Chart of the Day: Chinese stocks in steep downtrend & CBOE VIX AT NEW LOWS

As stock markets around the world continue to edge upwards, the Chinese Equity Markets and the CBOE VIX have both been trending downwards.

Chart of the Day - Chinese stocks in steep downtrend

Equity valuations continue to be driven by hopes of QE3 and Bailouts/handouts by Central Bankers rather than fundamentals, which at this stage are still looking rather weak.

As the VIX trends to new lows, it's important to take profits in stock portfolios and rebalance them towards more stable large cap companies that preferably have less leverage than their mid-cap counterparts.

GOLD : Overextended after a massive run : more volatility to come

After testing $1900, gold prices have corrected sharply. In the near term prices continue to remain overextended, well above supporting trendlines at $1640.

I continue to remain a long term bull, but would once again remind readers that in the short term, gold prices will continue to be volatile and reacting to options expiration and the FED's Jackson Hole meeting at the weekend.

Here is a fantastic chart from Jesse's Café Américain - a super site for all gold related news and excellent unbiased market analysis.

Thomas Friedman - on a Theory of Everything (sort of)

A precise article by Thomas Friedman about the current state of unemployment, credit and strained government finances.

A Theory of Everything (Sort Of) - NYTimes.com

You +1'd this publicly. Undo

You +1'd this publicly. Undo

MARKET UPDATE: THESE ARE CRAZY DAYS

Just a quick post today before I put up some detailed analysis soon.

There's so much happening in markets these days - Debt Ceiling, US AAA downgrade, Equity Market crashes, a really manic VIX (Volatility S&P500 ^VIX), UK Riots and all the ongoing discussion of the ''fragile'' global economic recovery!!

Below is a snapshot of todays wildly gyrating markets! For the ''goldbugs'' out there, Gold has been riding high, driven upwards by all the uncertainty & it is overbought in the near term!

The FED has signalled that it wishes to keep rates at record lows well into 2013!----the recovery must be more fragile than they first thought.

Overall, I would refrain from any risk taking at the moment and would look to hedge gold positions. In the medium term, I expect gold to continue to be volatile in a price range of $1550 to $1780(New all time high as of today).

Will come back with some market specific ideas soon.

THE ONGOING RECOVERY - NOT!

As the US Government is negotiating to raise the US Debt Ceiling, Central Bank Governors around the world are struggling to keep the fragile economic recovery intact while tackling inflation concerns at the same time.

Below are some magazine covers, that you would not expect to see at this stage of a economic recovery!

DJIA - THE RALLY GOES ON

As the rally in the US equity market continues, even the most ardent ''bear'' is probably just about ready to throw in the towel.

Can this rally be explained in light of deteriorating fundamental news such as rising unemployment and government debt levels ?

Perhaps now is the time for the prudent investor to re-assess his risk reward matrix.
Does waiting for a possible upside from current levels justify the risk at this stage?
Some analysts are saying that the current rally since 2009 has started to form a bearish ascending wedge formation on the charts, and that it's time to book profits.

The Bullish Bear Blog's view:

• The risk reward ratio is clearly not in favour of the long only investor.



• After a monster rally from the lows back in March 2009, potential downside risk clearly outweighs any possible upside.



• The mega rally has exhausted a large percentage of short positions in the market. This in turn means that the market has much less support on the downside if a correction ensues.



• Meanwhile the market continues to ignore serious issues like the Club med debt crisis, unemployment issues in the US & steadily rising government debt levels in the developed world.

S&P 500 vs The FED's BALANCE SHEET

Investment Guru David Rosenberg in recent writings has commented on the positive correlation of the rally in the US Equity Markets and the size of the Balance Sheet of the US FED.

Here is yet another article from Jim Sinclair's Mineset website that supports Rosenberg's view.
This is some excellent research by Trader Dan Norcini and is worth a read.

S&P 500 Versus The Fed’s Balance Sheet

(LINK FOR CHART FROM JIM SINCLAIRS WEBSITE)

GEOPOLITICAL NEWS IMPACTING MARKETS

The last couple of months have really been a roller coaster ride for the world economy.

Whether its the unrest in the Middle East leading to surging Crude Oil prices, or rising food prices or EU Sovereign debt troubles, or the recent Japanese Quake and resulting Tsunamis...... a lot has been going on.
The incredible damage to property and the loss of innocent lives in case of the Japanese quake is really tragic.

