General markets sold off aggressively on higher volume yesterday, with the NASDAQ Composite breaking to the low of its recent range. Leading stocks also got hit hard. This pushed the Market Direction Model and the UVXY Volatility Model into neutral/cash positions. Futures are higher this morning at the time of this writing after the Bank of Japan delivered an aggressive quantitative easing package. This comes as no surprise due to the changeover in Japanese leadership as well as central banks around the world engage in a uniform campaign of aggressive easing moves. It will be a tug-o-war between QE which seems to be running out of steam but still has a propping effect on markets vs. market fundamentals and the European toppling domino effect.
In addition, precious metals ETFs the SPDR Gold Shares (GLD) and iShares Silver Trust (SLV) dropped sharply. The selling in GLD puts downside pressure on the price of physical gold by releasing more physical gold into an already soft market. GLD is backed by actual gold ounces purchased when investors buy the ETF. The selling in GLD is, according to former Assistant of the U.S. Treasury, Dr. Paul Craig Roberts, manipulation by the Federal Reserve to keep the dollar strong. As gold rises, more countries exit dollars, pushing the value of the dollar lower. The Fed wants to prevent this at all costs. While it is illegal to manipulate the bullion market, the U.S. government is doing it so the law will not be enforced. This smacks as a desperate move by the Fed as they have painted themselves into a corner. Countries, especially the BRICs, are moving away from the dollar as over time it will cease to be the world's reserve currency of choice and instead using the capital to buy gold which should put a floor on the price of gold, probably somewhere around the $1500/oz level. If the market moves into a serious correction, precious metals will likely be dragged down along with stocks, and so where a final floor will be found remains to be seen. The question is whether the concerted global demand for gold as the movement away from the dollar continues can outweigh the Fed's selling of gold with the intention of keeping the price of gold down and the dollar strong. Perhaps we are closer to a tipping point than thought.
As usual, it is key to keep a close eye on the price/volume action of the general markets, leading stocks, and precious metals. Should we see actionable entry points, we will advise members in real-time. Members should also be alert to potential moving average violations and sell signals as yesterday a number of formerly leading stocks, from homebuilders like Lennar Corp (LEN) or Ryland Group (RYL) to technology names like Netflix (NFLX) and Commvault Systems (CVLT) closed below their 50-day moving averages for the first time. A move below the intra-day lows of yesterday's price ranges for any of these stocks would constitute 50-day moving average violations, and hence sell signals. Overall, yesterday's action was not constructive, and at the very least a highly cautionary posture is advised at this time.