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27Apr

Fedflationary fabrications

Alex Bonds, Commodities, Forex, News, Stocks 0 comment

These press conferences with Federal Reserve Chairman Dr. Bernanke are becoming more amusing as of late:

“We, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation [..]” – Ben. S Bernanke

Really?  On what basis of calculating inflation can one say with a straight face that over the last 30 years inflation has been tame or for that matter stable?  Let’s take a look at the 30 year chart of the CRB index, which represents a broad view of commodities as priced in US dollars.

30 year CRB index chart showing high inflation and unstable prices

30 year CRB index

Clearly inflation is not under control.  However, if the above chart is not enough to make one skeptical of the Fed’s latest remarks, then here’s a 30 year chart of the US dollar index, the currency in which prices are set for all the items we purchase in the United States (and other countries using or pegged to the US dollar).

30 year US dollar index chart

30 year US dollar index

What one can gather from these charts is that we’re experiencing 30 years of a weakening dollar and extremely volatile commodities prices.  Our central bank has the audacity to tell us that inflation is under control, and that in essence one should ignore gas prices, food prices and the prices of other goods which have surged over the last few decades (because all of the official inflation statistics ignore said prices).

I’ve always been a skeptic of the Fed’s press releases and these conferences, but this statement alone is enough to make one’s head spin when put in to context with the charts above.  I believe instead that the Fed is claiming inflation is under control as a guise to give them the flexibility to perform more easing should the European contagion come home, or if our own sovereign debt issues begin to become more apparent to bond investors.

Without quantitative easing, twisting (and lots of shouting) our markets would likely have higher Treasury yields, lower equity prices — but people would be enjoying lower prices on food and energy.  With the labor market stagnating and the overall economic picture still quite dismal, one has to wonder whether the Fed’s dual mandate of encouraging employment and maintaining stable prices has been abandoned in favor of recklessly supporting the financial system at large, and more specifically US Treasury bond and equity prices.  It certainly seems to be the case when objective data is reviewed from a macroeconomic perspective.

09Nov

Caution! Market crash could be imminent

Alex Commodities, Finance, Futures, Stocks 0 comment

With growing uncertainty surrounding the European debt crisis, and the contagion spreading to much larger sovereigns, such as Italy, we now see risk aversion back on the table.  US markets are down over 3%, the headlines seem to be getting progressively worse and many fear that the situation could deteriorate much further — giving up much of the gains achieved in October.

Growing concern as market whipsaws

This kind of volatility, both up and down, is historically an indicator of very large market moves.  With the bias largely negative, it seems that a market crash could be coming if no resolution is found for the EU debt implosion.  Alternatively, should a large scale bailout ($2T+) occur, we could see a significant rally, especially within precious metals spot prices and miners.

For investors and traders, this type of price action is stressful.  Seeing fluctuations of multiple percentage points in indices and nearly 10% in stocks can cause forced position liquidation because of stop loss orders being triggered.  For traders, who generally capitalize on multi-day moves rather than moves within a single day, this type of action can cause significant losses should one be caught on the wrong side of the market action.  High frequency trading machines may capture gains, but are not providing liquidity or improving market efficiency, especially during periods of intense market moves.  Instead, evidence seems to be growing that the machine-based traders are making the market less stable and more prone to large price swings.

World view deteriorates

Global markets plunged as well, with Italy down over 9%, Poland down nearly 9%, Germany down over 7% and other European markets leading weakness as stock prices bleed, especially within the financial sector.  The lackadaisical response out of the EU, ECB and IMF leadership seems to be draining confidence and sparking fear in the markets.

US banks have hundreds of billions of dollars worth of exposure to European sovereign debt, banks and other related instruments.  Many have written credit default swaps, a form of insurance that has no capital reserve (see AIG implosion circa 2008) against European debt, exposing them to significant risks should the EU situation worsen.

Broken bonds from backwards economies

Many Western countries now face the prospect of sovereign debt problems, as their economies continue to slow, while investors fear that they will not be able to pay back the debt.  The United States is no exception, as its official debt reaches 100% of GDP, and by some estimates, their total outstanding unfunded liabilities have reached $75 trillion.

Japan has a 200% debt-to-GDP ratio, which is only made possible by the fact that most of their debt is held by Japanese banks and pensioners, but the situation there is deteriorating with growing political and economic instability.  Even China is no exception, as their economy is slowing down and the yield curve on Chinese debt has inverted for the first time — causing serious concern for those that felt China would lead the world out of recession.

