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December 13, 2009

Levitation Act

Hmmm. I don't see any strings or ropes, so some genuinely magical force must be supporting equities. Stocks are simply defying gravity and thereby mincing my efforts to hedge precious metals positions. Maybe next time I want to hedge against a dollar rally, I should just buy a few DX contracts! The only explanation I can garner for this levitation trick is one of sentiment. Gold is falling in response to the dollar because too many traders were on the gold bandwagon. Stocks, on the other hand, are the continued subject of economic naysayers who short every time the S&P 500 sneezes. Until these compulsive bears give up, there can be no meaningful decline.

s&p 500 daily chart

In real terms, the SPX has quickly retraced almost half of its decline since late August.

s&p 500 to gold ratio

If the S&P 500's gold price turns lower again will the decline come primarily due to a resumption of the gold rally or a crack in equity prices?

weekly s&p 500 chart

After a rapid decline, gold could easily pop to $1150 along with the SPX before both headed into an impulsive move lower.

Equities are also carrying several burdens, technically-speaking.

nasdaq-100 chart

dollar index daily chart

crude oil candlestick chart

bank stock index chart

Throw in multiple selling-on-strength days and the odds stack fairly well for an imminent decline in equity prices. However, given the way the SPX is behaving, I continue to believe the serious decline will begin with a short squeeze into a close followed by a gap down the next morning. It will be a gap that is very difficult, but nonetheless prudent, to follow.

It has been a long time since I wrote a new article for the macroeconomic commentary section of this blog, but the details of the financial reform bill passed in the House this week disgusted me so much that I just felt I had to retort. The article is entitled A Critique of the Financial Reform Bill of 2009 and has also been generously posted at


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