Tucker Report

As interest rates trend toward a zero percent yield it seems most traders and analysts are calling the interest rate market a bubble. Some are calling it the greatest bubble in years, and one that is about to burst wide open. That argument does seem logical on the surface. It doesn’t seem to make sense to tie up money for two years at less than a quarter percent, or ten years at less than two percent, which is a negative yield after figuring for taxes and inflation. It seems that the bill, note, and bond market must head down soon. However, that argument has been around for some time. That seemed to be the consensus a year ago, yet the bond market was one of the best performing markets of 2011, as illogical as it might seem. Can interest rates still head lower from these seemingly impossible levels? It seems so. That is the case in Germany right now.

Of course these very low yields are for the perceived safety of government dept. There’s little intrinsically safe in any government dept other than the fact that they can print their own money when they run out of revenues, unlike everyone else. But there is a wide spread between government dept and various levels of corporate dept, especially in the lower rated issues. Investors are being paid high yields relative to the risk on the lower rated corporate side. These are unusual times, and they may be around a bit longer than most traders think.

It would seem obvious that with governments running up dept like crazy, with the eventual need to monetize that debt, that inflation would be starting to get priced into these markets, with yields starting to rise and bond prices dropping. Yet just the opposite is happening, so far. Bernanke has said that interest rates will stay at these low levels for at least another year or more. But markets tend to discount the future and so far they aren’t discounting much inflation.

Perhaps deflation is the larger fear. Perhaps the analogy of pushing on a string is still relevant. Until jobs and spending resume it will be difficult to have any pricing power no matter how much the governments around the world try to destroy their currencies. The resumption of more normal times may be a long way off.

Most traders I know, and some very smart traders, are heavily short bonds with very large and mounting losses. They all seem to have thrown their money management out the window. It seem so obvious that this bubble will soon burst, but what seems so obvious is usually wrong. The weekly chart above shows that the trend is still up. The momentum indicator in the middle sub-graph got a bit overbought and has kinked down, but the trend indicator is still up and the adaptive CCI in the lowest sub-graph is still hovering around the +100 line, indicating the trend is still alive. Meanwhile, I’m leaving the short side of this market alone from a trading point of view until these indicators indicate that the trend has changed direction. And I’m parking some money in the high yield end, as those spreads seem to be well compensating investors for the risk, especially in diversified bond funds (as boring as that sounds).

The action in world markets last week took many markets down, of course, but especially hard hit was the gold market. I’ve been suggesting that this market has been in a bubble for some time. Bubbles do tend to grow larger than anyone expects, and this one certainly exceeded the expectations of all but those who are constantly and annoyingly hawking gold coins. It would seem that the news from last week would have caused a further upward move in the price of gold. We are all told that this is the place to be when there is a crisis, especially one involving debt and currencies. Maybe the market had already discounted the worst. This market was certainly ripe for a rout. One thing I had been keeping my eye on was the reluctance of the gold mining stocks to participate in the meteoric rise in the underlying asset. But recently the gold miners were starting to come to life. But it wasn’t to last. When the stock markets around the world started to unravel, gold joined the party. It is probable that large traders and hedge funds were overcommitted to gold (duh?) and there was likely liquidation in profitable assets to cover loses in the losers. Sometimes it doesn’t take much to pop a bubble, and once popped the air comes out quickly. Silver was hit even harder.

But what about technicals? The above chart is of the weekly etf of gold. I like to use the GLD etf to avoid having to create a continous contract of the futures. The GLD is close enough. You can see blue moving averages have remained bullish through the entire chart, and that whenever prices approached the blue line that a good entry point on the long side presented itself. We are once again sitting on that blue line. However, the last weekly candle is perhaps too large to expect support to hold. The middle indicator is the double stochastic and it defines cycles fairly well. Upturns from oversold, or the lower dashed line, represented good long entries. I use this only to enter in the direction of the trend. However, sometimes will use the overbought readings above the upper dashed line to exit, especially after a break of the upper dashed line. The lower indicator is the adaptive CCI. It has stayed above the zero line for the entire chart. When it is above the plus 100 line, which is the line that the indicator is still holding above, this suggests that the trend is strong. However, when the indicator crosses above the plus 200 line, which is the upper dark cyan line, prices are usually extended and ripe for either a pullback or a pause in the uptrend.

It would be very bullish in my interpretation of the gold market if that blue support line were to hold and then the cycle (middle indicator) were to turn up along with the CCI remaining positive. I really don’t expect this to happen because of the severity of the decline. It seems that the bubble still has more air to let out, but that’s just a feeling. Until the uptrend as been structurally broken on this chart, I’ll still trade from the long side, even though I would rather from gut feel be on the short side. I’ve learned not to trade against the trend, and that is still up according to the weekly chart, despite the huge drop last week.

