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June 3, 2008

B for Bully

Bernanke tried to bully markets this morning with some rhetoric about inflation (actions speak louder than words, Benny B), and the implication that the rates cuts are done knocked equity futures off their overnight gains, as well as saw precious metals 2% lower. Metals, however, made brave recoveries, especially silver, which saw its price escorted all the way back to even before it settled down a dime.

But really, anyone who believes Bernanke won't dish out more paper if the banks melt down again is deluding himself. And if the banking index is any indication, we have entered phase II of the meltdown:

stock chart

Nevertheless, something does not feel right about metals. I know readers would prefer a concrete layout of technical patterns within the backdrop of fundamentals, but right now I have to say simply that my inclination is to dump my excess silver. By excess, I mean my trading position... that which I hold beyond my core position, which won't be sold until my barber buys it from me. Or at least my neighbor's barber because why piss off a person who holds a straight edge to your neck?

Anyway, if the action in the miners is any indication, the metals complex is in for some weakness:

stock chart

This is just a postulation, perhaps for debate on the discussion board, but I could see a scenario where metals come under pressure for a few days as traders naively buy into Bernanke's implied threat. Then when the banking meltdown kicks in full-force and people realize that the Fed will cave and cut again, metals take off like the Road Runner just before Wily E. sticks him with a fork.

Equities followed the banks down again today and gave us no reason to believe that further weakness will not ensue. Today's action felt a lot nastier than a mere half percent drop would imply. We may see a bit of indecision as the SPX flirts with its 65DMA, but either way, some big weakness would seem to be in the cards within days.

stock chart

Keep in mind that the NDX is not behaving as weakly as the SPX (for the obvious reason that the former is not loaded with banking shares). The relative strength could be a warning that the current sell-off is just a correction and not the beginning of a full-fledged bear leg. These possibilities will have to be judged as events unfold.


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