Wednesday, June 13, 2012

The "chop" before the storm

Stocks have been absolutely schizophrenic this week and are going nowhere as seen on the chart below:

(click on chart for larger image)

Here's the Russell 2000 iShares ETF and I've circled the last seven days price action.  In spite of Monday's sell off the ETF has gone nowhere and is stuck between two Fibonacci levels.  Virtually every major index is a carbon copy of the chart above.

Spain's credit rating was cut today by two ratings agencies, Italian and Spanish bond yields are dangerously rising by the day, economic date out of the Euro Zone is horrible.  These data points would have sent the market into a tailspin last Autumn!  What gives?

There's a lot of position squaring before a very busy and tense week coming up, kicking off with the Greek vote on Sunday.  Nowhere can this be seen better than in the Euro/Dollar relationship:

I've stacked the daily Euro chart above the Dollar and you can see the almost lockstep inverse relationship between the two currencies.  That's because the Euro is 57% of the Dollar Index.  But for all the horrible news coming out of Europe and the Dollar recognized as the "risk off" or "safe haven" trade why is the Dollar weakening against the Euro?  There's a record short speculative position in the Euro and people are starting to get nervous if their position goes against them (which it very well might if Greece votes pro austerity on Sunday).

On top of all this positioning is "quadruple witching" on Friday (when contracts for stock index futures, stock index options, stock options and single stock futures all expire at the same time). 

So, it's a tough market to read (to say the least).  But perhaps Gold is trying to tell the marketplace something:

Gold has been having a stealth rally that's been little noticed by the market.  It took a beating last week during and immediately after Bernanke's testimony before Congress.  But since that time it's been inching higher by the day (brown circle).  We know that in the past nine months Gold has been caught in the deflationary downdraft like all other risk assets and because of that its not seen as a "fear trade" asset but as an inflation hedge.  But deflationary pressures abound unless Gold is being predictive about upcoming events ...

Assuming Gold continues its march higher into Friday I'll expand on my thesis about Gold in my commentary this weekend.