It’s been a long time since my last update. I took the month of June off for vacation in New York as well as a Sheridan reunion in Chicago. Upon my return I was facing the huge task of moving my mother from a large home into a small retirement apartment. It is amazing how long it takes to dispose of much of a lifetime’s worth of accumulation. So I decided to take July off as well as it would be too distracting to trade with that huge task facing me. Then August happened, with unprecedented whipsaw swings. Trading the wild swings was just too hard for my frame of mind. I guess I needed a little more time off anyway.

There are times when technical analysis can help to make trading decisions, and then there are times when market uncertainty along with multiple standard deviation moves makes even the best analysis extremely challenging. We are in a period now that makes trading, at least for swing and position trading, very difficult. It could last a while longer. I plan to sit this out until I see more normal markets return. Whatever comment I could make on the market would probably be invalidated by the market action the next day, as these triple digit swings continue to knock traders off both sides. Perhaps day-traders are having fun with this.

Regarding gold, that asset bubble became much larger than I thought possible. Nothing much has changed my opinion. I good washout was not a surprise. A clue, as I’ve mentioned many times, was the huge divergence between the price of gold and the price of the gold miners. Many believe that relationship no longer is valid, but I think they we justifying the divergence, thinking, as always happens at tops, that “this time is different.” I’m still a bull long term. When the radio ads disappear I’ll jump back in.

Just a side note for any bloggers out there, I had a terrible run-in with Getty Images. I helped a nursing organization put up a small website. The site was for about 30 nurses in the Northwest to announce meetings and collect via PayPal their $12 membership fee. Nothing was being sold on this site, and the organization is non-profit. On the home page we put up a generic photo of the Seattle skyline copied from Google images, with no reference to a photographer, photo bank, copyright, or anything. The organization received a very nasty letter from Getty Images demanding that the photo be taken down and also demanded a settlement amount of about $1200 for the past usage of the image, and the threat that if payment wasn’t received within 14 days that the matter would escalate and the organization would face a lawsuit. Now I can understand that if someone were profiting from the use of one of their copyrighted photos that a demand for settlement would be in order. But if a small non-profit website accidentally put up a photo, I would think that a cease and desists letter would be in order. But a threat and demand for $1200 is more like extortion. The photo was immediately taken down, of course, but Getty Images would not remove the demand for the money. After many back and forth emails, they asked for proof of their non-profit status, which was supplied. Getty then cut the demand settlement in half. Then I got involved and went through the entire Getty archive of Seattle skyline photos, and could not find an exact match between the image they accused the nurses of using and any of the images in their catalogue. I sent them an email with my findings and said the nurses would settle if they could explain the discrepancy between the image they used and the one they accused them of using. As it turns out the image the nurses used was shot at a different time of day, had a different cloud pattern in the sky, had more of the skyline than the Getty image. It was obviously a completely different image. So they eventually acknowledged their error and said they would drop the case. But it left a really bad impression of Getty Images. As a result I took down all the images on my website, just in case one happens to be something that is in the Getty Images data bank. I did a Google search and found horror stories of people using a simple little image on multiple pages and then were handed a bill for tens of thousands of dollars. One was even a student project with no commercial intent, and Getty Images wouldn’t budge on their demand. They are really bastards. So if anyone is reading this, make certain you have no images that can in any way be linked to Getty Images. They’ll find the images eventually. They apparently have some way they scan the entire internet looking for matches. I suppose that method isn’t so perfect, as in the case of the nursing site where they made an error. But it was a real pain to sort it out with them.

It’s been a while since my last update. The last two updates were on the silver bubble as it was reaching a very overbought condition. At the time it seemed like the bubble would burst at any moment, but as is usually the case in an extremely overcrowded bullish market, the bubble burst very dramatically and quickly. My last couple of posts gave some clues but technical analysis will often either give false or late signals when this type of market finally falls apart, as was the case this time. One can usually find momentum divergences, and there were many during this run-up, but it is usually not a good idea to act on these when a market goes into its parabolic blow-off. I find the adaptive CCI (in the middle sub-graph) to be helpful in determining if a market is trending too strongly to fight a trend. In this case by time this indicator fell under the 100 reference line to indicate the market was no longer trending (the upper cyan dashed line) the market had already collapsed. Taking a shot at the downside in a parabolic uptrend is very risky and usually success is either a matter of luck or of deep pockets combined with perseverance. Most traders give up after a succession of losses just at the time when the trade would have worked out.

