Weekly: Silver CTAs, Dumb as a Stampeding Wildebeest Herd
Plus Goldman Sachs on Inflation and Russian Nat Gas Disruptions
Goldman on last week’s PPI, and Nat Gas cutoffs. We run down Gold correlations, and Silver stampedes.
UPDATE: we just found out it’s spelled WILDEBEEST… ahhhh
Housekeeping: Many will be receiving GoldFix Weekly for the first time. It is different than the dailies. This post is more like a magazine. Content touches many areas of markets. The index may help.
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SECTIONS
Market Summary
Technicals
Podcasts
Calendar.
Charts
Premium divider
Analysis
Research Recap
1. Market Summary
Could it be that stocks finally bottomed Thursday?
Equities rallied to end the week after a gruesome performance Monday to Thursday. This was the longest negative stretch since 2008. The S&P has dropped 10 of the last 14 weeks.
Several factors look good. To summarize: Longs are not panicking (options say this); China Covid seems to be easing; and Fed speakers were not so brutal (Powell) for a change.
H/t Newsquawk and Zerohedge for data and graphics
While it's probably too early to call it the end of the bear market we could be at least ready for a bounce. Some Wall Street strategists were hopeful:. Here’s one:
“There was a sense of calm in the markets, but again without any fundamental news to suggest this is perhaps the bottom,” wrote Fawad Razaqzada, an analyst at City Index and FOREX.com.
The sense of calm alluded to above is no doubt a function in part of the aggressive hedging before the selloff actually happened these past two plus months. Options behavior suggests that there will not be a panic low. Why? It seems that many institutions had hedged for this possibility by buying puts. Which means they have not been sellers of stock in the downdraft.
Professionals bought puts on the way down in anticipation of the rate hikes and are seemingly sanguine about risk right now. We’d think that there will be shorts covering positions if the market peeks above 4000 for any length of time.
Still this does not imply the downside is done. It does imply that the smart money is acting smart for a change. Which then suggests that a rally, if it comes, could be wicked because hedged longs are patient longs.
So who is selling this other than retail? Speculative short sellers, who can and frequently do get their faces ripped off on seemingly no news. Now imagine if there is relief from the Ukraine. Then we’d be talking.
Powell also reiterated his support for raising rates at the June and July policy meetings but reassured that bigger hikes are off the table for now. That’s good for bulls.
Stocks and Bonds have come off enough these past 3 months for Jerome to stop talking like Volcker. plays right into the concept discussed here in reference to Zoltan’s call to arms on volatility last month
While we are not betting, if we were forced to, we’d say the stock market should be higher Monday. The clincher for us was stocks being up with oil ripping higher again on Friday. If that couldn’t put a damper on equities, then it may be clear sailing for a day or two.
Final comment: how annoying is it that the Fed behavior is all that moves the market anymore? Once upon a time we studied companies, earnings, and industries. Now it’s all about monetary policy. Everything is up or everything is down.
Sectors:
Friday
The Week
Commodities:
Gold extended its recent plunge and closed at the lowest level since February. More on that below
Silver had been lower 17 days straight. More on that below as well.
Crude oil, gasoline diesel, prices again rallied hard on optimism from China's COVID situation
Oanda notes, "the crude demand outlook is not going to fall apart as the US enters peak driving season and as European air travel remains solid. The focus for much of the week has been on the EU’s inability to reach agreement on a Russian oil ban, which suggests we won’t have an immediate shock to the oil market."
Dollar to its highest level since the pandemic panic March 2020 scramble
Bonds:
On the week, bond yields were lower slightly, but started creeping back up on Friday. The back end continues to go higher as a deterrent to mortgages, house prices, and stock prices in general. The market is no longer in danger of inverting right now. It is in “bear steepening” mode. And we think that is what the Fed wants to happen between now and the next rate hike.
Crypto:
There was some much needed stability on Friday in cryptos; which suffered their worst week in years. The Terra and Luna algo-stables imploded, leading to tens of billions in losses in what can be called a peg attack not unlike past ones on British Sterling, various LATAM currencies in the 1990s and Asian currencies in 1997-1999.
The attack was characterized as an isolated incident. But Tether, had a hiccup as well.
Insert DoKwon here
GoldFix Friday WatchList:
Complete Watchlist Here
2. Technical Analysis
Report Excerpts Courtesy MoorAnalytics.com
GoldFix Note: Do not attempt to use price levels without symbol explanations or context. Moor sends 2 reports daily on each commodity they cover. The attached are non-actionable summaries.
Gold
TECHNICALLY BASED MARKET ANALYSIS AND ACTIONABLE TRADING SUGGESTIONS Moor Analytics produces technically based market analysis and actionable trading suggestions. These are sent to clients twice daily, pre-open and post close, and range from intra-day to multi-week trading suggestions. www.mooranalytics.com
Energy
Bitcoin
Go to MoorAnalytics.com for 2 weeks Gold, Oil, and Bitcoin reports free
3. GoldFix and Bitcoin Podcasts
More GoldFix Broadcasts HERE
More Bitcoin Podcasts HERE
4. Calendar
Some upcoming key data releases and market events
MONDAY, MAY 16
8:30 am Empire state manufacturing index May--24.6
TUESDAY, MAY 17
8:30 am Retail sales April--0.8%
8:30 am Retail sales excluding vehicles April--1.5%
9:15 am Industrial production index April--0.9%
9:15 am Capacity utilization April--78.3%
10 am NAHB home builders' index May--77
10 am Business inventories (revision)March--1.9%
WEDNESDAY, MAY 18
8:30 am Building permits (SAAR)April--1.87 million
8:30 am Housing starts (SAAR)April--1.79 million
8:30 am Philadelphia Fed manufacturing index May--17.6
THURSDAY, MAY 19
8:30 am Initial jobless claims May 14--N/A
8:30 am Continuing jobless claims May 7--N/A
10 am Existing home sales (SAAR)April--5.77 million
FRIDAY, MAY 20
8:30 am Advance services report Q1
Main Source: MarketWatch
5. Charts
Gold
Silver
Dollar
Oil
Bonds
Wheat
Charts by GoldFix using TradingView.com
6. Analysis
Gold and Stocks. Reality check
The correlation of gold prices to US large cap equities (S&P 500).
