Well, among the many things that I'm frequently proven incorrect about, I would have to say that my assertion in Monday's comments that the markets were primed for a quiet trade this week after last week's volatility has been rebuffed with extreme prejudice. Apparently, volatility is back in the market place as the session saw a number of markets move to new highs and promptly reverse course in rather dramatic fashion. Somewhat unsurprisingly, gold, silver, crude oil, and equity proved to be the focus the whipsaw trade. With much of their recent gains predicated on pure momentum, it was merely a matter of time until some sort of correction materialized. And while it's too early yet to call an end to the rally, there were a few developments in the marketplace that seem to reinforce the notion that we've put in a top.
Among the most compelling developments on the day was seen on the S&P 500 (and the other major equity indices as well). After opening the session sharply higher and pushing to a new 52-week high of 1,235.05 in short order in an attempt to challenge the 1,241 level (this price level constitutes the 61.8% retracment of the decline from late 2007 to the lows in early 2009). However, these attempts failed fairly quickly and prices subsequently weakened through the session. In a typical bull market, breakouts above the previous high price (1,227 in this case) tend to be accompanied by a wave of bullishness that often sends prices well above the previous level. This serves as confirmation of the trend's viability and underlying conviction as investors scramble to get into the market before it moves even higher. The fact that today's move to new highs on the S&P 500 saw virtually no follow through and an eventual reversal is highly suggestive of a market that is prone to correction and lacking the requisite investor conviction needed to move higher. And looking at the volume readings for today's session, it is clear that there was a sizable amount of bearish conviction behind today's pullback. After trading approximately 3 billion shares for the past several months, today's trading generated an eye-popping volume reading of 6.4 billion shares! This says to me that today's reversal was more than just a setback for the equity market, but an outright shift in investor sentiment that induced and likely will continue to induce widespread sell orders.
Interestingly, this reversal profile was seen across numerous markets today, especially in the commodities sector. To an extent, this is an unsurprising development as commodity and equity markets have been move in tandem for several weeks. As such, what's been good for one market has often bled over to the other and, in the case of today's price action, vice versa. However, I believe that the larger take away from the collective sell off among these markets is one of a sizable and collective shift in investor sentiment away from momentum-centric markets. The reasons for this shift are still unclear at this point, but such a shift in sentiment would normally benefit the Treasury market as investors flee to them for safety and stability. However, today's dramatic rise in yields (more than 20 basis points on the 30 year Treasury bond) clearly showed that money was not flowing into its usual haunts.
To say that I was able to hold on to my short gold position by the thinnest of margins might be the understatement of the year. As I mentioned in my early comments, I've been looking at an RSI indication that suggested that bullion prices were prone for reversal near the $1,430 level. But after trading $1,430.60 intraday, it looked like my position was about to be stopped out. However, like the price action in equity and crude oil, gold prices began to weaken promptly after attaining this level and the selling continued unabated for the remainder of the session. On the day, gold prices fell $21.60 (-1.52%) to $1,401.80. This is certainly not the kind of price action gold bulls wanted to see as it showed that the euphoric sentiment that had been underlying the market's recent move higher may have been much more hollow than what the price action. As a result, the door is once again open for the sharp move lower I've been anticipating since late November. Like equity prices, I'll need to see some follow through selling the rest of the week to confirm today's indications, but I think most any objective observer has to admit that gold is now showing definitive signs of breaking down. And with the U.S. Dollar Index proving resilient throughout the day, it's clear that gold isn't likely to get any sort of tailwind from a weakening greenback for the foreseeable future. Put another way, looking at today's trading in gold, is this the sort of market you'd be wanting to buy into? Me neither.
Tomorrow's early trade is likely to shade to the negative side of the ledger as many investors view today's price action as an omen of bearish things to come. But as is so often the case in the financial markets, the story won't be told at the open of the trading session but rather in its final 30 minutes. As I mentioned before, I'm looking for a generally lower session as a means of confirming today's apparent reversals, so that will be the focus of most of my attention. Mortgage application data is due out at 6:00 am CT from the Mortgage Bankers Association, which could add to the bearish sentiment. With mortgage rates climbing rather sharply over the past few weeks, it's hard to believe that consumers have chosen to buy or refinance in a rising rate environment. Needless to say, this would not be additive to the notion of a recovering housing market. Other than this piece of data, the economic calendar is pretty empty, which will leave the market to trade on sentiment. Today's price action, in my opinion, suggests that sentiment is now on a fast track to the bearish camp. Having been a bear for so long, it'd be nice to have a little company for a change.
Until tomorrow.....
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