Gold Outperformed Oil, Dollar and S&P From October 2006 to 2009

From October 2006 to October 2009 gold outperformed oil, the US Dollar and the S&P by a long shot. Gold rose 77%, Oil rose 15%, the US Dollar declined 10% and the S&P 500 came in last place down 24%! I know it's only a 3 year period but during that time the economy aged pretty quickly. First a little history.
  • Leverage Boom, mispricing of risk
  • June, 2006 the Fed makes it's last rate hike to 5.25% from 1.25 in 2004.
  • March, 2007 New Century Financial sub-prime bust.
  • June, 2007 two Bear Stearns sub-prime hedge funds going under.
  • September, 2007 Fed starts to cut rates aggressively.
  • October, 2007 the S&P peaked, recession begins.
  • May-July, 2008 Hot money flows into gold and oil and out of US Dollar.
  • September, 2008 Fannie, Freddie and Lehman go bust; Oil and Gold sell off, Dollar spikes.
  • October 2008 $700 Billion TARP established, bank capital infusions begin.
  • November, 2008 $200 Billion TALF created, Gold begins rally.
  • February, 2009 Oil begins rally.
  • March, 2009 stock market begins rally, US Dollar breaks down... Reflation trade begins.
You can see that oil was riding the commodity inflation train in 2008, up 140% at one point (about double gold's performance), while the US Dollar was hitting all time lows. From the second chart below it's interesting that, from pre-collapse levels to now, the US Dollar is up 7%, gold is up 9.8%, oil is down 34% and the S&P is down 25%. Everyone is giving the Dollar hell right now, but you would've outperformed the S&P by 32% and actually made money if you put money under a mattress during the past year and a half. And since S&P benchmarks are so important, looking at the 3 year numbers, the US Dollar outperformed the S&P by 14% even with a trillion dollar stimulus! That is insane.

Gold, Oil, USD, S&P 3 Year Chart (Courtesy of Stockcharts.com)
Gold, Oil, USD, S&P Pre-Crisis April, 08-today (Courtesy of Stockcharts.com)

ISEE Index Analysis to S&P 500: Put/Call Ratio Excluding Market Makers

The ISEE Index or the ISE Sentiment Index is a put/call ratio that measures opening customer transactions on the International Securities Exchange and leaves out market makers, which distorts the normal put/call calculation. The ISEE can be used as a directional sentiment indicator, protective (hedging) or speculative in nature. Just like the normal put/call ratio it can show extremes that traders can fade or run with, depending on your judgment of giddiness/doomsday. During the second half of 2008 and the beginning of 2009 the extreme short bias on the normal put/call open interest and volume was spot on (read this post), with help from the $VIX (volatility index). At ISE.com you can find the index and they also provide links to articles on the ISEE Index.
"The ISE Sentiment Index is a unique put/call value that only uses opening long customer transactions to calculate bullish/bearish market direction. Opening long transactions are thought to best represent market sentiment because investors often buy call and put options to express their actual market view of a particular stock. Market maker and firm trades, which are excluded, are not considered representative of true market sentiment due to their specialized nature. As such, the ISEE calculation method allows for a more accurate measure of true investor sentiment than traditional put/call ratios."

So it is more of a real indicator than nominal I guess you could say, deleting the noise. I did some analysis between extremes in the ISEE and the resulting move in the S&P. Out of each extreme from March until now 5/7 predicted direction correctly. I'll remind you that this was a period of declining volatility. The massive bullish extreme on 3/9 would have made people a lot of money on the upside. Looking at the activity now, the ISEE itself has been volatile during the past couple of weeks. Right now the SPX is making a low, testing the 50 day moving average, while the ISEE is at the mid point. It looks like ISE customers need to place their opening bets on the 50 day moving average.

ISEE Index Extremes (Courtesy of ISE.com)

SPX w/ ISEE Extreme Comparables (Courtesy of Stockcharts.com)


I found they had a white paper on their site. Here is their whitepaper section. This one is titled ISEE vs. DJIA in 2008 (PDF source).