The coming crisis

What happens next is not clear, but what is evident is that the world is changing.  Slowing economic growth, the bursting of the largest credit bubble in history, significant deterioration in debt-driven consumption and resource depletion all leads to a potential crisis.  All of the new debt that has been created to attempt to stem the last debt crisis has only exacerbated the underlying structural economic problems we are facing.  Papering over large amounts of fraud within the financial system and ignoring the peril of main street has divided the Western world.  Growing civil unrest and lack of available employment, especially for the young, has created the potential for large scale disruptions (think of the “Occupy” movement, but on a global scale with a significant percentage of the population participating).

I feel that unless we start seeing accountability within the financial sector and governments of the world, prosecution of the enormous fraud, transparency within the political and electoral process and erosion of corporate personhood in so far as money is considered free speech, as well as more regulation of over the counter derivatives, we will look back at the 2008 crisis and think of it as a relatively calm and orderly time within the financial markets compared to what could happen next.

25Sep

Silver’s scary sell-off

Alex Commodities, Economy, Forex, gold and silver, Metals, Technical Analysis 0 comment

Silver and silver-related assets were smashed across the board on Friday as the World Bank and IMF met in Washington, DC to discuss the worsening global crisis.  Other commodities saw sharp declines as well.  More silver was traded that day in any given hour than silver is available on the market for an entire year.  It was an electronic sell-off.  Physical prices now command a 10-20% premium to spot paper prices, the highest in years.  Gold to silver ratio is now over 1:50, the highest in a very long time.

 Predictably news comes out after the trading day (but we must assume the large insiders knew the whole time) that COMEX was raising margins by 15.6% on silver. 

http://www.gold-prices.biz/comex-raises-gold-margins-by-215-silver-margins-by-156/

The problem is the COMEX does not have the silver to deliver, so forced liquidation is the strongest tool they have to bring prices down and take parties who would seek delivery out of the equation.

Silver is still up 46.31% on the year and has strong support in the $30.00 area.  I think we need to see what the price action is when buyers step in and shorts cover.  It could very well move up as fast as it did down (and higher) if we see ECB rate cuts, a Greek bail out, good earnings in the US, emergency Fed easing or other central bank policy movements as well as any geopolitical or event risk scenarios playing out.

Given that even though silver fell to $30.00, but physical silver commands a price of $33-35.00, there is evidence of a growing paper vs. physical price discovery bifurcation. 

http://www.apmex.com/Category/160/Silver_Eagles___Uncirculated_2011__Prior.aspx

As far as my strategy goes, I don’t see any change in the situation for the dollar long term.  The recent strength has been more of a liquidation panic in Europe and foreigners buying dollars because it’s the least bad currency for the moment.  There’s even some rumor of weaker central banks liquidating gold and silver holdings to raise liquidity.

I saw the same pattern of behavior in 2008 and 2009, yet gold and silver are much, much higher now despite the occasional (and sometimes violent) correction.

Over the last 11 years silver and gold have outperformed all sectors of the S&P 500 by many multiples.  There is no paper asset class quite as trusted during times of crisis, either. 

http://finance.yahoo.com/q/ta?t=my&s=SLV&l=on&z=l&q=l&c=SPY (three year chart)

Now, given the potential for further easing by the Fed, ECB, BOJ, BOE, SNB and others, the need to monetize debt in the US to keep the government open (i.e. the necessity for QE3) — without debt monetization the government will go in to a crisis mode where their ability to spend will be limited as interest rates rise because treasuries are sold more than bought.  But we’re not the only country that has to monetize debt.  Keep in mind the US government has over $75 trillion in unfunded liabilities and there’s no ‘economic growth’ scenario that allows these debts to be funded from revenues.

QE3 from the Fed at this point seems like a foregone conclusion once we see a sovereign debt or large bank collapse.  The ECB is also monetizing debt in the Euro zone for a few of the larger PIIGS, the BOE has QE’d in England and there’s a good chance the BOJ and SNB will continue to print money to artificially devalue their currency.

http://www.reuters.com/article/2011/09/24/us-imf-ecb-stark-idUSTRE78N1Y220110924

These actions will create a short to intermediate term burst in global money supply — and hot money seeking a high return.  These types of inflationary pressures lead to booms for precious metals.  

http://www.businessweek.com/ap/financialnews/D9PU96280.htm

Greece’s default is all but inevitable, and that is going to rock the world and create the need for much, much more liquidity.  This situation will spread throughout Europe and spread here and to Asia.  Lower rates and more stimulus will follow.

http://www.zerohedge.com/news/lehman-weekend-redux

Many shops sold out of their silver bars and coins on Friday because the appetite for physical silver was so strong at $30.00 (even though customers gladly paid the $5.00+ premium making purchases $35.00+ per ounce).  In fact I still saw online stores selling silver for $45.00 to $50.00 per ounce.

