• 287 days Will The ECB Continue To Hike Rates?
  • 287 days Forbes: Aramco Remains Largest Company In The Middle East
  • 289 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 689 days Could Crypto Overtake Traditional Investment?
  • 694 days Americans Still Quitting Jobs At Record Pace
  • 696 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 699 days Is The Dollar Too Strong?
  • 699 days Big Tech Disappoints Investors on Earnings Calls
  • 700 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 702 days China Is Quietly Trying To Distance Itself From Russia
  • 702 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 706 days Crypto Investors Won Big In 2021
  • 706 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 707 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 709 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 710 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 713 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 714 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 714 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 716 days Are NFTs About To Take Over Gaming?
Tesla Struggles To Compete In European Market

Tesla Struggles To Compete In European Market

Tesla continues to catch the…

Trade In Counterfeit Goods Hits Half A Trillion Dollars

Trade In Counterfeit Goods Hits Half A Trillion Dollars

The counterfeit market has breached…

How Millennials Are Reshaping Real Estate

How Millennials Are Reshaping Real Estate

The real estate market is…

  1. Home
  2. Markets
  3. Other

Centrifugal Forces

It's never a panacea - but its the only game in town.

They are merely blunt instruments working along the fringe. A bazooka here, a helicopter over there. Like a cowboy corralling the herd with a "Yah!" and a occasional cattle prod, we react in both the emotional and physical sense to their interference. First wincing in bewilderment and confusion - then running as if our lives depend on it.

On occasion, the herd gets itself so worked into a momentum frenzy that the weak are literally trampled to death under the weight of their own kind.

Make no mistake about it, the recent participants in the silver market were trampled to death by their kinsman. It may have been their approaching monetary handlers or just the glimpse of their precarious and lofty surroundings that spooked their course. In either case, they have my focused attention. It would be wise to watch them both in the historical sense and to where we sit today - to glean any perspective of where we may be tomorrow.

To interface this idea, I have included a 10 year chart of the CRB index with hashes acting as demarcations of silver swoons. The three time periods of the broad head and shoulders top formation of the CRB Index are described below. On the respective time study's, the SPX is provided for additional context.

CRB Daily 2002-2011

The 2006 retracement ran roughly commensurate with the equity market decline. Both markets correlated gains into the break, with the equity markets leading the decline by a few sessions. The break in silver correlated with the broader retracement of the CRB index.

SPX and SLV 2005-2006

The reverse was true for the decline in silver in 2008. The respective asset classes were inversely correlated going into the break - with the equity markets rallying once the precious metals market broke down. The actual top for the CRB was not made for another four months.

SPX and SLV 2007-2008

Today, we have a similar dynamic to 2006 where both asset classes have been trending together. The primary difference is the magnitude of gains and losses for silver relative to the equity markets. I believe in terms of just price structure and how it is represented on this chart, that the equity markets will likely tighten that spread.

SPX and SLV 2010-2011

In my rose-tinted view, the Fed accomplished the primary goal of QE2 by enticing risk briskly back into the system across all asset classes. Certainly it's an imperfect method of policy, with collateral damage from my bill at Wegman's to the action in the commodity markets. However, as of last summer the market's were very close to rolling over, even crashing (technically speaking) - before Bernanke introduced the notion of QE2.

There is no way for me to definitively prove this (*but that is the dirty little secret to all market musings - no matter how quantifiable they appear to be), but once a market reaches critical mass, it can become perpetually motivating (to a point) and more resilient to extraneous trauma. Like a gyroscope teetering on its fulcrum, requiring a quick spin to regain torque - the markets, and by extension the economy - required that burst of energy last summer to reach critical mass.

To further push the envelope of physics analogies forward, you could say that I am expecting the markets to go through a centrifugal transition from indiscriminate reflation to focused reflation - the eventual byproduct of which will be cheaper commodity prices and an inflow of capital from commodities into equities. Here is a perfect example of the contrasts in asset classes today at both sides of the spectrum.

Equity Weightings of US Pension Funds

The blow-off effects of the commodity market cycles (sharp rise followed by a sharper fall) may even translate into a brief recession (as defined by NBER) - which I am expecting the equity markets to continue discounting. The magnitude of weakness (which I expect to be at a minimum of a 15% decline for the SPX) will be dependent upon the collateral damage of a strong dollar/weak Euro, the degree of commodity hedge fund contagion (i.e liquidity) and the Fed's reaction to the markets swoon. The debate over the deficit and debt limit will likely add fuel to the fire - although you could make an argument that it will force Congress to resolve that issue sooner rather than later (I know wishful thinking...). As a guide, a simple fib retracement from last summer's low should provide a broad outline if the market decides to decisively break lower.

SPX Daily

I am carrying a short position of the Russell 2000 small cap index (via TZA) into next week because I believe my expectations for a bull trap (see here) in the equity markets could be realized as early as Monday morning. The Russell looks the most appealing from my perspective, because it has enjoyed the broadest gains since the start of QE2 and is stretched the most technically.

 


I try to routinely update the Chart Lab section of the site. Unfortunately it will not show up in the RSS feed which draws from the main page.

I just joined Twitter. All my trades and occasional market musings are disclosed in real-time here.

 

Back to homepage

Leave a comment

Leave a comment