|
I'm
sure you know that gold and oil stocks took huge hits yesterday. I discussed
a likely commodity correction over the weekend and in a WSW Power Investor update
yesterday gave some initial targets and explained what I'm looking for as a
buy signal. We aren't there yet. I just watched CNBC for a few minutes this
morning, because I wanted to get their feel for the market action. The
anchors and three of the analysts they paraded are calling this the top in
gold and commodities and are taking it as a vindication of the Fed. One of
the reporters said that the financial crisis is over and any more bad news
that comes out will be "meaningless." Two of the analysts said the
market is in the process of bottoming off of the 1270 support level on the
S&P 500 - which it has hit three times now this year.
 
I found the
discussion amazing. Already they are calling this the bottom and saying that
gold is over. Yesterday was NOT a vindication of the Federal Reserve. There
was more totally wild action in the financial markets. People were not
selling gold, because they thought the Fed had fixed things. Those selling
gold were doing so to book gains on the best performing sector of the year
and to deleverage themselves. They also were
fleeing into the safety of the bond market as the yield on the 3-month
Treasury bill fell 27.78% to close at 0.65%. The yield has fallen from 2.2%
to 0.65% in just the past three weeks. This is a shocking gyration in the
bond market. It is a result of institutional investors fleeing for total
safety.
Last week the
Fed announced a $200 billion treasury bond swap on Tuesday. The DOW rallied
350 points on that day. The reasons for the Fed's action
was not public, but there were rumors at the
time that Bear Stearns was near bankruptcy. On Tuesday people were
celebrating the market rally. The next day the DOW fell down a bit. It wasn't
much only 30 points or so, which is normal after such a big day. However, the
action in the bond and currency markets was alarming. The bond yields dropped
sharply and so did the dollar. There was real fear in those markets. Less
than 48 hours later Bear collapsed.
This past
Tuesday the DOW rallied over 400 points as the Fed cut rates and people made
the bet that Bear would be the only big bank to collapse thanks to Fed
action. But the very next day panic once again returned to the bond market as
3-month Treasury bill rates dropped sharply. This is not a sign of a Fed that
has all of a sudden fixed everything, but a sign of a market still very
concerned about the credit markets and worried that the Fed bailouts are
going to fail. The move in T-bills began right as the market opened in the
green and continued all day long. Now we have to wonder what they were so
fearful yesterday.
Much of the
selling in gold was due to a giant macro hedge fund that had to sell
positions in order to meet investor redemptions. John Meriwether, who if you
remember was the guy who set up the Long-Term Capital hedge fund that blew up
in 1998, apparently faced huge redemptions yesterday in a group of billion
dollar hedge funds. His Relative Value Opportunity fund suffered a 24% loss
in its fixed income fund. He also has a billion dollar macro hedge fund down
around 9% this year. It is likely that he had to sell gold and commodity
positions in this fund to meet redemptions or get off margin.
I believe this
contributed to the sharp drop in gold and gold stocks yesterday. However,
remember that I was talking about a likely correction over the weekend, so a
drop was likely anyway due to the charts. Oil stocks in particular were very
vulnerable going into this week.
That wasn't the
only news that swamped the market yesterday. Thornburg Mortgage revealed that
it has to raise at least $948 million in the next week in order to stay in
business.
This remains a
very dangerous and volatile market. Although the market is oversold and could
hold the 1270 support level on the S&P 500 for a few weeks I believe that
this level is eventually going to be breached and I expect that event to lead
to a panic waterfall decline in the market. The longer the S&P 500 stays
above the 1270 support level the worse the drop will be once it eventually
closes below it. The selling in gold and commodities is not a sign that all
is well, but is simply the start of the deleveraging
of hedge funds that will climax in a sharp market drop that will mark the end
of this bear leg that began back in October. Once it ends I expect gold
stocks to resume their leadership of the market for the rest of the year.
Fore more sign
up for our free weekly newsletter, with a focus on gold stocks and weekly
commentary on the stock market. Just click here.
Mike
Swanson
Editor, Wall
Street Window
Disclaimer: Michael Swanson is the President
of USA Capital, Inc., which provides management, support, and research for institutional
investors, hedge funds, and mutual funds. The ChartWizard is also an employee
of USA, Capital, Inc. Both Swanson and employees and associates of USA
Capital, Inc. may have a position in securities which they mention on WallStreetWindow or any of its services. In such cases,
appropriate disclosure is made. Under no circumstances should the information
received from WallStreetWindow represent a
recommendation to buy, sell, or hold any security. WallStreetWindow
contains the opinions of Swanson and the ChartWizard and is provided for
informational purposes only. Neither Swanson, the
ChartWizard, nor TimingWallstreet, Inc., which owns
WallStreetWindow, provide individual
investment advice and will not advise you personally concerning the nature,
potential, value, or of any particular stock or investment strategy. To the
extent that any of the information contained on WallSteetWindow
may be deemed investment advice, such information is impersonal and not
tailored to the investment needs of any specific person. Past results of WallStreetWindow, the ChartWizard, or Michael Swanson are
not necessarily indicative of future performance.
WallStreetWindow does not
represent the accuracy nor does it warranty the accuracy, completeness or
timeliness of the statements made on its web site or in its email alerts. The
information provided should therefore be used as a basis for continued,
independent research into a security referenced on WallStreetWindow
so that the Subscriber forms his or her own opinion regarding any investment
in a security mentioned by WallStreetWindow. The
Subscriber therefore agrees that he or she alone bears complete
responsibility for their own investment research and decisions. We are not
and do not represent ourselves to be a registered investment adviser or
advisory firm or company. You should consult a qualified financial advisor or
stock broker before making any investment decision and to help you evaluate
any information you may receive from WallStreetWindow.
Consequently, the Subscriber understands and agrees that by using any
of the WallStreetWindow services, either directly
or indirectly, TimingWallStreet, Inc. shall not be
liable to anyone for any loss, injury or damage resulting from the use of or
information attained from WallStreetWindow.
| 
