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May 31, 2009

Commodity Bull Market

What a nasty way for stocks to end a Friday, eh? The S&P 500 was ramped about 1.5% in the last hour with the bulk of the move actually occurring in the final 5 minutes. The upper bound of the triangle I was watching got smashed, and price broke a pattern of lower highs coming off the May 8 top.

s&p 500 chart

I had promised to close my shorts if the triangle resolved higher, but I have not rushed out of my position just yet. The purpose of stops, conceptually, is to get a trader out of a losing position when the outlook has changed. Generally speaking, a trader uses a line in the sand to mark such change, but I think it is important to ask why the line was violated. Normally, such analysis will be conducted ex post facto, but at times market conditions will offer a slow pitch.

Friday's triangle break can easily be ascribed to end-of-month antics by institutions. In other words, I think there is a good change this break will prove to be a head fake. If I am right, we should see the market unwind the late-day gains rather quickly on Monday. I will use this conceptual stop for my short position such that if Friday's ramp up holds, I will exit and await a juicier setup.

Despite frustrations with efforts shorting the equity market, May was handily my best month of 2009. Here's why:

silver chart

gold miners

My two largest individual positions both increased by about a third! More importantly, each broke above important pivot points during the last few sessions. The stage certainly seems to be set for a mega run in the precious metals sector. We just need gold to close back above $1000 to seal the deal. Now, the extent of the run over the last month in combination with the spinning top candlestick posted on the GDX chart probably has a few traders concerned about taking profits here. Given the bigger picture, I would be more concerned about losing profits by being duped out of my position. There are going to be a plethora of upside surprises during this bull market, and I guarantee you will miss a few big ones if you are jumping in and out based on candlesticks and oscillators. My money is just going to ride this one out until the macro view changes.

Here's another reason I don't want to chicken out:

dollar chart

The outlook for the mighty buck is becoming bleaker by the day. Unless we bounce strongly off that pivot, the dollar's collapse could actually accelerate. That would be fabulous for our precious metals positions, but frankly, I don't want to see our country devolve so quickly. As mentioned in prior posts, PMs should continue to fare well even with a rising dollar since all major central banks are on a printing spree.

The dollar's woes are also pushing most commodities higher. I'm not sure how our sage leaders think higher prices for general resources... the natural result of their policies... is good for our economy.

copper prices

natural gas price chart

oil prices

stock chart

Gee. Great job, guys.


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