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MLR - Premarket Pulse April 16, 2013

All of the major market indexes took a tumble on huge volume, logging their largest one-day drop since November of last year. Meanwhile gold and silver continued to crash, streaking to the downside as investors crowded the exits in panic selling. After gapping down 6% at the open, gold finished the day down 9% and silver down over 12%. This morning the metals are bouncing in a reaction move, but it is too early to tell whether a bottom is in, despite yesterday's selling having something of a climactic tone. Spurring the sell off, China's gross domestic product came in lower than expected. The idea that gold is falling due to a recovering U.S. economy seems far fetched as U.S. economic news continued to show weakness with the Empire State factory index and NAHB housing market index both missing expectations. As a result housing-related stocks were roundly clocked in yesterday's trade.

Getting back to the precious metals, it is more likely that gold's plunge is due to a combination of factors including short sellers piling on as gold breaks down below the lows of a basing pattern for the first time since it began its uptrend in 2001, fears that central banks will have to sell more gold to raise capital, deflationary fears from a PPI that came in at -0.6% last Friday, money moving into U.S. Treasuries due to Japan's aggressive quantitative easing program, the U.S. being slow to give back gold to Germany as a reflection of the U.S. attempting to hoard physical gold while fostering a fear of holding paper gold, and manipulation of the dollar by the Fed to push it higher and push gold lower.

On the bullish side of gold, QE is firing on all cylinders and central banks bought $3 billion worth of gold in the first two months of 2013. But price/volume rules all and currently it is telling us that something is not right. It could be simply a combination of the bearish arguments above, but it may be something worse. It is therefore prudent as always to keep a close eye on any positions you own, keeping stops tight, as the free fall in precious metals could be the harbinger of an ill omen whose reasons remain to be seen.

Stocks across the board were hit hard, and recent breakout attempts were soundly quashed. Futures are up this morning, but some serious damage has been done. While the NASDAQ, S&P 500, and Dow all held above their 50-day moving averages the broader small-cap Russell 2000, which is now lagging severely, and the New York Composite Index, both broke down through their 50-day moving averages in a sign that the broader market is much weaker than the action of the "big three" major market indexes might imply, and therefore long side risk has been heightened.

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