There was another important bit of news that went by unnoticed.
"" Wisconsin Gov. Scott Walker on Friday signed into law the controversial bill that eliminates most union rights for public employees""
Wisconsin governor signs anti-union rights bill World DAWN.COM
Wisconsin governor signs into law union curbs Reuters
Clearly the crisis on Main Street is not over yet. As David Rosenberg recently said, the impact of cost cutting and downsizing at the state and local government level will really undermine the '''ongoing consumer recovery'''
So I think that it's time that the guys on Wall Street sit up and take notice.
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The Dow Jones may continue to brush off the impact of rising gasoline & food prices and the discontent on Main Street for now, but the prudent investor must realise that its now too late to join the equity market bandwagon. The risk reward ratio is not in favour of the ''long only'' investor and his margin of safety is far too inadequate at the current time.

US HOUSING MARKET & the 30 YEAR FIXED RATE MORTGAGE

Home prices in the U.S. will continue to face headwinds as the 30 year fixed rate mortgage rate continues to climb despite the FED's best efforts in QE2.

A combination of declining home prices, rising food and energy prices and persistantly high levels of unemployment will continue to weigh down on the economic recovery.

IT'S NOT OVER YET !

Here's David Rosenberg with more words of caution.

It's not over yet!

DAVID ROSENBERG on US UNEMPLOYMENT

The graphs below come from 'Lunch with Dave' - January 7, 2011.

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SILVER - OFF TO THE RACES !

Silver has been a star performer over the last year.

While prices have corrected slightly from a level of just over $31/oz, the overbought condition in silver means that there could be further downside in the near term if lasts week's weakness in the commodity markets persists.

Below is a chart from some excellent analysis from Adam Hamilton of www.ZealLLC.com

EURO - OUTLOOK 2011

The Euro currency faced a turbulent 2010.

As concerns continue to mount over the finances of the '''PIIGS''', 2011 could mean even more volatility.

Will the easy money/quantitative easing policy of the USA or the austerity measures of the Eurozone be successful?

Here is a chart and an article by Graham Summers of Gains Pains & Capital on the EURO crisis.

Link: End Game: The Euro As a Concept Is Finished

UPDATE : 30 YEAR US TREASURY BOND

The recent sell off in US Treasuries comes at a time when the FED continues onward with its QE2 programme.

The USD too has weakened somewhat over the last few months, even against the troubled EURO.

Could this Bond market sell off further complicate the attempts of the FED to revive the ''global'' economy? Falling Bond prices means that yields will rise, a fact that will not go down well in a market where credit growth is actually contracting. If mortgage rates start to rise, the US housing market will face further headwinds.

WATCH THIS SPACE!

GOLD - TOO FAR TOO FAST?

Here's an update from Przemyslaw Radomski of Sunshine Profits. He says that Gold is near a critical resistance and consolidation is likely.

Graham Summers of Gains Pains & Capital warns of the possibility of a correction in gold prices, given the herd like negative sentiment towards the USD at the moment. Notice the '''negative rising wedge''' in the chart below.

Personally, the awesome relative strength in precious metals (especially Silver) in recent months has surpassed my rather conservative estimates.

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QE2 has come and gone and there's no solution to the ongoing ''recession'' as yet. Commodity prices are just about the only thing that have responded positively to the FED's QE2!!!

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Meanwhile, Club Med in Europe is showing no signs of turning around, and this has taken the edge off the recent Euro rally. The USD Index has recently crawled back above the 80 mark.

Below is a long term USDX chart by Graham Summers.

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Remember, just because the USD is headed downward over the long term, doesn't mean that it can't stage a counter trend rally in the near term.

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Equity markets, especially emerging markets are refusing to factor in the possibility of a relapse in the global economy.

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A cautious wait and watch approach may be the best way forward for now.

Traders may consider hedging some long gold positions.

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Short term corrections aside, I remain a long term Gold Bull!

LENGTH OF U.S. RECESSIONS

Here are a couple of charts on the ''now ended'' Great Recession.

The Monetization Equation

Taipan Daily's Justice Litle & John Williams of Shadowstats.com have the following view on the monetization equation and the rally in Gold prices.

This could help explain the rally in gold prices despite the ongoing deflationary environment.

