Week Ending 6/25/10
The following excerpt is from this week's full market wrap report available on the Honest Money Gold & Silver Report website.
Bonds and stocks have been moving in opposite directions: money leaving stocks has gone into T-bonds during the European sovereign debt crisis and flight to safety play.
The chart below shows the 10 Yr. T-bond rallying since April. At the beginning of May it broke above overhead resistance at 119 (blue horizontal line) and stocks began to fall.
Bonds move inversely (opposite) to interest rates. Consequently, lower rates are not good for stocks. This is a bit different from how things were 20 years ago - rising rates were generally not good for stocks or bonds. It clearly is a brave new world out there.
Above: interest rates and the stock market are closely correlated: if rates go down - stocks go down. Below: bonds began rising in April and commodity prices began falling soon thereafter.
The currency markets have been in the driver's seat for most other markets, which seem to key off them. Recently, the flight out of the euro resulted in stocks and commodities falling, while gold and T-bonds, and the U.S. dollar and Japanese yen, went up.
A most unusual combination, but there it is - the same as during the height of the financial crisis. Look for an increase in the frequency and magnitude of these mini-crises: currency and sovereign debt crises; and eventually a solvency crisis, as the paper fiat debt system implodes. As the problems increase, so too will gold's value as the ultimate currency.
These problems could easily be fixed - if paper fiat debt-money was replaced by gold and silver coin, per the U.S. Constitution; including digital gold and silver accounts ONLY if they are set up and run as debit (not credit) accounts on 100% segregated reserves held on deposit. No fractural reserve lending is to be allowed.
The chart below shows the yen rallying in May, at the same time stocks started to fall. This was one of the safe haven plays - money flowed into the yen.
Presently, the yen is bumping up into overhead resistance at 111 (blue vertical line). If resistance is broken through, it will mean that stocks are continuing to decline. A break above resistance will basically equate with a test of the recent stock market lows.
At the bottom of the chart is a comparison with the S&P 500, which shows the inverse correlation between the yen and stocks. When stocks rose, the yen was falling; and when stocks fell, the yen was rising.
Overall, commodities were up for the week, with the CRB index gaining just over 1%. Commodity prices and the stock market have been closely correlated this year, however, this week they diverged: stocks were down almost 4%, while commodities were up about 1%.
Last week I mentioned that several commodities were at important junctures: various support or resistance levels were being tested. One was copper, which is also closely correlated with the stock market. Copper held support and rallied over 7% this past week.
Oil rallied, but less than 1%. It will be important to see if copper and oil realign with stocks; and whether it is stocks that turn back up with copper and oil; or if copper and oil turn back down with stocks.
With the sovereign debt problems in Europe, and the fall in the euro, many global stock and commodity markets fell as well, providing a whiff of deflation in the air.
Another hint of deflation came out this week with new home sales in the U.S. at the lowest levels ever recorded. Needless, to say this was not good news; and the market reacted accordingly.
This is not the stuff that recoveries are made of, and the same is true of the unemployment situation. Both of these areas need to improve if there is to be a sustainable recovery.
The following charts show the decline in new home sales and the huge fall lumber prices have taken. In last week's report, I mentioned how the housing stocks were underperforming - now we see why.
Above: drastically falling new home sales. Below: lumber prices have almost been cut in half. Note the comparison to the S&P at the bottom of the chart.
The GDX showed why gold stocks are considered volatile. On Monday the GDX opened up at 54.27 from Friday's close of 54.06. The index continued higher to 54.39; and then reversed and closed down almost 2 points to 52.52.
During mid-week, the GDX hit an intra-day low of 51.42, which filled the two open gaps mentioned in last week's report. By the end of the week, the index closed at 53.88, for a weekly loss of only -0.33%. It ended the week almost where it started.
Price is once again approaching overhead resistance (54). MACD is in positive territory, but is showing negative divergence.
The fact that the gold stocks were little changed for the week brings us back to what was said in last week's report:
Presently, the index has arrived at an important juncture: overhead resistance going back to its May 2010 and Dec. 2009 highs. If resistance is broken above, the middle range of the price channel becomes the next target.
So, either the index breaks above resistance and moves on to new highs; or the index turns back down and below its rising channel. It is pretty much a make it or break it situation.
This week's candlestick is a hammer, meaning that selling pressure has increased somewhat. Price is sitting right on lower trend line support; and right beneath overhead resistance.
Price movement is being squeezed from resistance above, and support below, into a narrower triangle. Buying & selling pressure is being compressed AND it is going to break one way or the other.
The above excerpt is from this week's full market wrap report, available only on the Honest Money Gold & Silver Report website. All major markets are covered: stocks, bonds, currencies, and commodities, with the emphasis on the precious metals.
In today's turbulent times of financial crisis gold and silver are more important than ever. The precious metals and other markets are at crucial inflection points. The coming moves will be sudden and dramatic, with violent swings in both directions. Volatility will reign supreme.
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Good Luck. Good Trading. Good Health. And that's a Wrap.