Historically post the GFC, Gold's counter relationship with Stocks gets to about negative 40% before regressing to the mean. That mean it’s basically zero on average. ( 1st graph)
But that average of zero varies widely based on events (2nd graph)
Since the GFC: Gold has not net-net been a diversifier. It has moved with stocks. This is in no small part from QE we imagine.
Gold as a hedge of equities had been destroyed by QE. Lets see how it does in QT
Gold and Stock Correlations.
A few data points to set the stage:…
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Since 2007, the correlation between the daily change in the price of gold and the daily return of the S&P 500 has averaged 0.03 over any given 100-day period.
That is essentially zero, which is what you’d expect to see. However, as the chart below shows, gold-stock price correlations vary considerably across time.
Gold’s value as a portfolio diversifier changes depending on overall market conditions.
It tends to perform that function best going into a rough patch for stocks (2008, 2011, 2016, and even 2019).1
Coming out of a crisis, asset price correlations trend towards 1.0 and gold is no exception. We’ve noted these extremes in the chart. We bring this up because the gold – S&P 500 correlation over the last 100 days stands at negative 0.27, just outside one standard deviation (0.26 points) from the mean.
Analysis: Overlay of extremes in behavior
We’re not yet at true outlier levels, as shown in blue above, but gold is certainly trading in a manner consistent with prior periods of equity market turmoil.
Takeaway: should equity markets continue to move lower on geopolitical and inflation concerns, the historical data says gold should remain a productive hedge. There is still room for gold to be even less correlated to stocks over the next 100 days than the last 100 days.
GoldFix Comment/Caveat
The Fed does not want this inverted correlation. It will hurt their plans 2 ways. First, it will call attention once again to Gold as a safe haven from stock volatility. This will dampen bond buying. Second, it will simply start to do better than stocks. Buyers originally for safe haven use will begin to see gold not just as a parking spot, but as a source of profit. The Fed cannot let that stand.
The takeaway from experience, therefore is this: despite the excellent data above telling you to buy gold and sell stocks in a bear market, the Fed will do everything in its power to break any re-emerging narrative of Gold as a hedge for stock risk.
This in the past has not been hard to do given the brain dead momentum chasing of hedge funds and CTA retail flows. It will get harder for them to do this in the future as Gold reasserts itself on a global stage. But never underestimate a cornered, wounded animal. And the Fed is that right now.
Assume things can stay as they were in the past for now (Gold kept in its place) with Gold given a bigger leash on which to stretch away from that past; but not enough to break that leash yet. The Fed needs to be completely distracted by some other bigger problem first. Of this we are supremely confident.
Remember, keeping gold down hurts Russia’s Ruble now. Therefore Oil finally getting slammed will hurt Gold based on algorithmic action seen lately. Thus, they will use all their powers to keep the 2 assets down. So far they have failed with oil. But you can blame the politicians for that idiocy.
Finally, longs continue to sell their gold as they weigh the combined effects of Fed rate hikes and the end of the world not coming from the war. Sorry, this is a stupid reason to sell gold, but it exists and has been facilitated by decades of Fed “discouragement”
Silver: Stupid Is As Stupid Does
First, an April 20th excerpt:
Gold and Silver Specs are Too Long, Netflix is Poorly Run
GoldFix: CTA flows are typically like Retail interest. They make money alot in trending markets, but when they lose, they lose horribly and sell for the wrong reasons. Kind of like the classic story of the shoeshine guy recommending stocks to JP Morgan or someone. Right now the CTA people are way too long for this price…….
We’ve said it several times over the last few months. But that doesn’t make it any less painful. Here it is again: CTAs always recommend to their clients to sell Silver in a recession due to its industrial applications. They should sell copper, and some do, but the copper market is not as big in the US.
Now, with increased global unrest you can almost literally see the exacerbation of this idiotic behavior. What does that mean?
Investors sell silver to hedge their stocks if a recession is believed to be coming
The Russian invasion caused them to buy Gold as a hedge for stocks
Some bought gold and sold silver at first. The silver shorts got killed and silver ripped higher last month
Now the recession is on their minds again and more silver selling is here.
Gold, even though nothing has changed, is again being thought of as not performing and will drop in a peace generated stock rally initially we fear.
See this graph of Silver CTA positions over time.
Silver is nowhere near its seasonal position of short CTA players. And if the war continues to recede and the recession risk continue to grow, we expect more selling to come in. We look for open interest to hit those historical lows on the short side between 8/10/21 and 2/10/22 before speculating on a rally.
Then, when a catalyst comes, we will see a face ripper. Between now and then, watch to see how much lower Silver goes ( if at all) while those CTA morons pile in short.
Conclusion: A herd of Wildebeasts is stupid, but they can kill you if you get in their way while they are running off a cliff. In the video below, the stampede starts from fear of a non-existent predator coming for them. Behold the CTA client!!
7. Research:
Zen Moment:
Via DataTrek report dated April 27th