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As David Rosenberg has been pointing out in recent times, the ''bond market rally'' has resulted in mortgage rates remaining near record lows. As a result, the bond market has helped to cushion the slump in the housing market.

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This will make it even more difficult for the fed to raise interest rates in the near future.

All in all the aftermath of a bust of a bubble created by cheap credit takes time to sort out and the adjustment can be painful.

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There is no quick fix, as consumers return to living within their means and go back to age old practices of saving and taking on less debt!

GOLD - IT'S RALLYING AGAIN !

Just about everyone seems to be bullish on gold at the moment.

As bullish momentum takes over, we could be in for higher prices in the days ahead.

Over the last month, silver has soared from levels of $18 -$18.50 to almost $20.80 currently.

Below is a chart by Chris Vermeulen, who acknowledges the currrent bullishness, but wisely takes a step back to take a look at the ''big picture''

Here is Chris Vermeulen's article on kitco.com

Gold Forms Overbought Rising Wedge at Resistance

While I remain both a gold bug & bull, it's worth noting that the equity markets may be overly optimistic about earnings estimates for the second half of 2010.

The USD has been beaten down by the recent lack of risk aversion.

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If market tremors re emerge, gold could sell off. Just to put things in perspective, a 20% sell off from the current level of $1273 will still mean that gold will continue to trade over $1000.

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All that I'm saying is that fresh buying may be postponed for the time being, and that its advisable for long only, long term investors to wait for a pull back before jumping in at current prices!

Where are we headed to now ?

Well it's been a while since my last post.

Markets have been bullish across asset classes. Equities, Bonds and precious metals, all rallying at the same time!!
U.S. unemployment numbers as well as the continuing slump in the US housing market continue to be worrying reminders that all may not be well with the global economy.

David Rosenberg recently reminded us that the U.S economic recovery has been largely dependent on government support (think mega bank bailouts, cash for clunkers, food stamps, infrastructure funding packages etc). By this stage of the game and given the extraordinary stimulus packages of the last two years, the economy should have been growing strongly.

Instead it looks like the U.S. economy is unable to survive on its own, given its slumping home prices, high unemployment numbers and high consumer debt levels.
Even Ben Bernanke is looking to cut growth forecasts while remaining silent about the eventual withdrawal of 'fed support' for the economy.

The FED & GSE's continue to support the housing market, even as home prices continue to remain weak.
No government in the western world can risk withdrawing its support for the ongoing ''fragile'' economic recovery. In fact, many are contemplating another round of stimulus packages to head off a slowdown in the second half of 2010.

Here's a quick roundup -

• Gold and Silver are on a surge yet again, after trading confidently throughout this summer. They appear to be overbought in the near term, especially silver which has had an almost vertical rise over the last fortnight.

• US Equity funds continue to see outflows, while US debt funds continue to see further inflows.

• US Equities have been rangebound in the 1030-1130 range on the S&P 500.There have been multiple corrections and rallies and despite regular tremors about the Club Med economies, the Euro and the state of finances of the states like California in the U.S.A --markets have chosen to ignore any worrying news.

• Emerging market equities are rallying again and decoupling theorists are back to claiming that the BRIC economies can thrive and grow despite global headwinds.

• The Indian equity market has been an outperformer in 2010 YTD. The rally is spreading to the mid caps and small caps. Overall the markets appear to be factoring in growth rates that may prove to be a tad unrealistic, especially if we see any turmoil in the ever slowing western economies

Overall, I continue to be wary of the ongoing rally in equity markets that seem to refuse to acknowledge poor economic data as well as the total lack of confidence on main street (especially in the developed world).

Are equity markets adequately factoring in a possible slow down in the second half of 2010? - I think not

Remember, it's better to be realistic that hopelessly optimistic.

I am still bullish on precious metals. We are also entering a 'seasonally strong' period for precious metals. Caveat Emptor - A sell off in equity markets will trigger a sell off in precious metals.

Expect upcoming posts on Gold, Silver and Indian Equities in coming weeks.

DAVID ROSENBERG ON VOLATILITY

Here are some charts from David Rosenberg.

It's been one hell of a roller coaster and frankly, many investors are now sea sick!!

David Rosenberg has also been alerting our attention to the slumping Chinese equity markets and the Baltic Dry Index, which have had hardly any coverage in the financial news.

These are no ordinary times....