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/9/23_Sprott_Money_Temporarily_Runs_Out_of_Physical_Silver.html

I believe that the bifurcation in physical and paper prices is important to note because it indicates that there are two markets.  A real market and a phony market.  The phony market is being manipulated downward to an artificially depressed price.

This happened in 2008, too.  But from that low price of $8.00 silver quickly rose to $48.00 in the course of three years, a 600% increase or averaged to 200% per year.

http://www.kitco.com/charts/popup/ag3650nyb.html

Gerald Celente, one of the best trend forecasters of our era is now buying physical silver.  He made the announcement on Friday, so I believe that will mean something to the many that follow his advice and watch his investments closely.

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/9/24_Gerald_Celente.html

One year silver chart

Tonight silver is testing the 350 day moving average.  Some continuation selling was to be expected after Friday’s drop, but we’re looking for some consolidation or even a short term reversal due to the very, very oversold condition, combined with the support of the 350 day moving average at 29.57 as well as the appetite that should be present in Asia during this season.

We’re also dealing with price move that is over a four standard deviation event — i.e. something that is extraordinarily rare and it’s punctured the bottom bollinger band, leaving a reversion to the moving average around $37.00-40.00 quite possible if technical buyers come in.

24 hour silver chart Right now silver is trading at $29.83, having found some support at the $29.57 area.

Volume is light as to be expected, but once Sydney and Hong Kong open we’ll get a better idea of what the Asian appetites for metals are after last week’s discount.

Personally, I am tempted to buy silver and silver-related assets given these discounts.  Even if prices are weak short term, I know they will be much, much higher in the intermediate and longer term.

21Sep

Twist, but don’t shout

Alex Commodities, Economy, Finance, Stocks, Technical Analysis 0 comment

(Updated at 4:25 p.m.) The Federal Reserve announced that it will begin selling shorter term US Treasury securities and use the funds raised to buy in to the 6 to 30 year space.  They also indicated more easing in the mortgage-backed security market.  Stock and commodity markets had a knee jerk reaction lower, selling off on the statement’s release.  The total size of the program is expected to be about $400 billion — but there is no balance sheet expansion, just swapping of securities.   Notably the Fed did not reduce interest rates on bank reserves, thus there is no expectation that banks will lend more when they are poised to make even less because of the yield curve compression.

I believe that this is the beginning of more aggressive approach that the Federal Reserve will implement to lower borrowing rates for consumers on both fixed-rate mortgages and revolving lines of credit.  Whether this action has any material impact on the ailing economy remains to be seen, but I am highly skeptical as I don’t believe the Federal Reserve is capable of doing much more than delaying the deleveraging that must happen in all sectors of the economy.

Fed causes sell-off of equities with twist

Traders are apparently not enthused by Fed's maturity "twist."

Because of the renewed pressure on equities and the lackluster reaction to the policy release, I now expect the head and shoulders pattern to play out on major US indices.  These stock market indices have decisively broken down below the 10 day moving average, indicating a loss of upward momentum.

A sell-off down to the 10,000 area on the Dow could occur within the next week or two, and if that area does not provide technical support to markets, additional downside pressure could bring markets to the 9,750 to 9,500 area in relatively short order.  If frenzied selling occurs, perhaps as a result of news-driven events in Europe or more bombshells being revealed in the American banking sector we could see the 9,000 area give way to much lower stock prices.

Curiously silver is outperforming gold today, with gold weaker and silver spending much of the trading day in the green.  Even more interesting, however, was the difference in action in the paper and physical markets.  SLV and silver futures took a hit after the announcement and did not recover, but PSLV (the Sprott Asset Management physically-backed silver fund) saw selling and then filled the gap almost immediately, albeit temporarily.  Does this bifurcation in trading indicate that investors are more confident in the real thing or is it only a blip that will be arbitraged by the quants?  At this point it looks like an aberration as the gains have been given back, and then some.

