Its an old story. When stocks fall, gold and bonds rally. So far in 2016 that has been the theme. With the S&P up 2,200% during the 8 year bull market, and now the Fed trying to push rates higher, the rush to sell stops is on pace for the same level the markets saw during the credit crisis. Traders can make as many historical comparisons as they’d like about the current sell off, but it has the feel of the beginning of the tech bubble back in 1999-2000, only much bigger.
The S&P 500 futures (ESH16:CME) fell all the way down to 1821.75, and were down 51.50 points before rallying 33.25 handles off its low to settle down 22.75 points, or down -1.20%. The Dow Jones futures fell 389 points down to 15729, rallied 280 points late in the day, and settled down -1.10% on the day, and down -11.25% year to date. The Nasdaq 100 futures sold off all the way down to 3883, down 157 points, before recovering 78 points late in the session to settle at 3961, down -2.10% for the day, and down -15% in 2016. Gold (CGH16:NYM) closed up $15.5 after being up 26.00 earlier in the day and then falling back to 1189.60 on the close.
I worked in the gold pit as an arbitrage clerk spreading between the cash gold market and the futures in the late 1980’s. For years there had been a battle going on between the COMEX and the CME over who should control gold trading. The Chicago Board of Trade had the silver pit so why shouldn’t the CME have a gold pit? That’s not how NY saw it and for years the Chicago metals markets were second best to the NY Comex. The problem then, and the problem now, isn’t which exchange it’s traded on, but when is it best to be traded? With all the risk on risk off trade, the sharp drop in commodities, soaring bonds prices, and endless currency moves, gold has come out shining the last few weeks. The question is will it keep going or will the metals reverse if stocks move back up? That’s a good question and one I want to tackle.
I understand that gold is where people rush to as risk increases, and investors are seeking a flight to quality. A few years ago, 2 years after gold had made its high, I was asked to speak on a panel for Benzinga.com. When I was asked about gold I said it would have hard time holding above $1,300.00, and that it was ‘out of flavor’. After the Fed cut off its zero borrowing policy and stocks sold off, the risk on – risk off trade in the stock market has led to renewed interest in the metals. Over 8 months ago I was asked again about where gold was going, I said it would have to get above 1285 to keep going up, and it got up to 1288. Over the last 8 weeks the CME Group’s front month gold contract has rallied 150 dollars as investors fled stocks and piled into the metals. The long term question is, is gold a good investment? I believe it is but I also think that buying and selling of gold and silver can be a fad. In past run ups it’s been known to ‘suck’ the public in as TV commercials push the purchase of gold and silver bars as long term investments. The metals go in and out of style quicker than any other commodity. That said, while the most recent push up is getting the attention of the gold bugs, I am not not fully in that camp that says gold is going to keep ramping higher, but I do not think it should not be overlooked. The big questions traders are asking are is gold about to break out? Are the metals really sustainable? In my opinion that is still unclear. What’s clear is that small investors have been jumping back on the gold wagon, but the large institutions are more in the mode to sell the the rally than buy it. In my mind it’s something to buy and hold when conditions are right, but I do not believe they are. I do not see gold going to above $1,250 or $1,300 anytime soon.
Yesterdays gold rally pushed the precious metal all the way up to 1201 before falling late in the day as stocks rallied. I do not think gold is leading the way, it’s more a function of how stocks are moving, and how people are moving to less risky assets. With the VIX moving around so sharply and oil still trying to find a low, it seems like just about every financial and commodity future is at risk. Whats going on in stocks is real, the question for gold, is it really real? As traders, we are paid to react, to buy and sell when the markets are moving, and clearly gold is moving, but it’s still not shining to me, or at least not yet.
In Asia 6 out of 11 markets closed lower (Shanghai Comp -0.63%), and In Europe 12 out of 12 markets are trading lower this morning (DAX -1.30%). Today’s economic calendar includes the NFIB Small Business Optimism Index, Redbook, JOLTS, Wholesale Trade, 3-Yr Note Auction and earnings from Baidu Inc (BIDU), Coca-Cola Co (KO), Panera Bread Co (PNRA), Wendy’s Co (WEN), Viacom Inc (VIA), Walt Disney Co (DIS), Wyndham Worldwide Corp (WYN), and more…
Great American Shrink Down
Our View: It’s 7:30 pm CT and the (ESH16:CME) is down 13 handles at 1839.00 and oil is up +0.42 cents at 30.11. Sure the ESH had a 33.25 handle rally off its lows, but that doesn’t mean the bear has gone into hibernation. Today will be a test of whether the ESH can hold the 1820.00 level and we can see a Turnaround Tuesday, or its tale out 1820, down to 1805 and then down to 1785. If the ESH can indeed rally to 1858, then 1863 and 1875 will become near term upside objectives. Overnight the ESH16 traded as high as 1856.75 and as low as 1832.00, and is trading 1835.00 last, down 17.00 handles. if there is anything to be said it’s that the S&P remains very unstable. Our view is to buy weakness and sell the rallies with the idea that there could be a possible Turnaround Tuesday.
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 6 out of 11 markets closed lower: Shanghai Comp -0.63%, Hang Seng +0.55%, Nikkei -5.40%
- In Europe 12 of 12 markets are trading lower: CAC -1.96%, DAX -1.30%, FTSE -0.71%
% at 6:30am CT
- Fair Value: S&P -5.50, NASDAQ -5.85, Dow -68.27
- Total Volume: 2.67mil ESH and 6.2k SPH