A Rising Tide…

Oct 22nd Boat

With the exception of the US dollar and energy, nearly everything in the market rose after the jobs report which came in below expectations. The SPX made another all-time high, bonds were strong and drove yields down, precious metals broke higher out of their bull flag consolidations, and the rest of the world joined in the party. Because of the drop in interest rates the real estate sector was the top performer on the day, and other rate-sensitive sectors such as utilities posted sympathy gains. Crude oil and natural gas were hammered, and so between lower interest rates and lower energy prices we are either seeing traditional signs of deflation, a poor economic backdrop, or just another day in the new normal.

Looking around the world in comparison to the SPX, we see that Europe and precious metals outperformed, emerging markets and bonds held steady, and commodities underperformed:

Oct 22nd SPY Compare

I believe the most important thing going forward is having a plan ahead of time for managing risk in various scenarios and being flexible to move with the price action. Here are potential possibilities that could surprise right now:

1. A parabolic blowoff in stocks
2. A larger than expected drop in the dollar
3. A powerful move up in mining stocks
4. A large directional move in bonds/yields

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2 & 3) I think that most people expect the dollar to rally hard very soon (myself included) and that is partially the reason why most people have no exposure or are underexposed to precious metals right now. It is this kind of wall of worry that can frustrate metals bulls because they can’t commit to the long side like they want to with the dollar about to pop. Currently I am watching the miners more than the dollar because I think the miners will give a clearer signal of money flows into the sector than relying on a dollar correlation that tends to fail when you are relying on it the most. The miners are saying that they don’t care about the dollar and I tend to agree. We have defined exit points in the miners and as much as I want to take a big position in the metals (and I have wanted to for several days) we didn’t get solid confirmation of a new intermediate cycle until the miners broke out of their channel today. The precious metals sector loves to keep people afraid of going long and then keeping things overbought so that nobody gets a dip to buy. The miners usually provide the dip but I think this current rally has the potential to surprise people because most bulls can’t commit and the bears are still trying to short every rally. A falling dollar, falling energy prices, and rising metal prices are a perfect storm for miners.

4) Even though stocks have been rallying bonds have been rallying too. Bonds by nature do not have as much beta as stocks and should underperform on a 1:1 basis but the levered treasury ETFs are holding their own. Bonds are hated and shorted right now and while not many correlations make sense in the market at this time there could be more upside for bonds. A drop in interest rates could help stocks even more by providing consumers with cheaper borrowing and pumping up the real estate and dividend names.

Regardless of what you think about the market at the moment, I think the following is a very important chart that could finally unlock inflation. Until credit gets in the hands of consumers readily then deflation will be in control. The tide may finally be changing again as lending finally is going positive for the first time since 2008 and the banks are sitting on massive reserves:


[table id=1 /]

The drop in interest rates was evident today in the strength of the homebuilders and utilities but there was also strength in metals and mining and the momo names (solars, biotech). If rates continue to drop then the weaker sectors of the indexes could drive the market higher:

Oct 22nd US Compare

Oct 22nd DRN

Oct 22nd ITB

Oct 22nd TAN

Oct 22nd IBB

Oct 22nd XME

Oct 22nd XLU

[table id=2 /]

Europe continues to outperform the world across the board. The core names such as Switzerland and Germany led today instead of the momentum names such as Spain, Italy, and Greece. Even though a stronger Euro seems like a bad idea, it has not affected the stocks recently:

Oct 22nd EWL

Oct 22nd EWG

[table id=3 /]

Emerging markets are keeping up with US equities and I continue to watch India for a major multiyear breakout on the Bombay Sensex. China has been strong and money continues to flow into these names:

Oct 22nd EDC

Oct 22nd EZA

Oct 22nd SCIF

[table id=4 /]

Despite the strength in stocks, the leveraged treasury ETFs are holding their own and even outperforming handily. Bonds are hated, but after their historic spike this Summer a solid retracement is due and momentum is now firmly to the upside. The lower rates will also aid consumer spending:

Oct 22nd Bond Compare

Oct 22nd TMF

Oct 22nd UST

[table id=5 /]

Energy has gotten killed recently and crude oil needs to hold the 96 level or it has much bigger technical problems. Even though we made good money in natural gas there is a strong potential that it is now forming a Wave 3 down and the recent impulsive price action supports that view:

Oct 22nd UGAZ

Oct 22nd WTIC DR

[table id=6 /]

Because of the potential for a dollar rally and forecasts across the board for sub-$1000 gold both the metals and the miners have showed tremendous strength in the face of equity strength. Miners broke out of their downtrend channel today and could be setting up for a strong end of the year rally. Silver is outperforming copper, and the gold:silver ratio is strengthening showing speculative interest entering once again. Bulls can’t commit to positions and bears short every rally, and that is the recipe for a surprise move to the upside:

Oct 22nd Gold Compare

Oct 22nd AGQ

Oct 22nd GDX DR

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Good trading all.

Steve Chapman, TRI

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20 comments on A Rising Tide…

  1. elgin
    October 22, 2013 at 6:05 PM (3 years ago)

    Is it possible that gold/miners and the US dollar rally together? Or at the least miners hold their ground as UD dollar rallies. How much do you think the US dollar will rally out of the cycle low?

    • Steve Chapman
      October 23, 2013 at 5:16 AM (3 years ago)

      The dollar has been a difficult asset class to use as justification for other trades even though it does matter. It just seems to let you down when you expect it to affect something else consistently.

