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Index Wrap

Summer siesta interrupted by bugs. GOLD BUGS!

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Traders and investors took another summertime, or pre-holiday nap as volume levels on the New York Stock Exchange were below the 1 billion level, managing to turn their second-lowest volume rate for the year at just over 927 million share, while traders among 4 and 5-lettered stocks at the NASDAQ showed a little more interest but still light volume of 1.2 billion shares traded, as a non-existent economic schedule made for light trade.

But a trader's summer nap was interrupted, as gold bugs were busy bidding gold futures and gold stocks to higher levels, with the unweighted Gold Bugs Index (AMEX:HUI) 193.93 +6.11% surging to its record high and easily capturing today's sector winner trophy.

My view is that market participants were bullish the sector on some type of sudden realization of inflationary data being present in tomorrow's economic data (Q2 Chain Deflator), but some traders saw today's move higher coming ahead of bullish demand should the World Gold Council, which filed an application with the SEC back on May 14th for the launch of an ETF, which would be the first commodity-backed ETF in the U.S., create a surge in demand for the gold commodity itself.

This second thought from futures traders does warrant some attention. In a prior Ask the Analyst column on June 22, 2003 titled "A new security to grab a gold bugs attention," http://www.OptionInvestor.com/ask/ask_062203_1.asp we discussed this proposed security. I was thumbing through some articles on the Internet late this afternoon and found where Gold Bullion Ltd. performed efficient frontier analysis, which suggests a 5% allocation to gold to stabilize portfolios returns.

I'm familiar with this efficient frontier analysis (made major impact on my thoughts toward risk management), which was introduced by Harry Markowitz with his paper "Portfolio Selection," which appeared in the 1952 Journal of Finance. Thirty-eight years late, Mr. Markowitz shared a Nobel Price for economics with Merton Miller and William Sharpe for what has become a broad theory for portfolio diversification.

While it would be somewhat far fetched to think that 5% of the worlds financial wealth would suddenly be allocated to a commodity-based gold ETF, the article went on to note that if only 0.1% of world's financial wealth in terms of bonds and stocks was switched to gold, it would equate to a demand of 5,000 tonnes (metric ton) of gold, twice as much as the world's annual supply of newly-mined gold.

While our June 22nd Ask the Analyst focused on the potential impact this new commodity-based ETF could have on gold equities, I may have failed in my supply/demand analysis to understand the potential implications toward the commodity itself.

As dull as today's broader market trade was, these gold dynamics actually provide some very fascinating dynamics currently in play.

Tomorrow, we may find out about the inflation scenario, but I could not uncover any news that the SEC has approved the Gold ETF.

AMEX Gold Bugs Index ($HUI.X) - Daily Intervals

Just as gold futures triggered triple-top buy signals on their point and figure charts, the $HUI.X generated a triple-top buy signal on July 23 when it traded 158 (2-point box size) and it has been the better-part of onward and upward since. I've placed two retracement brackets on the $HUI.X, where the blue retracement would be similar to what I did with the February 2004 gold futures contract in today's 01:00 PM EST update. I've also placed a red retracement, anchored from the July pullback low, but also attached it to the $HUI.X's bullish vertical count of $228.

Two things I'll be monitoring tomorrow as it would relate to inflation is the continued action in Treasury YIELDS and Gold. Last fall, when it looked like the economy was in a recovery phase, gold stocks and Treasury YIELDS moved higher in unison. By January, Treasury YIELDS fell, gold stocks followed that move lower about one-month later. The major equity indices mimicked both the up and down move.

The Semiconductor Index (SOX.X) 449.91 +2.95% closed at a new 52- week high today. Sector gains were spurred by National Semiconductor (NYSE:NSM) $28.74 +5.77% and Lehman Brothers upgrading the stock to "equal-weight" from "underweight" ahead of next Thursday's quarterly earnings. NSM was today's top percentage gainer in the S&P 100 Index (OEX) 498.73 -0.11%, while Texas Instruments (NYSE:TXN) $23.49 +3.57% finished a distant third behind electronic retailer RadioShack (NYSE:RSH) $29.09 +4.04%. Market-cap heavyweights General Electric (NYSE:GE) $29.75 -0.43% and Microsoft (NASDAQ:MSFT) $26.42 -0.56% edged lower.

Pivot Analysis Matrix -

A 40-point range in the Dow Industrials (INDU) 9,333.79 -0.07% makes for what I consider a tight range of trade and we'll make first note that the DAILY S2-R2 point ranges are rather tight.

With economic data due out tomorrow, I'm going to have to consider DAILY S2 to DAILY R2 in play. Today's rather tight range of trade finds few correlative levels in play except at the outlying DAILY S2 and R2.

