highs. In the case of the S&P 500, a move to key resistance at 1,420 – 1,450 could occur.

Readers should keep in mind that weakness could be disguised as just a consolidation near the 20 period moving average which has occurred in the past when analyzing the Dollar Index. However, I would not rule out one more leg lower before the Dollar finds a bottom.

Gold, silver, and the miners have been under selling pressure for some time and are likely due for a bounce to the upside. The weakness in the Dollar discussed above would allow precious metals and miners to work off some of the short term oversold conditions that we are seeing presently. The daily chart of gold futures is shown below.

Gold Futures Daily Chart

After a move higher into or around the $1,700 / ounce price level for gold, I believe that another leg lower will be quite likely.

Conclusion

Readers should be mindful that the 1^st Quarter will end on March 30^th for financial markets. Window dressing and portfolio painting are likely to occur next week. I would not be at all surprised to see the tape painted to the upside during the final week of March after this brief pullback that we witnessed on Thursday and Friday morning.

Money managers want to show off their returns while demonstrating ownership of key names that drove performance during the quarter such as AAPL. I expect the price action on Friday and the rest of next week to have relatively light volume and a bias to the upside.

Barring any major financial news or geopolitical event, I do not expect to see price action work below the 2011 highs in the near term. The possibility cannot be totally ruled out, but it would seemingly be a rare occurrence to see a major support level break down on the first back test attempt. We may see lower prices early next week, but if the 2011 highs hold the bulls remain in control in the short term.

The real question readers should ask themselves is if prices do extend higher and we reach my target resistance zone for the S&P 500, will the retail crowd jump in and push prices higher, or will the banks be trading with each other as a major top forms? In coming days and weeks we should find out once and for all just who the real muppets truly are.

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The SP 500 Just Might Hold Some Clues to the Peak in Gold and Silver

J.W Jones....."The warning signs were all Dismissed or shouted down So it goes".......

The single biggest news event this week besides the Royal Wedding (who actually cares) was Federal Reserve Chairman Ben Bernanke’s televised press conference. The Federal Reserve is attempting to appear more transparent after coming under pressure from the United States Congress because of their obscure and potentially nefarious operation. For most Americans, Ben Bernanke is someone they likely have never even heard of, but on Wednesday Mr. Bernanke got to bask in the sunlight that is generally only reserved for public elites such as celebrities, pro athletes, and the President of the United States.

While Chairman Bernanke had his brief moment of publicity, his answers to seemingly pre-screened questions were vague, misleading, and rather contrived. He answered questions using very long responses which generally obfuscated rather than clarified the situation. In my estimation, Mr. Bernanke solidified what many market participants already believed; he is nothing more than an academic.

Mr. Bernanke and the Federal Reserve have based every decision they seemingly make on antiquated models and algorithms which work in a classroom and fail in real time. To the average man (myself included), he blathered on speaking about things that most people do not even understand. It is almost as if he did this to prove his intelligence and ability.

For long time readers, my disdain for the Federal Reserve is relatively easy to recognize. While the U.S. Congress is nothing more than charlatans, the Federal Reserve is the greatest thief in American history. Through the debasement of the U.S. Dollar and a long time track record of reacting too late or not at all to economic events, the Federal Reserve has stolen purchasing power from the American people. 

The inflation that has been unleashed over the past 10 years has been tremendous and the long term impact on the standard of living in the United States has been negatively altered. In essence, the Federal Reserve took from everyone and “we the people” got nothing tangible in return.

Mr. Bernanke made comments about the U.S. Dollar including “that it fluctuates.” The only direction it has fluctuated since he has been in charge at the Federal Reserve is lower. If lower and fluctuation are synonyms, I wish my weight would fluctuate!

Where were the hard questions from reporters? Where were questions about gold and silver rallying to new highs nearly every day? Where was the question about the Fed’s credibility when it totally missed the sub-prime crisis and referred to it as a contained event? What has the Federal Reserve done a good job at besides causing inflation based bubbles immediately followed by nasty busts. However, the real question still remains, what does the future hold for financial markets?

What I’m about to say may surprise readers, but history supports my thought process. If the Federal Reserve continues on the same path it is possible that the U.S. Dollar could go through a real currency crisis. The potential for such an event is intensified by the fact that Asia and Europe are raising interest rates due to inflationary pressures. Time will tell, but gold and silver remain strong, however I would not fall in love with either commodity, or any commodity for that matter. Whether we have a currency crisis or not, there is going to be one nasty sell off in commodities in the future, specifically in silver.