  2. Chris DeLaney
    October 22, 2013 at 9:56 PM (3 years ago)

    Not calling a top (I know better by now!), but just pointing out that the long term trendline since the 2009 low is around the area of $1800, or slightly less. Not far from here. A good place to get very cautious for at least a more significant pullback…. perhaps to the lower trendline?

    • Chris DeLaney
      October 22, 2013 at 10:14 PM (3 years ago)

      I know you are looking for a possible blow-off, but I’ve been recently looking at the possibility that this is just ending a wave 3 up of the entire rally since 2009.
      Specifically: Wave 1 up to 1219 in early-mid 2010. Wave 2 is an irregular flat down to 1074. Since then, we seem to have a series of 1-2, 1-2s and the middle of wave 3 from late 2012 to mid 2013…. now we are finishing up those inner counts before a final wave 5 up into the big wave 3 top somewhere along the trendline.
      If this is in play, I would expect a sharp “big 4″ correction down to the lower trendline, then a long multi-month wave 5 rally that will take us through most of 2014!
      whatya think? It seems to bullish, but I want to balance my bearishness on the economy with a very bullish count :)

    • Steve Chapman
      October 23, 2013 at 5:25 AM (3 years ago)

      A lot of bullish EW’s see us in the middle of 3 of 1 of a new secular bull market instead of still being in the previous secular bear market. I agree with your analysis and it is the Fed balance sheet that continues to affect everything. That could change soon or we could get more of the same as the past year. Mcclellan’s chart of how rallies tend to last at least 12-13 months for long-term capital gains tax reasons could be in play, and the would be November of last year to November-January of this year before we see real profit taking.

      Great stuff.

  3. adam clark
    October 22, 2013 at 11:54 PM (3 years ago)

    i like these changes very much, concentrating on the macro view and covering all the bases makes me feel in very safe hands. I also like your flexibility and open mindedness ( even though I believe your a closet pm bull at heart lol). you seem to have a steady hand steering this ship, very impressive stuff

  4. Lyn
    October 23, 2013 at 4:58 AM (3 years ago)

    Steve – since we are managing our positions more than usual, please comment on this morning’s price actions. Thanks.

    • Steve Chapman
      October 23, 2013 at 5:20 AM (3 years ago)

      I see stocks down a little and bonds up a little right now. I still have our short position on to reduce volatility until we get a better idea if stocks are still early in their daily cycle with more time to run to the upside.


  5. Dutchisu
    October 23, 2013 at 8:36 AM (3 years ago)


    Chart 3 “End of the Credit Crunch” seems to show an incomplete picture. I think that chart needs to be coupled with goverment debt and the Fed balance sheet. If you look at just Chart 3 and compare it to golds behavior over the same time frame it would almost look as if gold has an inverse relationship to the growth of large and small corpation debt.

    • Steve Chapman
      October 23, 2013 at 10:46 AM (3 years ago)

      You’re correct, there isn’t the full information and there is a lot more good info from the FRED website. I just thought it was notable that it was just getting back to breakeven after 5 years.


  6. Richard Irvine
    October 23, 2013 at 10:28 AM (3 years ago)

    Steve – if GDX can fill the gap (which it looks like it’s going to) will you be a buyer? Thanks

    • Steve Chapman
      October 23, 2013 at 10:45 AM (3 years ago)

      I am a buyer tomorrow or Friday, and I am also looking to take partial profits on our bond position and put it into miners. This is a typical Wave 2 down and the time to be buying and not selling.


  7. Lyn
    October 23, 2013 at 10:41 AM (3 years ago)

    Should we hedge GDX with DUST? Thx

    • Steve Chapman
      October 23, 2013 at 10:44 AM (3 years ago)

      I’m planning to buy more GDX or NUGT tomorrow or Friday. This is a core position I am scaling into.


  8. Lyn
    October 23, 2013 at 10:48 AM (3 years ago)

    Thanks a lot for the quick reply!

    • Steve Chapman
      October 23, 2013 at 10:55 AM (3 years ago)

      As long as GDX does not break below 22.88 it is a good buy. No miner move goes higher without a dip, and that is why I didn’t buy with NUGT and I didn’t buy big. I knew a gap fill was a possibility, and I plan to increase our exposure now.


  9. Lyn
    October 23, 2013 at 11:36 AM (3 years ago)

    $22.88 is a long way to go. Why $22.88? Looking at your GDX chart, looks like 22.88 is going back into the inner downward channel.

    • Steve Chapman
      October 23, 2013 at 12:01 PM (3 years ago)

      I’m not expecting it to go to 22.88, just that if price went that far the charts would turn bearish again. Here is a quick drawing of what I see happening. If we get a bounce up to VWAP I’m going to put on a DUST hedge tomorrow. I see a retrace to the 61.8% area and that lower gap to hold:



  10. Lyn
    October 23, 2013 at 1:16 PM (3 years ago)

    About 2 hours ago, you were considering increasing exposure tomorrow or Friday. Now you are considering a hedge if price goes up to VWAP tomorrow. What made you change your mind? Perhaps I misunderstood? Are you saying you will add Thurs or Friday with continued weakness, and hedge of there price goes up tomorrow? Sorry about all the questions. I am trying to understand and be mentally prepared tomorrow. Thank you!

    • Steve Chapman
      October 23, 2013 at 5:07 PM (3 years ago)

      It is based on the Wave count that I showed you. Price moves in 5 Waves up (Wave 1) and 3 Waves down (A-B-C Wave 2), so today we had the first wave down (A). If we get a bounce tomorrow (B), then Friday will probably be close enough to the low that we can increase our exposure, but it could also be a 3-5% down day.

      I hope that explains it. I don’t want anybody to worry about positions, I am just following the path that the market typically takes.