Author: Ivanhoff

Precious metals are outperforming handily today, foreshadowing the market expectations for the widely anticipated New resolution of the European Credit crisis. There will be currency dilution involved and capital is slowly moving back to gold and silver as alternative assets that cannot be monetized. The U.S. will also participate in the bailout via IMF, so the U.S. dollar will also be affected.

The forced liquidation in gold is behind our back and there is a good chance it might move higher from here. Just last week, $GLD was on a precipice of breaking down, but as it has often been the case with gold lately, it rallied when everyone was turning bearish.

From my perspective:

– If the market likes the deal, precious metals should rally;

– If the market does not like the deal, capital is likely to flow into both Treasuries and precious metals;

The Fly also offers his perspective on the metals, naming them “the only long trade here” based on seasonality, among other reasons.

As always, I focus my attention on liquid names with the highest relative strength and the smallest float: $RIC

Long from 11.30 with a stop at 10.50 – discipline should always trump conviction.

Expect the unexpected. Just when it seemed that the news from the financial sector could not get any worse as it became clear that a substantial portion of banks earnings over the past 2 quarters were imaginary derivative of creative accounting practices, finnies rallied and in my mind contributed to a technical short squeeze in industries you would not believe:

Residential construction: $TOL $LEN $BZH $SPF $DHI $MDC

Industrial equipment: $GWW $SWK  $STRL

General building materials: $USG $AWI $GFF $NX

We all know that after the excessive 9-day move, a consolidation of some form is natural and even needed, either through time or price. For the rally to continues, we’ll need to see new breakouts sticking and new leadership to emerge. Currently leadership is still thin and represented by old, well-known stocks.

Sentiment continues to be very volatile and driven by short-term price moves. Sitting and waiting a few days until the picture becomes clearer is a sound approach here.

Arguments could be made for both the bullish and the bearish market scenario

Bearish:

– technically extended, which limits risk appetite;

– recently heightened volatility has created a renter’s mindset. No one is willing to commit to big holdings for a prolonged period of time due to the elevated macro uncertainty;

– breakouts are failing across the board;

– defensive groups are still leading – utilities, tobacco, discount stores;

– Market reaction to earnings has been terrible so far.

 

Bullish:

– The worst case scenario for Europe might have been already priced in, at least for now. (to be honest, it’s still unclear what would be the consequences of a credit event related to Greece aka will the bond holders get scared and require much higher yield for Italian bonds?);

– We are in the 3rd year of the presidential cycle, which historically is very strong in terms of performance;

– With Nasdaq and SPX almost positive for the year, performance anxiety could drive institutional investors’ decision making for the rest of the year;

– the expectations for this earnings season are excessively low, meaning that companies have a low hurdle to meet and surprises could be plentiful.