I agree with many market prognosticators in that we are in a commodity bubble. The weekly chart of silver futures below illustrates just how parabolic the move has been:

At some point the U.S. Dollar will bottom, and when it does a significant rally will take shape. When the U.S. Dollar rallies it has the potential to be sharp and fast. Silver would be hit hardest as the chart above shows the parabolic move higher that has transpired over the past few months. The timing of the U.S. Dollar’s bottom is difficult to quantify, and picking bottoms is a fool’s game. Nevertheless, the commodity charts will tell us when it’s time for the rally to unfold, but for right now prices will likely continue higher for commodities and equities.

While I think longer term precious metals investors might be able to withstand the impending selloff, the other side of that selloff will likely see gold and silver work higher still. Longer term gold and silver will likely perform well, but traders must be aware that a sharp pullback is not only likely, but would be considered healthy by many market participants. The Dollar Index weekly chart illustrates the sharp selloff in the U.S. Dollar the past few months.

While several articles have been proffered by authors I respect deeply, they have not offered a means to determine when the Dollar has bottomed. While nothing is full proof, the longer term SPX chart may be a guide as to when the U.S. Dollar will begin to bottom. The SPX weekly chart shown below illustrates the long term ascending channel that the S&P 500 has been trading in for some time.

My “educated guess” as to when the Dollar will begin to bottom will likely coincide with a test of the ascending trend line. In previous articles, I opined that I thought we would see the S&P 500 rally and we are in that process now. My guess is that about the time the S&P 500 tests the rising channel, we will see the U.S. Dollar begin to bottom. The short opportunities that will be presented from a risk / reward perspective could be outstanding. Cycles typically line up, particularly when one particular asset, in this case the U.S. Dollar, are driving markets in one particular direction for a long period of time.

Typically business cycles end when commodities and commodity based stocks such Exxon or Barrick Gold rally. We are in that stage of the business cycle right now, and typically when that stage has been reached it is indicative that the economy is starting to overheat. Cyclicality in financial markets has been discussed for years, but often times technical analysis will align with the business cycle. While I may not be exactly right as to the timing, it certainly gives a solid framework for risk-based decisions going forward.

Conclusion
I believe that the actions taken by the Federal Reserve for the past 2-3 years are going to result in additional selling pressure in the future for the U.S. Dollar which will propel commodity prices and equity futures prices higher than what many will expect. While the selloff may occur within the confines of a short to intermediate term time frame, the U.S. Dollar will eventually bottom and a nasty selloff in commodities and stocks will transpire and the next leg of the secular bear market will begin. The business cycle and the technicals are aligned at this point, the question is really how long it is going to take to get there.

The end game will likely result in the Federal Reserve looking foolish while the American people and the global economy will suffer from the Fed’s ineptitude. The possibility that the Federal Reserve is forced to raise interest rates to slow down inflation at the same time the U.S. Dollar bottoms is a recipe for a potential economic disaster.

Slowing economic conditions based on higher oil prices and inflationary pressures paired with higher interest rates will result in another recession fueled by the Federal Reserve’s Keynes based economic models and decision making. Ben Bernanke was right about one thing, the Federal Reserve uses educated guesses based on their models when setting monetary policy. I posit to readers, what happens if the Federal Reserve Chairman and Governors’ price models and educated guesses are completely false?

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Crude Rises in New York as U.S. Economic Growth Signals Increased Demand

Crude oil rose after a report showed the U.S. economy grew at a 5.9 percent annual rate in the fourth quarter, signaling that fuel demand may climb in the world’s biggest energy consuming country. Oil increased as much as 2.3 percent after the Commerce Department said gross domestic product gained by the most in six years. The growth rate was higher than the government reported last month. Federal Reserve Chairman Ben S. Bernanke said this week that the U.S. economy is in a “nascent” recovery.

“The positive GDP number is putting upward pressure on prices,” said Peter Beutel, president of trading adviser Cameron Hanover Inc. in New Canaan, Connecticut. “We are going to be focused on anything that gives an indication of where the economy is going.” Crude oil for April delivery rose $1.70, or 2.2 percent, to $79.87 a barrel at 10:41 a.m. on the New York Mercantile Exchange. The April contract is down 0.2 percent this week.

