Comments For Energy And Metal Producers
Energy: As noted, the action in natural gas has reached exhaustion levels, and on Monday this was recorded in the leading coal stocks. Moreover crude is working on a major exhaustion. The weekly charts are producing the first exhaustion alerts since the invasion of Kuwait in the summer of 1990. The monthly chart is at extremes not seen since 1980.
The energy sector is vulnerable, and this has shown up in the quick decline in the XNG from the record high at 766 at yesterdays open. This accomplished an outside reversal, indicating the vulnerability of extremely overbought action.
Oil stocks (XOI) set their high at 1664 in the third week of May and have shown only modest response to record high oil prices. Perhaps the sector is acquiring the ability to signal important reversals. The index is threatening support at 1475.
Base Metal Prices: Copper's romp up to 4.07 (London) seems to be a last minute squeeze on something that could be squeezed. Going the other way, lead and nickel have slumped to new lows for the move.
Specifically, Thursday's action in London had copper up 2.6%, as lead gave up 5.9%. For copper, this seems to be a big test of the March-April highs and the 11-cent drop in NY suggests both the squeeze and test are over. Today's metal action is an instruction with copper giving up 3.6% and poor old lead has plummeted 10% to 1546 in only two days. In accomplishing the biggest cyclical gain in a century, the high was 3970 (no typo) in October.
Our index, including nickel, reached 2325 in early March - now it is off 31% to 1605. As recorded by the SPTMN, mining stocks were in lala land as they usually anticipate the cyclical change in metal prices. The index set its rebound high on the perpetual takeover story at 894 in the third week of May. Then in two trading days it plunged from 860 to 760--that's a 12% hit.
Out of the January panic we played the sector for the seasonal rally out to March-April when we advised taking money off the table.
Gold Sector: Last week we advised deferring buying until the pending break in commodity speculation came in. The HUI enjoyed a two-week rally from 393 to 466 and in two rough days this has dropped to 428.
Also last week the advice to traders was to begin to protect longs by using some ETFs as well as shorting some of the senior silver stocks. Buying some puts in the latter will likely be another good trade.
The gold/silver ratio remains choppy. Since late May, the ratio has rocked between 50 and 54 a few times with the latest drop to 50.5 being the fourth hit to that level. Volatility in the ratio is an alert to possible change in the main game, which has been the mania in some commodities. Momentum remains neutral and should the next bounce carry above 55 it will confirm the developing crisis.
The breakdown to new lows in China, India and now the US stock markets strongly suggests that the cycle for share certificates has turned down and the global business cycle is doing the same with the usual lag of a number of months.
Last July, our conclusion, then based upon the change in the credit markets since that May, was that the greatest train wreck in the history of credit had begun. The recent stock market failure confirms this and it will have a profound effect on the precious metals. Gold will significantly outperform silver.
As in previous post-bubble contractions, this will prompted by an outstanding increase in the investment demand for true liquidity of gold. This has been showing up in the increase of the real price of gold since the January panic in the investment markets. Our gold/commodities index represents this and increased to 230 right as the January disaster completed. It declined to 194 on May 1 and has recovered to 208. Rising through 220 will turn the trend up and through 230 will really extend it. At some point it will take the gold equities with it.
Yesterday's special study followed up the May 26 piece that concluded that the topping process had completed with the weekly "Outside Reversal to the Downside". This was based upon the same action that completed the equivalent patterns in 1973 and 1937. We have little regard for the sophomoric utterances this week that a bear market arrived after the Dow was down 20%. The sharp break in May confirmed that the bear that started from the high in late October. As we noted in late January, the 55-day slump in the NASDAQ was an event that typically ended big bull markets.
In October, 2002, Ross identified the start of a cyclical bull market within a secular bear. His section in yesterday's study provided some details. The salient argument is the match up to 1973, which started the worst bear since the 1930s and 1937 (nuff said).
Both years recorded considerable volatility in commodities.
The decline could encompass most equity sectors.
The Long Bond is working on the knee-jerk rally with the hit to the stock markets. It is worth noting that the last big high at 122.81 was set against the January panic, and with the senior stock indexes at new lows the bond is not at new highs. This could be due to the surge in commodities - possibly with some due to diminishing liquidity. The latter is evident in the May collapse in sub-prime garbage and follow through with widening of traditional corporate spreads. In this sector, the BBB has widened from 177 bps on May 20 to 224 bps this week. Going through this level will resume the trend towards another and even more magnificent crisis by late September.
Intense speculation in crude oil has been associated with the dollar index declining to 72. There is support at 71.9 and this is likely to hold as the oil play is reaching rare Upside Exhaustion readings.
This move increases the evidence that on the near-term it is rising commodities that drive the dollar down. After all, a long in crude is a short in the dollar. A couple of weeks ago natgas generated the upside reading and on Monday the same was registered on the coal sector. We regret not being able to send the info on coal out, but our administrator is on vacation.
However the surge in the hot commodities is blowing out and once completed the dollar index will rally.
The Canadian dollar found resistance at 99 and seems to want to spend some time at 97 to 98. However, the energy sector seems ready to falter and this could take it down to 96.
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