Whitepaper ISEE vs DJIA Complete 2008

Wells Fargo Put Volume In October and January, Implied Volatility Update (10/2)

I saw that WFC had big put volume today in October 2009 and January 2010. Related to this? "S&P Lowers 12 Wachovia Bank Comm Mortgage 2007-ESH Ratings 21 minutes ago - Dow Jones News". There's a large amount of open interest so I'm not sure if they are closing out positions or putting on hedges. Maybe both. Steve Smith over at Minyanville claims they are monster rolls. Andrew Wilkinson of Interactive Brokers also mentioned Wells Fargo and Morgan Stanley put activity here. Also from ISE, Implied Volatility = 48.32 and Historical Volatility = 36.52. $WFC is trading at $26.19 and as of 3:40 eastern time:

84,111 October $24 puts traded with 131,234 open
109,081 October $27 puts traded with 102,077 open

and

60,447 January $20 puts traded with 166,949 open
60,330 January $27.50 puts traded with 47,360 open

Looking at the chart. It broke below an uptrending wedge and the 50dma. It could test lower levels from here if RSI (relative strength on chart) continues to move lower. But remember this is a TARP bank and Warren Buffet is the biggest holder (302 million shares, 6.48% outstanding) so if there is a price puke coming, maybe the $22 level/200dma will act as support. We'll see. Earnings come out on October 21.


Chart Courtesy of Stockcharts.com

2009 Bank Failure List, Closing Dates (Count: 95 Up Until 9/25/09)

Source: FDIC.gov
Banks With 20% Unpaid Loans at 18-Year High Amid Recovery Doubt

"Non-current loans averaged 4.35 percent of the total at U.S. banks as of June 30, the most in 26 years of FDIC data. Regulators typically take notice at 5 percent, according to Walter Mix, a former commissioner of the California Department of Financial Institutions. Corus Bankshares Inc.’s bank unit in Chicago was shut Sept. 11 after 71 percent of its loans soured.

The last time so many banks had 20 percent of their loans more than 90 days overdue was in 1991, near the end of the savings-and-loan crisis, when there were 60, according to an SNL analysis of FDIC data. That year the number of bank failures was less than half those at the peak of the crisis in 1988; this year closings are almost four times what they were in 2008." (Read full article at Bloomberg)

$USD and $SPX 2008-2009 Long Term Inverse Trend Correlation

I find it interesting that long term trends (about a year) between the US Dollar and S&P 500 are exactly inverse to one another. From March 2008 until now on this chart. It's still going... I'm waiting to see when that correlation no longer exists.
$USD vs. $SPX 2 Years (Courtesy of Stockcharts.com)

Jim Rogers Update On Dollar, Yen, Base Metals, Gold, China (10/1/09)

Jim Rogers live from Singapore via CNBC sees a US Dollar short squeeze and plans to sell a rally if it comes, Yen strength on carry trade unwind/Gov incentives to bring Yen back, not buying base metals right here (base metals train moved too fast), Chinese market doubled and could consolidate but bullish long term. Prefers silver over gold, not buying either at the moment though. Long term he doesn't like the US Dollar. Boo yaaaa Jim.

$UNG (Natural Gas) Still In Downtrend But Everything Comes To An End, Eventually

Look at this monster downtrend for UNG, the natural gas ETF. Looking technically, contango infested UNG failed at resistance and the 50 day moving average 11.83. UNG needs to break above those levels. UNG has been in a crazy downtrend and had nice bear market rallies to trade. The money flow (CMF) is making strong moves to the upside and downside which could form a new price channel eventually.

To be bullish I'd like to see the 20d cross the 50d to the upside and for UNG to make a strong move ABOVE resistance and the 50dma. Also an up-trending RSI above 50 and the MACD (moving average convergence/divergence) above zero is required on a momentum standpoint. So it looks like a short to neutral play until things deviate from the norm. I still have those massive 10,000 $10 call trades for February and March 2010 in my head which were bought for pennies ($0.056) Trader Buys Cheap Out Of The Money Natural Gas Calls (August 19).

$UNG (Natural Gas ETF) (Courtesy of Stockcharts.com)

So all eyes are on natural gas spot and the futures curve/roll yield. At some point there will be natural gas inventory absorption and a rebound in demand as well as a positive roll which would benefit UNG. For more on this read: What Contango Means for Oil ETFs (ETF Trends).
"a negative “roll yield” could cause the net asset value of USO to deviate significantly from crude’s spot price."

