Since we noted a couple weeks ago that the TIP fund was trying to put in a short-term bottom, it ground around but continued upward. Of course, with the smell of risk ‘off’ in the air, TLT has gone up even better lately.
What I find pretty cool is the inverse nature of TIP-TLT and USD (UUP) in the lower panels. We are still on the potential ‘inflation trade’ (anti-USD) bounce theme but it is safe to say that for it to get going, TIP-TLT would need start climbing. I have some TIP and STIP to go along with SHY as part of my ‘cash equiv.’ but think of it more as an indicator.
Guest Post by Steve Saville
Below is an excerpt from a commentary originally posted at www.speculative-investor.com on 5th October 2014.
As long as a market is in a strong rising trend almost any bullish argument could appear to have a ring of truth about it, even a completely baseless one. A case in point is the deluge of baseless, bullish-slanted US$ analyses prompted by the strong rise of the past few months in the Dollar Index.
Excerpted from this week’s NFTRH 311 (10.5.14)…
Using Tom McCellan’s article discussing a “blow off” move in the US dollar and its very bearish net short position by commercial traders as a starting point, I would like to talk about the USD and gold and how they each fit in to the global macro backdrop. We could add silver into the mix as well because its failure in relation to gold (ref. the gold-silver ratio’s breakout last week) is the other horseman (joining Uncle Buck) that would indicate a changing macro. Here’s the McClellan piece:
First I would question the term “blow off” when talking about the USD. Markets that have come off of long term basing patterns and broken above resistance with plenty of overhead resistance still to come have not blown off. A blow off is Nasdaq 2000, Uranium 2007, Crude Oil 2008, Silver 2011, etc.
Guest Post by Tom McClellan
October 04, 2014
The U.S. Dollar Index has recently been in one of the biggest blowoff moves we have seen in years. The lesson of the past blowoffs is that the downward slope out of the eventual top tends to symmetrically match the slope of the advance up into it.
This week’s chart shows us that the commercial traders of various currency futures contracts are already making a huge bet on a dollar decline. The indicator in the chart is one that I created several years ago by combining the commercial traders’ net position in multiple currency futures contracts into a single indicator. It does not include all of the currency related contracts which are now featured in the most recent Commitment of Traders (COT) reports, because they do not all have the same lengthy and consistent history of reporting. This indicator combines the commercials’ net position in the euro, yen, pound, Mexican peso, Swiss franc, Canadian dollar, and US Dollar Index futures, each weighted according to the dollar value of each position.
So our thesis has been that a concurrent rise of USD and the Gold-Silver ratio (GSR) would not be a good thing for markets. Stick it in the blender and mix with several other indicators (we have not even mentioned weak junk bonds and junk to quality credit spreads, at least not publicly) and you have ‘so far, so good’ on a coming bear case.
To review, a rising GSR means that speculative liquidity is coming out of the markets, as in risk ‘OFF’. The rise in USD is a fundamental consideration that would hit manufacturing first. Here again, I tell you that the biiwii guy, a former manufacturing person, was the first to project coming US manufacturing strength for NFTRH subscribers. Just to counter a few wise guys who would finger point and yell ‘perma bear!’ Today’s firm bulls were all hiding under rocks as Congress did the Fiscal Cliff Kabuki Dance at the time.
To put things in non-technical terms, I think some shit’s happenin’ out there folks. We’ll see.
People should try to get their heads out of their ass(et) classes and look at the signals that these assets may be sending. Look, gold bugs are screwed and being run up the analytical flagpole as outdated anachronisms and stuffy old fogies with outmoded views. The stock market has proven bullish again and again and policy making has worked swimmingly for a couple years now.
So take out the gold bug, the silver bug, the commodity and inflation bug and the stock market bull and/or bear and just look at the signals. The Gold-Silver ratio (GSR) is rising strongly and it is happening in unison with the now well bull horned US dollar, which everyone left for dead just a few months ago *. The question that should be asked now is not ‘how do I defend my stance?’ or ‘what asset should I buy or sell?’ but rather, ‘what does this mean from a macro market view?’
The correlation by daily view of the GLD/SLV and UUP ETFs is not very good, but over a longer-term is GSR and USD are generally in line. We have always felt that the USD (a global asset anti-market or counter party) is a bedfellow of the gold-silver ratio (a risk off/illiquidity indicator).
More to come on this in the form an NFTRH excerpt later on. But we should be beyond hoping that this or that asset class will go up and into a time of evaluating what, if any meanings can be taken from the USD-GSR relationship. A lot of people are interpreting the rise of the USD as a bullish event, with only gold and commodities to suffer. They had better do the work to confirm that view rather than just making assumptions.
* Not by me and not by my market management service. We charted its hold of important support and casually followed its progress every single week. Now Uncle Buck is all lit up in neon and as usual, a majority is now aboard the story and promoting distortions.
There are a lot of things in play today, including a notable rise in the gold-silver ratio concurrent with USD (finally, these two are both working together, which would be a component of our favored macro plan for future economic contraction, stock market troubles, etc.). But the point of this update is to further the point we made last week about the Emerging Markets’ potential breakdown nominally and in relation to the US market.