Gasoline for March delivery climbed 4.3 cents, or 2.1 percent, to $2.08 a gallon in New York. The increase in prices accelerated as the dollar dropped against the euro. A weaker U.S. currency bolsters the appeal of raw materials as an alternative investment. The greenback traded at $1.3627 per euro, down 0.6 percent from $1.3548 yesterday. Oil fell 2.3 percent yesterday after the number of Americans filing first time claims for unemployment benefits unexpectedly gained in the week ended Feb. 20, and durable goods orders excluding transportation dropped in January.....Read the entire article.


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Crude Oil Pares Losses in New York as Equities Recover, Dollar Weakens

Crude oil traded little changed in New York as the declining dollar tempered selling driven by concerns that China will raise interest rates. Oil recovered from a near one month low as equity markets rose and the weaker U.S. currency heightened the appeal of dollar priced assets for hedging inflation. OPEC nations must improve their compliance with the group’s output quotas to prevent further pressure on oil prices, Shokri Ghanem, chairman of Libya’s National Oil Corp., said yesterday.

“With OPEC ready to act if there’s further weakening, I think prices may be nearing a bottom,” said Christopher Bellew, senior broker at Bache Commodities Ltd. in London. “Weakness in the stock markets and the prospects of monetary tightening in China helped trigger the exit of some speculative money.” Crude for March delivery was at $74.82 a barrel, up 28 cents, in after-hours electronic trading on the New York Mercantile Exchange at 11:35 a.m. in London. Earlier the contract fell as much as 43 cents to $74.11. Futures dropped 2 percent to $74.54 on Jan. 22, the lowest settlement since Dec. 22.

Brent oil for March settlement climbed as much as 67 cents, or 0.9 percent, to $73.50 a barrel on the London based ICE Futures Europe exchange. It was at $73.36 a barrel, up 53 cents, at 11:35 a.m., having fallen 2.4 percent to $72.83 on Jan. 22. U.S. stock index futures gained on signs Ben S. Bernanke will be confirmed as Federal Reserve chairman for a second term. The dollar declined 0.2 percent to $1.4189 per euro as of 11:07 a.m. in London.

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Oil Pares Weekly Gain as Bernanke Says Fed May Tighten Policy

Crude oil fell in New York, paring its weekly gain, as the dollar climbed after Federal Reserve Chairman Ben S. Bernanke said monetary policy may be tightened once the economic outlook has “improved sufficiently.” Oil traded near $71 a barrel as the U.S. currency rose against the yen and the euro, damping the investment appeal of commodities including gold. Prices rallied 3 percent yesterday after the dollar declined and the number of Americans filing for unemployment benefits dropped.

Bernanke’s remarks have had “a small impact on the immediate market,” said Ken Hasegawa, a commodity derivatives sales manager at broker Newedge in Tokyo. “It shows policy is not decided yet. The trend of the dollar will continue” to give direction to oil prices, he said. Crude oil for November delivery fell as much as 66 cents, or 0.9 percent, to $71.03 a barrel in electronic trading on the New York Mercantile Exchange. The contract was at $71.13 at 11:09 a.m. Singapore time. Yesterday, it rose $2.12 to settle at $71.69. Futures are poised.....Read the entire article.

Bloomberg Analysis: Crude Oil Risks a Pullback to $59 if $66 Support Fails

Crude oil, struggling to sustain gains above $70 a barrel this month, faces a decline to $59 if support on technical charts fails in the coming days, National Australia Bank Ltd. said. Oil is likely to continue drifting in a sideways pattern as traders seek to gauge the market’s short term depth, according to Gordon Manning, a Sydney based technical analyst. Your keywordFutures, which touched a 10 month high of $75 a barrel Aug. 25, haven’t traded at $59 since mid July.

“It’s trying to find a bit of a base,” Manning said in a telephone interview. “A close below $66 would easily take it lower.” Crude oil yesterday rallied 3 percent, the most in a week, after Federal Reserve Chairman Ben S. Bernanke said the recession has probably ended, fanning expectations global demand would rebound. The contract for October delivery on the New York Mercantile Exchange traded at $70.28 a barrel, down 65 cents.....Read the entire article

Oil Climbs to New 2009 High

Oil prices jumped Friday to a new high for the year after Federal Reserve Chairman Ben Bernanke said that the U.S. economy is nearing a recovery and other economic data backed him up. Benchmark crude for October delivery surged $1.81 to $74.72 after Bernanke spoke at an annual Fed conference in Jackson Hole, Wyo. By midday, oil was trading at $73.91, topping the previous annual high of $73.23 set on June 11. Oil started climbing early in the morning after financial information company Markit said its composite purchasing managers' index showed the European economy was stabilizing.....Complete Story