We see the Japanese Yen (JPY) playing an ever increasingly important role in the American markets during this low volume August trading. As one floor trader has said, “It’s evident that the trade between the Yen and the S&P futures are directly inverse with this lack of activity.”
This chart illustrates the directly inverse relationship between the Yen’s strength and US market weakness this week. This relationship exists because of the carry trade. It will be important to keep watching this trend until the Federal Reserve speech Friday at 10:00AM, when traders will be paying much more attention to Dr. Bernanke.
We saw gold drop $14 this week, gold stocks were punished and the market showed a lot of fear and trepidation. With such volatility, you might ask, why do I think gold is good? It’s simple.
That’s right, simplicity. That makes an asset attractive. For the past two years gold has outperformed the S&P 500, Dow Jones and NASDAQ.
If this isn’t enough for you, however, you should note a few very significant facts:
- Gold trades in US dollars. That means when the dollar is weak, gold is strong. The dollar has strengthened recently because of a “lack of liquidity”. Liquidity usually refers to US dollars flowing in and out of different equities and other asset classes. When it dries up, that means there are less “dollars” (whether in hard or soft form) in the system. This creates a temporary boost in the value of the dollar and temporary weakness in gold.
- India and China are now the world’s largest consumers of gold and their appetites are likely to keep expanding. This creates more demand and pressures the supply, thusly raising prices.
- Gold is the world’s oldest asset and is only gaining in popularity and probably the world’s most liquid asset.
- Hedge funds bought gold as an appreciable asset, not fully understanding the implicit lack of hedging this creates when other funds mimic the same behavior. Gold was oversold this week because of investors having to cover their losses in other assets by selling their profitable investments.
Gold is now ready to rebound and it closed today bullishly up $9.70 in to the weekend, indicating investors are willing to stay in their positions. Gold stocks rebounded positively as did the precious metals indices. The overselling that occurred mostly to cover losses is over and the bargain buying has already begun.
The next step is for the Federal Reserve to cut interest rates in September (or sooner). Once this happens, the dollar will further weaken because of the increased availability of credit (which is essentially virtual money flooding the system). This weakening dollar and increased availability of credit encourages investors to flock back towards gold, stocks and other oversold assets.
It may just be time to buy some gold ETFs (IAU, GLD), futures or stocks (AUY). Have a Mooriffic weekend!
Another interesting chart demonstrating how the carry trade unraveling affects all asset classes, including gold. In the chart below I have JPY (vs US dollar) compared with gold (rather than the reverse in my previous entry). As you can see, JPY and gold have a direct correlation, much more than I expected.
Good luck trading!
Hedge funds and brokerages typically borrow low interest rate Japanese Yen (JPY) to buy US and European equities. This creates a flood of cheap liquidity boosting the markets. What happens when this situation dries up?
Below you will see a chart of the S&P 500 (blue candlesticks) with the US dollar vs. JPY imposed above (the red line). This illustrates that the weaker the US dollar is vs. JPY, the weaker the US stock market. It is very important to note this trend and watch it closely.
Good luck trading!
It’s important that every investor realize that we are not limited to stocks, mutual funds, ETFs and bonds. There are other asset classes, such as commodities and currencies (forex) that offer profit, too. Trading anything requires consistency and a system to be regularly successful. The same systems that analyse stocks are applicable to intraday trading of foreign exchange futures.
Remember that this is a very speculative play that requires sophisticated technical analysis skills and an established system to successfully trade.
The first system is bottom trading a downward trend (note that the EMA is moving downward). That means, if we see the Euro become “oversold” (or if it’s sold on very high volume, and dips below the lower Bollinger band) it is likely due for a technical rebound upwards. Because of the weakness at this point, I only hold the Euro until it peaks the EMA and sell the futures contracts there. This is a bullish sign, but it’s also a point of resistance.
The second system is momentum trading. I trade the upward trend, purchasing futures contracts as it moves above the moving average, which you will notice is establishing an upward trend (notice upper/lower bands). As the Euro crosses below the EMA again and the bands begin to widen indicating increased risk, I sell.
Gold trades myopically based on fear and greed, generally not taking the larger picture in to consideration (long term: weakening dollar, US economy slowing, inflation growing). As such, opportunities arise to exploit fear and greed to yield a high profit.
As you can see in the image below, gold oversold based on fear this morning that the market would collapse based on credit concerns. I bought here $675.00 because I felt gold, being down about $20 from the day before, was oversold.
As you can see, it quickly rallied to $686.00, where I sold, because I felt the rally was overdone by traders relieved by the Federal Reserve injecting $19B in liquidity to banks suffering from a lack thereof.
That’s basically how the fear/greed trade works. This is a single trade that can span minutes, hours, days, weeks, even months and years depending on your strategy and outlook.
The US Dollar slid vs. the Euro amid expectations of lower economic growth in the US, pushing gold higher. US Markets are poised to open higher as better than expected earnings from General Motors, Waste Management and Sun Microsystems beat Wall Street expectations.
UPDATE: The dollar’s strength was increased by news of slower domestic inflation. This caused a sharp turn-around against the Euro and as a result pushed gold futures lower.
Exxon Mobil tanked 8% on bad earnings and market weakness, but I don’t think they’re done moving by a long shot. Today we saw a technical bounce bank, but relative strength should gain again as investors cast off myopic fears spawned by weak earnings of last quarter and begin looking forward to this quarter’s earnings. Crude prices have neared $80 a barrel on purely a supply/demand basis, without any disruptions in supplies from political or natural events.
Watch this stock and do your homework. If you believe Exxon Mobil is oversold then I encourage you to buy purely on a technical basis. As a long term investment, Exxon Mobil is an excellent energy play as well.
Welcome to Moo Trades. We’re here to provide bullish insight to investors about stocks and options through technical analysis, trading strategies and informative opinions.
Moo Trades aims to provide weekly coverage of the markets. This week’s Moo Trades are chosen for the anticipated Q3 2007 tech rally. We know we could mention Apple (AAPL) or Google (GOOG), or some of the other popular names. That’s not our aim, though. We believe investors are saturated with the most well known names constantly and need a breath of fresh air.
We’re currently watching Seagate (STX) and Corning (GLW). We believe the market is positioned to trend higher based on good earnings, solid economic outlook and moderating treasury bond yields. The price of fuel has not yet had a tremendous impact on profits.
Seagate (STX) is the global leader in storage, providing the best quality hard drives to the greatest number of customers. They are currently positioned to grow their storage revenues from increasing demand driven by Microsoft Windows Vista and increased data storage demand for videos, music, photography, etc.
Referencing the chart below, we believe the target buy-in price for Seagate is $22.50. Seagate is strongly above its 50 day moving average (in black), the RSI (chart bottom) indicates it is not overbought and the stock between the Bollinger bands (in gray). We feel this means the stock is in a good position to be acquired.
Corning (GLW) is lighting the way for the US fiber infrastructure build-out that companies like Verizon, Comcast and ATT are participating in to bring their broadband networks in to the 21st century. Corning’s fiber is also being used in Verizon’s FiOS Fiber-to-the-Home offering, which is growing rapidly. We believe Corning is poised to continue its upward trend given the high demand for its products.
Referencing the chart below, we believe Corning’s stock may be overbought (see high RSI) at this time. There is increased inherent risk given the stock gravitating towards the top Bollinger bands. Conversely, we feel the stock may continue to ascend in price from aggressive purchasing. We at Moo Trades encourage caution when purchasing these type of growth stocks unless you are a savvy investor.