Read The Message of The Markets - Not Headlines

Investors are getting nervous? Investors are always nervous. When they’re not, particularly retail investors, it’s time to run for the exits. Trend energy (REV) and market internals (breadth) have yet to confirm this rally, but the money flows and sector rotation suggest increasing inflation – a hyperinflationary model.

S&P 500 ETF (SPY):


NYSE Breadth1:


NYSE Breadth2:


Headline: What Happened to the Rally? Why Markets Are So Worried

Even though investors seem to have gotten everything they've wanted over the past month or so-political changes, Fed help and tax relief-the markets are still full of jitters.

Over the past few trading sessions, bond yields have jumped, commodity prices have slumped and stock prices haven't done much of anything, despite optimism that a tax accord in Washington would be the final push the market would need to close out 2010 on a strong note.

Source: finance.yahoo.com

10-Year Auction Results

It's not so much is anyone buying but rather who's been doing the buying since onset of the debt collapse. Dealer participation rate are falling and remain weak in comparison to historical reference points. This has been offset by increased purchases from Direct (anonymous) and Indirect (likely foreign central banks), likely coordinated, sources.

10-Year Auction Results


Source: treasurydirect.gov

Hey Bond Vigilantes, The Canary Already Died!

If your investment voice is not laughing the association of two unrelated pieces (bond vigilantes and tax deal) of information, then it's time to reread Adam Smith's Wealth of Nations. Smith often alludes to the fact that centralized governments require no vigilantes as their own actions inevitably destroy themselves from within. The secular trend in the bond market, already down in constant currency terms (see chart below), could care less of Charles Bronson of Death Wish (1974) was the leader of the bond vigilantes. The canary in the coal mine** - Sting might be the only one that knows it, without a doubt keeled over in 2001, yet nary a word of caution emanated from this often cited bond market vigilantes. Go figure.

Long-Term U.S. Government Bonds Total Return Index (LTGBTRI) to Gold Ratio:


The tax deal is simply more deficit spending, currency devaluation a la 1934-1940, intended to boost (C) consumption of GDP = C + I + G + (NetX). The Administration is smart enough to know that any attempt to raise taxes, regardless of the popularity of the idea, will quickly translate into lower consumption (C). That’s a huge deal. Personal consumption expenditures still account for greater than 70% of national income (GDP) as of Q3 2010.

Personal Consumption Expenditures (PCE) As A %GDP and Personal Consumption Expenditures As A %GDP Average from 1947:


Headline: Bond Vigilantes May Thwart Tax Deal

The biggest losers in President Obama's deal with the Republican on taxes aren't the Democrats. It's the bond market.

Yields soared in the wake of the plan that will add upwards of $900 billion to the federal deficit, sending bond prices tumbling, especially in the municipal market.

Meanwhile, the engineered panic in gold and silver once again has many within the community watching Death Wish for investment advice. Buy strength and selling weakness creates the churn necessary for connected money to reposition for the next advance.

Silver still looks technically sound despite the bucket shop style operation. Jim mentioned yesterday, three taps and out. That’s what I am watching as well. It’s only a matter of correctly identifying the third tap. The labeling cannot be determined until a breakout of upper channel is achieved.

A clear sign of strength, however, is trend energy. The new highs in REV(E) on 12/06 suggest a healthy bullish trend.

Silver ETF (SLV)


Source: finance.yahoo.com
**Source:youtube.com

This Is Not Technical Strength

Another take down of gold and silver on marginal dollar strength is simply another opportunity for smart money to get on the right side of the trade.

The weekly dollar chart shows the futility of the rally being pushed hard by the media. A curl under a long-term neckline is not technical strength.

US Dollar Index ETF Weekly (UUP):


Today's dollar rally filled the 12/03 gap on a big contraction in volume. This suggests that the high volume downside gap is becoming resistance. This is not technical strength.

US Dollar Index ETF (UUP):


Nevertheless, media is doing it's "hard sale" to scare the weak hands while smart money repositions for another decline in the dollar and rally in gold. This is why you won't make a dime chasing headlines.

Obama defends tax deal, says he's kept promises

Anyone that has seen a few elections know that campaign promises are anything but ironclad. Go ahead and raise taxes as some suggest. Substitute the US economy everywhere you see Willy E Coyote and you'll get the picture.

With fellow Democrats balking, President Barack Obama declared Tuesday that a compromise with Republicans on tax cuts was necessary to help the economy and protect recession-weary Americans. He passionately defended his record against Democrats who complain he's breaking campaign promises.

Source: finance.yahoo.com

There Is Only One Side of The Market - The Right Side

Amir,

Let's call it the battle for the upper trading channel. The scrap will intensify within the zone, but battle will not alter the direction of the market. While traders and investors, also people in general, like to separate the world into sides (cartel versus free or bull versus bear), they ignore the inalienable truth that markets have none. Markets have only one side, that is, the right one. The 'cartel' you describe or any group seeking to maximize profits and fight for influence and control must be on the right side of the market. The message of the market is more important than any group.

Regards,

Eric

Hi Eric,

I'm familiar with the cartel shenanigans and all, and I see this as another one of their desperate takedowns, but I can't say I'm not concerned, so I just wanted to ask you what you thought of it? I would appreciate your perspective...

Cheers,

Amir

Find Your Investment Voice - Fast!

As expected, the run in silver (and gold) to its upper trading channel has brought forth numerous ‘experts’ providing (dis)information for both sides of the trade. The nearly spiritual rhetoric, largely intended to fleece the public from their funds, can only be compared to the bucket shops in which Jesse Livermoore, one of the world's master traders, learned to read the tape.

Livermoore beat them because he had no personal feels for “the game.” Don't forget that.

They might be crooks or they might not be as black as they were painted. I did no propose to let them do any trading for me, or follow their tips or believe their lies., Reminiscences of a Stock Operator

The number of the ‘experts’ talking about silver (and gold) is increasing by the day. For example, The Silver Market Is Becoming More Volatile -- Could This Be a Bubble?

The real question is why?

The game has changed. Smart money knows it. The COT silver (and gold) shorts, similar to 2005-2006, have their heads squeezed in vice. This is revealed by unusual changes in leveraged money flows for gold and silver market. The “reason” behind the redirection of money flows, while likely debated endlessly on the Internet, will be largely immaterial to profit.

The fact is that silver is trading, better depicted as fighting within an immensely critical (to the shorts) resistance zone of the upper trading channel. If this resistance is broken and tested as support, it suggests that silver will enter a more aggressive, higher-order advance. This advance will be difficult to control.

Silver, London P.M. Fixed:


Gold, London P.M. Fixed:


Why focus on silver? Silver, as expected during hyperinflation, is leading gold. The gold and silver ratio, approaching the target box, is probing levels not seen since 2007. The accelerating decline reflects the growing divergence between perception and reality as it pertains to currency valuation; It represents the evolution of the Weimar experience in America.

Gold to Silver Ratio (GSR):


Those seeking to play “the game” going forward must develop confidence in their investment ‘voice.’ And, fast. Have no doubt that rhetoric will swipe at the voice box in attempt to render it useless.