Overall I think this monetary policy shift should be bullish in the long term for hard assets, especially gold and silver, as the maturity “twist” diminishes the interest rates on long-dated fixed-income securities and provides less “safe havens” for investors to seek returns in the paper markets.  In the short to intermediate term a longer period of consolidation and possibly a correction across the commodity spectrum is growing more likely.

Full Fed statement here: http://www.federalreserve.gov/newsevents/press/monetary/20110921a.htm

06Sep

An exercise in reckless monetary policy

Alex Commodities, Economy, Forex, Metals 0 comment

The Swiss National Bank intervened in the foreign exchange markets today, effectively devaluing the Franc by over 8% in a single day. Through a combination of an aggressive monetary policy statement and direct foreign exchange purchases of other currencies (namely the dollar and the euro) the central bank virtually collapsed a long term uptrend in the Franc.

That being said, it probably would have been sufficient for them to instead declare that they were going to pursue a more accommodating policy stance with the potential for future interest rate reductions (given the trend on the Swiss Franc charts, it would seem that it is vulnerable to any downward pressure). But, the Swiss economy is not experiencing the kind of economic slack or debt burden that justifies any of this type of inflationary policy. In fact, the Swiss economy isn’t even export-driven, so this hurts the consumers and effectively wipes away the value savers were building up in the last month. That’s not to say there was no speculation in the Franc, there was, and it was bubbling over, but this type of monetary policy is dangerous and foolish. It’s akin to trying to use a machete to perform a precision surgery.

Today’s announcement from SNB was more aimed at Swiss equities, which “rallied” over 4%. And why wouldn’t they? After all they’re being recalibrated for pricing in a weaker currency. It didn’t seem to stimulate risk appetites in the region, though, as Swiss equities were effectively alone in a sea red being painted across tickers all over Europe.

Gold and silver saw a corrective sell-off. I believe a good portion of that sell-off was margin calls happening from the move in the Franc. A lot of speculative and leveraged forex positions were absolutely smashed with the move that happened today. Over 8% downside has the capability to pancake someone employing over 12X leverage to being insolvent instantly. Margin clerks likely saw the glimmering profits in the gold and silver positions and forced holders to sell to cover the liquidity vacuum in their portfolios.

Because of that, and the strong technical support I saw in both precious metals markets today, I believe this selling presented more of a buying opportunity than a change in trend. After all, the Swiss printing an enormous amount of Francs to devalue their currency is exactly the type of central bank policy that adds a catalyst to the upward momentum in precious metals prices.

04Aug

Risk off panic selling, Euro collapse and more

Alex Commodities, Economy, Metals, Stocks 0 comment

The world markets were roiled today by panic selling. The sell off was catalyzed by negative news on Italy’s solvency, accelerated further by margin calls on major institutions, forcing a major deleveraging across the board. Many are fearing a reemergence of recessionary declines across the globe.

Europe’s outlook has significantly weakened as of late after its been revealed that the fiscal problems of the sagging debtor states are growing more severe at a rapid rate. Headlines today included major exchanges shuttering temporarily, bond issuances being suspended and civil unrest growing. The Euro lost about 1.35% of its value in a single day, a significant sell-off — and one that is likely to continue.

The downside risks for speculative paper assets are intensifying. Growth stocks lost 5-8% or more of their value in a matter of minutes. Some posted double digit losses. The selling in the US continued in to the close without much sign of short covering, indicating that many are still bracing for a negative jobs report tomorrow.

Gold, silver and other precious metals were no exception, as margin calls forced traders and investors who were employing margin to deleverage their portfolio, selling their profitable positions to cover losses, presumably in equities.

The only green on the board was primarily in the US dollar and bonds, once again finding themselves as a safe haven asset during times of panic. One has to wonder, given the underlying uncertainty regarding the US debt, and the condition of global and local financial markets, how long such a phenomenon can last — especially given the tendency for investors to migrate in to hard assets when there’s a whisper of inflation.

The most likely scenario from this point forward is more quantitative easing, probably coordinated by the G7 countries, instead of a unilateral US effort, to prop up sagging markets. Such a liquidity infusion would likely spark a significant rally in commodities and equities, at the cost of the purchasing power of various fiat currencies. Such a powerful inflationary force could cause precious metals to stage vicious upward price discovery as more paper currency is created out of thin air.

In the short term and intermediate term we are looking at a very oversold market. By just about every measure possible we are in a very dangerous zone to be selling stocks. A violent bounce is highly likely, but how sustainable that bounce is depends entirely on what the ECB and Fed say in the coming weeks.