We're 3-days into the week and SPX/OEX have yet to trade their WEEKLY pivot, but a break above that level has WEEKLY R2's in play. Meanwhile, the S&P Banks Index (BIX.X) 299.72 -0.46% has traded a frog's hair above its WEEKLY Pivot. The S&P Insurance Index (IUX.X) 269.28 -1.05% didn't see a trade that would lend itself to strength in the financials.

I'm telling you/myself. There's something about these financials that just isn't right. It has to be something on the inflation front and Fed raising rates that has the banks and insurance out of favor.

At least the Securities Broker/Dealer Index (XBD.X) 563.20 +0.07% is holding above its 21-day SMA (560) and 50-day SMA (552). Neither the BIX.X, BKX.X or IUX.X, which would be more interest rate sensitive show such strength above these short and intermediate-term moving average.

And it remains this observation that has me skittish from the bullish side. One thing to be careful of tomorrow is simply "jumping to a conclusion" on the Q2 GDP number. I think we should keep a close eye on the Chain Deflator (forecasted at +1%).

I won't forget the weekly jobless claims.

Please believe me when I say I'm not a conspiracy theorist, or overly paranoid with things. At least I don't consider myself either of the aforementioned. It may well be, and most likely is, these high levels of bullish % and more extreme levels of risk that have me looking under rocks for the venomous snake that could jump out and bight us.

S&P 500 Index Chart - Daily Interval

Today's trade saw no net change in the broader S&P 500 Bullish % ($BPSPX). Still bull correction at 77.00%.

While weekly jobless claims will be closely monitored tomorrow, I think greater focus is on preliminary Q2 GDP. The reason I think we might want to keep an eye on the Dollar Index (dx00y) is this.

Recent economic data from Italy, Germany and France showed their economies slipping back into recession. These are European block countries. If I lived in that part of the world, saw that economic data, I'd have put bulk of my foreign equity capital into the U.S., where economic data has at least been signaling growth. This is simplistic, but may explain strength in dollar.

Now, on July 31st, the SPX did get "pumped and dumped." Granted that Oscillators were set up different then. On July 31, the Dollar Index (dx00y) rose/jumped to match a prior high at the 97.37 level, finished its session in the middle of that days range, then fell sharply the following day, not unlike the SPX.

On Tuesday, the dollar achieved a new 52-week high when it traded our MONTHLY R2 of 99.49 to the penny. A strong Q2 GDP will prove foreign investors correct that the U.S is the place to be for growth. The only "wrench in the engine" that I can think of is that too sharp a rise in inflation, may have some market participants changing their mind.

While I (Jeff Bailey) am not overly concerned about inflation (plenty of industrial capacity, low wage inflation), commodity prices, which industrial capacity can't address or offset, is perhaps the part of inflation that seems to be getting gold's attention.

The 60-minute interval chart of the U.S. Dollar Index (dx00y) has a rather nasty-looking head and shoulders top pattern developing with neckline conservatively placed at 98.50. I'm setting a downside alert on this index at 98.50.

U.S. Dollar Index (dx00y) - 60-minute intervals (all sessions)

Just a quick look at the U.S. Dollar Index (dx00y) on 60-minute interval. Head come from Tuesday morning's 07:00 AM EST trade at 99.49.

S&P 100 Index (OEX.X) Chart - Daily Interval

The OEX traded a tight 2-point range today. OEX holds above its short and intermediate term 21-day and 50-day SMA's , but a close below would have MACD crossing below signal, and in a modestly downward trending channel, would be a negative. Conversely, OEX would also remain in a range, perhaps best depicted currently by our pink horizontal lines at MONTHLY S1 and R1 (485 -512). 485 has been tested this month, 512 hasn't.

With financials not acting well, remain more cautious from the bullish side of things on the OEX and SPX.

Today's trade saw no net change in the narrower S&P 100 Bullish % ($BPOEX). Still "bull confirmed" at 82%.

NASDAQ-100 Tracking Stock (QQQ) - Daily Interval

The QQQ saw light volume trade today, and while an upgrade on semiconductor NSM most likely helped move some jittery shorts to cover (per last night's Index Wrap thinking) bears certainly didn't seem panicked.

GPD, Chain Deflator and Initial claims all out at 08:30 AM EST, while Help Wanted Index is due at 10:00 AM EST. Bets have been placed in the QQQ.

Stochs trying to turn at mid-point and MACD/SIGNAL still in momentum trend.

Today's trade saw no net change in the NASDAQ-100 Bullish % ($BPNDX). Still "bear correction" at 73%.

Dow Industrials Chart - Daily Interval

A trader asked a good question today regarding how to try and identify a negative trend in a stock/index before it actually become more evident. One way is to try and find a "old" trend that may have been in play, then clone or copy that trend. I've tried to show this in the above Dow chart.

MACD did just edge below its SIGNAL, which in a longer-term upward trend could signal a trend reversal, or simply a higher zone of consolidation ready to take place.

Today's trade saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU). Still "bull correction" at 80% bullish.

Jeff Bailey

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