Previous posts on natural gas:
Natural Gas: V-shaped Recovery Or $2.50 Retest, Karl Miller is Bearish (9/16)
Trader Buys Cheap Out Of The Money Natural Gas Calls (August 19)

Levy Forecasting On Deflation Train, Don't Tell TIP ETF (Chart)

From Tech Ticker. From the first video David Levy, President of Levy Forecasting said, "I think Treasuries (although I'd have a very diversified portfolio) and very high quality Corporate bonds makes sense here.... We're expecting a great deal of weakness in the economy on and off over the next couple of years more with a brush of deflation....".





Don't tell this to the TIP ETF, check out the recent break out. It could be related to the 1,014 October 102 calls open in the money. TIP closed at 102.88 today up 0.36 and the Oct 102 call was up 0.40 to 1.00. I'm wondering when those were bought.

TIP (Courtesy of Stockcharts.com)
TIP October Option Chain (Courtesy of Yahoo Finance)


Also a little history on Levy Forecasting (The Levy Forecasting Center, LLC)
"PREDICTING THE PULSE OF THE ECONOMY (New York Times)
By PENNY SINGER
Published: Sunday, January 10, 1988

WHAT everyone in business needs is a good crystal ball. But to be of value, forecasts must be accurate, and a Chappaqua consulting group, Levy Economic Forecasts, has compiled one of the best records in the country for predicting turning points of the business cycle in the United States for the last 40 years.

Forecasting the economic future is the business of S. Jay Levy, who started Levy Economic Forecasts with his late father, Jerome Levy, in Manhattan in 1949. In 1956 the company moved to Chappaqua to distance itself from the turmoil of Wall Street - in order to gain perspective on its work, Jay Levy said, Now with his son, David, as his partner, Mr. Levy publishes Industry Forecast, the oldest, paid-circulation publication of its kind in the country. Published monthly since 1949, the Levys's newsletter has attained a reputation for accuracy by predicting recession periods over a 25-year span." (Read full article)

Tech Ticker Video Sources:
First Video: Seek Bonds, Not Stocks as Deflation Is the Threat, Not Inflation
Second Video: America's "Very Soggy" Outlook: Why the Recovery Won't Be V-Shaped
Last Video (not embedded): No Way Has Housing Bottomed, Says David Levy

Alan Greenspan: Market Flattening Out Will Put Dull Face on 2010 (Bloomberg Interview)

Quotes from Video #2:
Alan Greenspan: "I think a very major part of this recovery that we have seen is a function of the huge spilling over of liquidity in the system which is coming from all of these capital gains, and it's hard to envision[?] going up 50% and then going up more. The odds are I have to assume that we flatten out, even though earnings are doing well as you know, and that flattening out is probably going to put some sort of dull face on 2010 but I don't look for an actual contraction [ ]...

Al Hunt: "But not 3-4%..."

Alan Greenspan: "I would doubt it."



Michael Moore On Capitalism Killing Newspapers

"They'll blame it on the internet"... What are blogs considered??? It looks like capitalism transferred news reporting to a different medium which in my opinion is better and faster than ever before. So how is that bad?



Paul Tudor Jones Predicts 1987 Crash, Dow in Eighties v. Twenties, Portfolio Insurance Crisis (Derivatives)

If this video sticks, Paul Tudor Jones and his team look at correlations between the 1920s and 1980s, predicting the 1987 crash. From Trader: the Documentary in 1987.



*I wanted to add this an excerpt from a Paul Tudor Jones interview in 2000. He mentioned "there was a tremendous embedded derivatives accident waiting to happen in the crash of '87 because there was something in the market that time called portfolio insurance". Sounds similar to the 2008 credit default swaps accident.

"Q: Can you give an example?