One technique to attempt to profit from these types of markets is to use options and do a put back spread. The above chart shows a trade that would profit if the market dropped dramatically, and would still profit slightly if the market continued to advance. The only area of loss would occur if the market stopped moving and just went sideways over a few days or weeks. But often when a market has an exponential blow-off the market will either continue the parabolic advance or will stage a dramatic reversal to the downside. Of course the market can do whatever it wants and it is possible to have a parabolic up-move followed by a flat trend, which would produce a losing trade with a back spread, but it seems more likely that the market will move one way or the other. The back spread in the above example is simply a short put option slightly above the money, and going long twice as many puts a few strike below the money. Of course this trade could be done with a bias toward the other direction by reversing the spread and doing calls instead of puts.

This is a specific type of trade to do during a specific type of market action. Just to be clear, I’m not in any way suggesting this type of trade after a bubble bursts or during more normal or range bound markets. It is only a tool to keep in mind when a market has a speculative bubble such as was the case in silver recently, or another type of unusual movement. This information is for educational purposes only and no trade recommendation is implied or should be inferred.

Now that the uptrend in silver has been broken it would be normal to expect rallies up to resistance. But where is resistance? It is difficult to find logical reference points when the previous uptrend was of a parabolic nature. I will be watching the moving average (darker blue line in SLV chart above) for a clue. There is no magic in the formula for this moving average, but it does attempt to adapt to the current cycle of the market and offers a good reference point when there are few other clues.

The silver market continues its impressive bull move. There are few technical signs suggesting that this will end, although from a sentiment perspective this trade is extremely crowded on the bull side. There are times when I’m fully in agreement with the story behind a market trend, but there are times within that trend when a market can overshoot and become vulnerable to a severe shakeout. My gut tells me that silver is at or near that point. Most signs point to continuation. Volume seems supportive of the trend. Buying seems to emerge at every little intra-day dip. The adaptive CCI in the chart above is staying above the bullish reference line, suggesting the strong trend is still intact. It seems like grasping at straws to find anything to suggest that this trend will ever end, or even slow down. It seems from past experience that when everything looks this bullish that something happens to send a market unexpectedly the other direction.

One thing I noticed is the symmetry of the two impulse moves defined by the two red lines over the price bars in the above chart of the silver ETF. These lines have been drawn both as regression lines and are of the same length. The little pullback in between these lines is subtle, but I think it is enough to suggest that these two impulse up-moves should be counted separately. If so, the current impulse may be at or approaching an end, not necessarily the end of the bull market, just the end of the current impulse. Before reading too much into this, I’d caution that these symmetrical impulse moves do seem to jump out of the charts when they succeed, but the failure rate is high, and all patterns seem to disappear from notice when they fail. It is easy to become fooled by randomness. But these symmetrical impulses, like other chart patterns do get my attention and often they do become a piece of the puzzle in reading market clues.

The above chart looks at a similar situation from a longer term perspective. This is the weekly chart also with two longer-term impulse uptrends described by the red regression lines. In this case there is a larger pullback that occured for most of the month of January. This time the first impulse to the left is of a longer duration than has occured so far on the current impulse to the right, suggesting this impulse has more to run if symmetrical impulses are in the works. On the other hand, the angle is quite steep, which could suggest this impulse could become unsustainable. There’s always an “on the other hand” when analysing charts. Again, the adaptive CCI is strongly bullish, as it would be with this strong of a move, and may not give much of a warning of a turnaround .

Another thing I always look when trying to figure out the precious metals market is divergence between the metal and the companies that mine it. The above chart shows Silver Wheaton in the lower part of the graph, which is a popular silver miner. You can see how this mining stock has failed to participate in the current uptrend in the underlying metal. Pan American Silver has even shown more weakness, and was down 93 cents today with silver being up by as much. Of course, many company specific issues can cause these divergences, but this seems to be occuring in many of the silver miners. However, (on the other hand) these divergences seem to be less reliable than in years past, probably largely due to the effect of the ETF market.

As I’ve said many times on this blog, it is dangerous to try to pick tops and bottoms. It is much safer to trade pullbacks once a trend is established, and clearly the trend is up in the precious metals. But it is also dangerous to overstay a position in an extremely crowded market. I’ve know many people who have been burned by the silver market over the years in previous bull runs. Almost as many as those burned during the great bubble dot com bust of a little over a decade ago. At least the precious metals market is based on something other than hot air, as was the case with most of the dot com stocks. This is most likely a very long term bull market, that will persists as long as politicians do what they do best. Maybe it will end when we get change that we can really believe in. But don’t hold your breath.