Technically on the S&P 500 there’s a good chance that we’ll see a retest of November, 2010′s lows around 1171 if economic data and news continue to build on the negative sentiment. The 1225 area has now become resistance. This could be the formation of a new trading range or the beginning of a significant downtrend.

Gold made new highs today, but margin calls forced liquidation and brought the price down over $40 from its highs. Silver tested the $42 level, but the same liquidation brought silver down by over 7% at the lows. There’s a good chance that the correction in precious metals could continue if the liquidity vacuum effect of souring debt markets in Europe continues. If instead central banks announce additional easing and credit expansion then we may see a significant rally.

Unfortunately today’s markets are no longer primarily powered by economic growth, but instead moreso from central bank money printing and artificially low interest rates. This is the main reason that more and more investors are turning to hard assets to hedge against, if not profit from, future inflation. If the sell-off continues, with gold, silver and other hard assets seeing discounts, I would consider it an opportunity to buy such assets as the longer term outlook is higher inflation and a resulting attraction towards precious metals.

09Jun

Precious metals outlook and thoughts

Alex Commodities, Economy, Finance, Metals 0 comment

After the violent price swings we’ve seen in silver and the correction in gold, I remain cautiously optimistic that the precious metals sector is now in a bottoming phase and that the nominal paper values disconnect between physical values indicates that real world demand is still far beyond what virtual markets indicate. Spot prices of rounds, bars and bullion are about $4-6/oz for silver above the spot paper price. This disconnect is the result of price manipulation and will likely correct in the favor of physical prices being the real gauge of value. Silver prices of $50.00 an ounce and gold prices of $1800.00 an ounce by late summer are not out of the question.

Traditionally around central bank meetings metals prices and miners take a hit. This has been a trend for several years and can provide an excellent buying opportunity. In addition there are seasonal factors. Summers are often volatile and illiquid, leading to wider, but generally less significant movements in the gold and silver markets as well. Sometimes these swings bring about arbitraging or purchasing opportunities of precious metals stocks or physical metals funds.

Whispers of Q3, persistently high unemployment, asset disinflation, Bernanke’s legacy and Obama’s electoral hopes all speak to the notion of further easing coming later this year. It could indeed be a bumpy ride, but let’s not forget that metals are priced in dollars and the dollar has been and continues to be in a long term structural and fundamental decline due to loose monetary policy, debt-driven government spending and a tendency to inflate to cover tax shortfalls, rather than raise taxes or cut spending — and that trend does not appear to have an end in sight.

We may see volatility, we may see market dislocations, but at the end of the day I feel as though owning gold and silver positions one appropriately for the two possible scenarios we see moving forward. Either there will be a extremely sharp depression or a bout of severe stagflation. Either way a loss of confidence in the currency and financial system is inevitable and forthcoming. When that day comes the oldest form of money known to man should reign supreme once more as the remonetization of gold and silver continues, perhaps at an even faster pace.

We are essentially in a war right now. The war is between the 40 year failed experiment of fiat currency backed by nothing but faith and sound money that the world has run on for 5,000 years of human history. I feel as though investing in gold and silver puts one on the right side of that war. Indeed, many battles so far have been waged successfully and the Wall Street bankers, whose stocks have been underperforming the market and indicating a significant solvency problem, are on the run, retreating because they are aware that the ponzi scheme they rely on is in its initial stages of collapse.

Remember that no investment path is straightforward, many carry the risk of loss, some even greater than the principal investment involved. Please ensure whatever investment decisions you make suit your plan for retirement, savings and are appropriate for the level of risk you are comfortable undertaking — and always, always, always do your homework. Best of luck to everyone!

Disclosure: Long precious metals funds and miners.

22Mar

Silver poised to make a move to $50 an ounce

Alex Commodities, Metals 0 comment

Silver’s uptrend has been nothing short of astounding. The precious metal has more than doubled in the last year, and yet the rally seems to continue unabated, supported by fantastic fundamentals. The industrial and investment demand for silver products continues as the global above ground supply diminishes.

In the near term, based off of technical and fundamental (demand) analysis, it looks like the metal will regain the inflation adjusted Hunt Brothers’ high of about $50+ per ounce reached in the 1970s. Some go as far as to speculate that silver could return to a 17:1 traditional silver to gold ratio over time. With gold projected to hit about $2,000 an ounce, silver, assuming this ratio comes to fruition over the next several years, could hit about $120 per ounce.

