The big jobs number this morning would normally strike fear into the hearts of many asset classes, because it signifies a potential early withdrawal of monetary stimulus. We saw the typical spasms and gyrations post-announcement as money was reshuffled, and now going forward we have to effectively evaluate if the news was already priced in. Equities have been at highs (many floating above their upper Bollinger Bands), the dollar has been a rocket, commodities have been unloved, and anything precious metals related has been decimated. So we have to ask:
Is this jobs number already priced into the market?
We won’t know immediately, but if we see equities sell off (or stagnate), the dollar drop, bonds catch a bid, and commodities awaken, then there is a good chance that we will have to dislocate our brains from our buy/sell finger and do the opposite of what has worked so far in 2013. The market doesn’t have to make sense, and often times our intellect is the biggest obstacle in our path to making money. Let the price action alone dictate where you allocate your capital.
We continue to hold contrarian long positions in GLD and GDX with a target at the 50 MA, and those that are long SPY are keeping their positions small and stops close. With the dollar strength and bond weakness this morning, two markets that are closely watched for policy decisions, we could be coming to the first crossroads of 2013.
Good trading all.
Steve Chapman, TRI
For those that took a position in IBB, after being up 7 days in a row I think that we can be content with the move and step to the side. For those that didn’t take a position in GDX yesterday, it has formed a swing low this morning and it will be easier to manage risk if you are not forced to chase at this point. No move is guaranteed, but the further it goes from the low, the further your stop is away. Remember, we buy strength and sell weakness. Typically, this only happens when price jumps above the short-term MA’s, but we have an MA Envelopes trade in effect and so this is mean-reversion back to the 50 MA.
Don’t get greedy, and let the market work at this point. Miners have been going down for so long that it will be tempting to get out. Cut your losers off quickly and let your winners run, the opposite of what your mind tells you to do. If price doesn’t confirm, we wait for the next trade and do it all over again. Maintain the same expectations on every trade or you will get married to some of them.
Good trading all.
Steve Chapman, TRI
The $SPX continued to do what a market with momentum does, it moved up on the day. Why did it move up? It doesn’t matter. Did it look pretty? I don’t care. You don’t mess with momentum, and if you choose to do so then you pay for the education…just ask anybody trying to pick a bottom in the mining shares over the last 6 months. It doesn’t mean that buying the $SPX is a good investment right now on a risk/reward basis, just that some things are better left alone or played with smaller position sizes.
Our goal as Refined Investors is always to find the assets that are undervalued or unloved, but ready to move over the intermediate term. We don’t want to be that person that has to make the first putt on the golf course (the value investor), we want to see how it breaks first and then take our stroke with confidence. With that in mind, let’s see what the market is telling us today:
SPY
SPY continued slightly higher above its Bollinger Bands on weak volume. I really don’t have a comment on this move except that if you want to participate, keep it small and keep moving your stops up. The index is floating on the Federal Reserve’s helium, and nobody knows if we’ll find out at some point that it is really hydrogen instead. Be careful.
XIV
Volatility futures continue to diverge from the $SPX. XIV benefits from the decay in VXX, and so for this to go down it means that 1 month volatility expectations really are increasing and not just staying neutral. A red flag for equities.
UUP
The dollar continues to go up, but so do equities. With currency destruction en vogue right now, the dollar might just be the cleaner car in the junk yard. Correlations with other assets are all over the place right now, but if this continues to go higher it might elicit a response from the Federal Reserve. That would be the bigger story.
GLD
Paper gold is either weak while equities remain at highs, absorbing all of the shorts in preparation for a massive run, or forming a base while waiting for the MA’s to swoop down. We still have an MA Envelopes long trade in GLD in effect, and last May the reversion to the 50 MA happened in an impressive one-day $60 jump. I am not predicting that will happen again, but with the commercials likely at 100 BLEES in the futures market right now and sentiment at multiyear lows, nothing would surprise me at this point. Our stop is below the Feb. 20th lows for risk-management purposes.
GDX
The miners finally grabbed headlines today for going in the other direction, and we hope that they weren’t just pulling a Forrest Gump and forgetting which end zone to run to. The MA Envelopes were hit for the second time, and once again it sparked a bounce. I posted an intraday update on the move, and this is something we definitely want to participate in. For those that didn’t get in today, get a position tomorrow and position size accordingly with a stop under today’s lows. The target is the 50 MA, which currently is sloping strongly downward, and we can expect to have some Atlanta Braves chop to get through at the 20 MA. When I talk about trades that have the chance to make huge intermediate-term moves (as opposed to the $SPX for example), this is what I mean. It took a lot of risk management to get to this point, but the reward could be massive. However, approach every trade with the same expectation, and look down before you look up. Know how much risk you’re taking on, and take an appropriate position size. Be prepared to bail if once again the price action does not confirm the move.
IBB
The IBB trade has worked out great so far, and the chart had a beautiful setup and breakout. However, price is approaching the MA Envelopes, and any move higher tomorrow will trigger a sell signal. Take your profits and see if a retest of the breakout level happens. We will enter the trade again on a successful retest.
PALL
Palladium, unlike its precious metals brethren, has made a nice breakout and performed a retest of the breakout level. The 50 Week MA is sloping upwards, the 50 Day MA is sloping upwards, and as soon as price breaks above the 20 MA we will likely take a position in the metal. Keep watching this one tomorrow.
PBW
PBW has now formed a multiyear rounded base, and after collapsing on no volume (more like disinterest) it has broken above resistance and retested the former highs on very large volume. The 50 Week MA is flattening out, the 50 MA is sloping upward, and price jumped above the 20 MA today. Keep an eye on this one, with a little more momentum it could form a very nice trending move.
Overall, we are long GLD, long GDX, long IBB, and watching PALL and PBW. Those that are brave can take a small position in SPY (have I said keep it small), but keep your risk low. We might be seeing a change of character in the market soon, as it appears that stocks could stagnate and the inflation trade could reappear at some point.
Good trading all.
Steve Chapman, TRI
I am not predicting anything here, but I just wanted to point out what strong volume looks like. When elephants leave footprints in the sand, pay attention:
Both lows ended right on our MA Envelopes. That typically means the trend has been taken way too far. Place trades and manage risk appropriately.
Good trading all.
Steve Chapman, TRI