Paul Tudor Jones: Certainly. The one on a percentage basis that's been the most profitable for me was the crash of 1987. There was a tremendous embedded derivatives accident waiting to happen in the crash of '87 because there was something in the market that time called portfolio insurance that essentially meant that when stocks started to go down it was going to create more selling because the people who had written these derivatives would be forced to sell on every down-tick. So it was a situation where you knew that if you ever got to a point where the market started to go down that the selling would actually cascade instead of dry up because of the measure of these derivative instruments that had been written. And in the crash of '87 you had an overvalued market and you also finally had a situation where every down-tick would create more selling and I think I understood the dynamics of that. The crash was something that was imminently forecastable to somebody that understood the measure of derivatives and how large they had grown in such a relatively short period of time and the impact that it would have on a relatively unknowing and na'e market. And the same exact thing happened in 1990 in Japan." Full interview here

$GLD, $TLT, $UUP - Something Has To Give Here

Something has to give with GLD, TLT and UUP. Looking at the 3 month chart UUP (the US Dollar long ETF)has been trending lower with TLT (20+ Treasury bonds) and GLD (gold ETF) moving higher. If there is runaway inflation positioning why is TLT catching a bid. If there's deflation going on why is UUP selling off. Those questions will be answered soon and will allow a nice trade imo. As of 12:01 eastern time today, $TLT is now unchanged, $GLD is up 1.09% and $UUP is down -.57%.

GLD, TLT, UUP 3 Month Chart (Courtesy of Stockcharts.com)
5 Day Chart (Courtesy of Stockcharts.com)
This sounds right: "RT @Infovestment item of the day is crude oil,the fantasy has once again hijacked all markets,it suppresses the USD and lifts all commods"

Google Wave Demo Video, I Like Website Embed Feature

I always wondered why Gmail didn't allow embedded Youtube videos. I think Google Wave fills that void. The team in the video said if email was invented today it would be like Google Wave. From their site:
"Google Wave is an online tool for real-time communication and collaboration. A wave can be both a conversation and a document where people can discuss and work together using richly formatted text, photos, videos, maps, and more."

It is very cool because it brings in other social networks, including Twitter, and Waves have an embedding feature for websites and blogs. I would like to embed charts and videos on this blog and have other people add their own charts, videos and comments below the post. They wouldn't have to be at the blog to comment which is the best part. Google Wave looks very cool and I'd like to try it out.


JJC, Comex Copper at Trend, Moving Averages, COT Inflection (9/28)

DV is watching the Comex Copper December Futures contract and JJC (IPATH UBS COPPER ETN). Both appear to be at the current uptrend line and below the 50day moving average. Copper is a huge recipient of the global reflation bid at this point and if there is a correction, copper could fall (opinion of course). If JJC breaks below trend it could hit 34.30 then 31.30 depending on catalysts. Look at the big volume spikes on down days.. The Dec Comex Copper future looks the same. Also if the 20dma crosses the 50dma to the downside that could bring downside momentum. $2.50 and $2.25 look like targets if downside movement takes over. These levels aren't officially broken yet, but I'm watching Copper.

JJC (Courtesy of Stockcharts.com)

Copper Comex Dec Future (Courtesy of Optionsxpress)



More on Copper's commitment of traders. From this chart from cotpricecharts.com net commercial hedgers vs. large speculators open interest is around par. Large speculative traders are a tiny bit short while commercials and small speculators are a tiny bit long. These levels aren't off the charts like February so a new trend has to tip large specs one way or another to profit off of price, unless I'm off here.

Copper Commitment of Traders (Courtesy of cotpricecharts.com)


UPDATE 1-Chile's Sonami sees 2010 avg copper price $2.50/lb (Reuters)
Copper Retreats On Chart Selling After Inventory, Homes Data (WSJ, 9/24)
Shanghai copper falls on lower LME, weak equities (Metal Bulletin)
Copper May Drop in London as Inventories Rise, Dollar Gains (Bloomberg)
Pricey metal (Business Standard)
The importance of copper: Panic and recovery (Resource Investor)

$TLT Above Resistance, Hedging Market or "Stern" Fed?

I'm watching TLT break above resistance heading toward 100, $UUP (USD Long ETF) testing resistance and GLD, SPY bouncing off of support, something has to give here. I find TLT's strength here interesting. This strength could be hedging a market/reflation trade correction or it could be betting on the Fed. Read this Reuters article. It noted Kevin Warsh's oped piece in the WSJ and it's "stern" tone on fighting inflation. IMO, last thing we need right now is another inverted yield curve.
"The reasoning behind the disparate paths was clear enough. If investors bet short-term rates will rise quickly, then they feel comfortable about the longer-term path of inflation, making them feel better about holding bonds that mature in seven years or more." (Reuters)

TLT
UUP


GLD

SPY