Another factor that is contributing to demand of the white metal is inflation that seems to be percolating through global markets at an ever increasing pace. West Texas intermediate light sweet crude is now solidly above $100 per barrel, grain prices have made significant gains, other industrial metals such as copper, aluminum, nickel and zinc are staging impressive rallies and the value of the US dollar when compared against other currencies continues to diminish at a rapid rate.

Many savvy investors say the best way to own silver is through mining stocks or through buying physical bullion. There are a myriad of players in the silver mining industry, so if you are interested, do your homework on the fundamentals, their management and the chart of the company in question. If instead you’re interested in buying the metal itself, make sure you find a reputable dealer with prices that aren’t too much above the bid/ask spread.

If silver triples in price over the next several years, that could mean that today’s prices are a bargain the likes of which we rarely ever see in the investment world.

(Disclosure: The author’s family currently holds some positions in precious metals ETFs and silver mining companies. The author may buy positions in precious metals ETFs and silver mining companies.)

12Nov

S&P 500 uptrend intact for now

Alex Commodities, Finance, Futures, Stocks, Technical Analysis 0 comment

The S&P 500′s uptrend remains intact in a defined channel that found support today, during the stock market sell-off, at the 20 day moving average. The chart below shows the trend channel as well as the moving averages.

S&P 500 chart

Uptrend channel intact

There are some technical issues at play here, however, that we cannot discount. First and foremost, as I mentioned in the previous post there is a double top pattern in the S&P 500 that is playing out and causing a decent amount of fear. Combine that with Chinese inflation worries that toppled the Shanghai index down over 5% last night and we find the markets climbing a wall of worries in to the weekend. Most commodities took extreme hits today, with sugar, silver, palladium, gold, cotton and various grains falling off their highs. Oddly enough the dollar was weak while all this selling in commodities and equities was taking place, which is contrary to what we’ve seen in the past months.

Seasonally this time of year tends to be rather positive for equities. The holiday season usually gives earnings and employment a boost and consumer sentiment usually picks up — except for what we witnessed in 2008 of course. Next week should shed more light on the technicals and fundamentals of these markets. As we see trading begin in Asia it will be interesting to see if the appetite for precious metals is once again renewed as it was after the silver sell off on Tuesday after the CFTC raised margin requirements by 20% (from 5% to 6%).

09Nov

Is the rally topping out or just starting?

Alex Bonds, Commodities, Forex, Futures, Stocks, Technical Analysis 0 comment

We’ve seen a significant gain since the bottom in March of 2009, up about 80% since those 666 S&P 500 lows.  Now the market is facing significant resistance, even after the massive $600 billion QE2 plan to inject more liquidity.  The resistance comes both in the US dollar beginning to find trend line support and the S&P 500 showing potential resistance at what could become a double top formation.

First let’s have a look at the long term dollar chart:

US dollar long term chart

It’s clear that the US dollar, despite a large drop in recent months, is beginning to find support at the trend line formed from previous lows. If this trend holds it could bolster the ailing US currency and provide room for not only a short term reversal, but some significant appreciation on the back of Europe’s woes and a correction in the commodity currencies. On the other side, the dollar is seeing significant headwinds towards sustainable appreciation because of the unsustainable forward looking debt load of the US government combined with the massive stimulus and easing programs.

Now let’s have a look at the S&P 500 chart:

We see the potential for a double top formation in the index around 1220. If this level can not be broken to the upside then we have some serious downside potential to contend with in the US stock market. The rally of around 15% over the last two months indicates that many are confident in putting their money in to equities, rather than bonds, and with that a lot of speculative stocks have seen impressive gains. But another side of this rally is that it has largely been supported by extremely loose monetary policy, a “Bernanke put,” is what many are calling it, meaning that there’s no reason to buy protection (or put options) on your investments because the Fed will be there to prop up the market.

This is an inflection point. It has the potential to decide the direction of where many different markets, including currencies, commodities, equities and bonds, will be trading for the next several months ahead. Should the dollar fail its trend line support and the S&P break to the upside of the resistance around 1220 we’ll see a massive rally in other currencies, commodities and equities. If instead we see the dollar hold firm and appreciate against other currencies, reinforcing the trend line support and the S&P breaks down at the aforementioned resistance level then we could see a daunting correction in other currencies, equities and commodities.

All we can do now is watch, wait and act accordingly…