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May 7, 2009


Stocks hacked out their first seriously bearish session since April 20, despite managing to once again ramp up during the last half hour. The S&P 500 assailed and failed the uptrend line we've been watching and did so on the highest volume since the beginning of the rally. To be fair, the spyders did show up on the buy-on-weakness data today with a modest $42M. Neutralizes yesterday's selling. I'm not worried about it.

spx chart

The NDX, which tends to lead the SPX, has also posted back-to-back bearish candles:

ndx chart

Don't freak out here, folks, but I think silver may now pull back enough to shake the resolve of some of the weaker bullish hands.

silver chart

Perhaps silver will just go vertical, but I'm eyeing the potential basing construct simply so I don't get shaken out by noise. I certainly am in no mood to reduce my position voluntarily.

Now this paragraph is academic and is designed purely for debate: Anyone who prefers hedged trades rather than direct exposure to precious metals can consider going long silver versus short gold. The historical ratio between the two metals is still way out-of-whack, despite shrinking from 84 to 65 recently, and even if PMs fall from here, silver should outperform gold. For that matter, miners versus gold is also a ratio betraying a vast underpricing of an asset, so long miners versus short gold is another valid hedged play.

My money is simply long both silver and the miners because I want the exposure. I have placed a partial hedge by shorting stocks. This hedge is designed to protect me from the primary perceived threat which is seeing another period in which deflation overpowers FOMC efforts. In fact, I do expect deflation (debt destruction leading to lower asset prices) to continue to frustrate the Fed for some time, but it is entirely possible that precious metals prices rise during a deflationary period as people seek to hedge future price inflation as well as seek a safe haven for wealth. So you see, the beauty of using stocks as a hedge against precious metals is that in not-too-improbable conditions, it is possible for both sides of the trade to run favorably.

On a closing note, I'm going to be out of town again next week... kind of a spontaneous trip. I'll hack out a post or two but I won't be writing every day.


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