BATTLE OF THE BULGES
Here are two prominent markets both argued by some to be bubbles, which is the bigger one?
On the left side we have 10 YR NOTES, and on the right side everyone's favorite market, GOLD. These are weekly charts. It is obvious to see the dramatic rise in both, I am currently long the 10 Yr, wish I were long gold. I have talked alot about Gold in this blog, and quite frankly have been wrong about this market. I have traded it profitably, but my prognostications about this market have been dead wrong. In all the years I have traded I have never seen anything like what is happening in this market. The small speculators have never in history from what I can find, been able to drive a market this far for this long. All of my commentary on this market has been based on historical tendencies. Generally, small investors can push things for awhile, but usually are wrong in the end. I could show you thousands of examples of this. However, in this case they have been absolutely "dead balls on accurate." I have said recently that there is absolutely no reason to short this market at this point and that is obviously the case just by looking at the chart.
I have also mentioned how closely the stock and gold markets are tracking now. Since there appears to be now a coordinated global effort to inflate things with lower interest rates to fight off the deflation wave that is lurking, I see no reason why this market will come down anytime soon. That is ironically the exact same argument I would make about the interest rate markets. Since almost all of the countries are pledging to keep rates low, I think the upward movement in both of these markets will continue.
I still feel generally, that the small speculators in the end will be burned in the Metals markets, but they certainly have so much profit in the trades, that they will still come out net winners. There are periods where these people hit it right on, but over a period of time they do not. You cannot bet on the underdog in every single race and always expect to win, even though there is a Secretariat out there from time to time. Here is the COT picture right now, and once again the Small Spec long position is in the area where it has caused pullbacks/declines in the past. Also note the record net commercial short position. This needs an asterisk because that represents hedging activities and who wouldn't do that after a run like this? This does not mean they are overly bearish for tomorrow's prices etc.. It just tells us that they are protecting profits and doing so aggressively.
We are not yet surprisingly enough at an overvalued level versus the US Dollar, which is a reading that has been at a high point each time a decline has happened in recent years. As a result, I think this keeps sailing along unless the stock market declines. If we were to see a sharp stock market drop which seems very unlikely, this market would probably take a hit. I do still think big picture this is an enormous historical bubble that will implode, but I have absolutely no idea when it will happen. It does not appear to be on the immediate horizon.
As to Interest rates, they are a different situation as far as why there are declining. They are doing so directly for fundamental reasons. We have a bad economic situation at hand, and on top of that governments are lowering rates, hence the interest markets rally. This is a situation where the large hands are driving the price move not the small fry's. We are seeing interest rate markets rally at the same time as stocks, this is also unusual by historical standards. The argument here by the folks calling this market a bubble is that we will have to print dollars ultimately to get out of this mess, this will cause inflation, interest rates will have to be driven up to fight that move. That could ultimately prove out to be true, but for the time being the opposite is happening.
In summary, it is my view that at the moment, neither one of these markets is actually a bubble as far as immediate price movement. There are credible arguments as to why both of them could be on a larger scale, enormous bubbles that will at some point deflate. What has to be kept in mind here is that unlike any time in my life, governments are intervening and controlling pricing of asset classes. As a result, alot of the traditional ways of measuring market swings are not currently valid. I think just weekly trend lines or something very simple like that are the best way of alerting us to any major shift in either of these trends. So far they are solidly up and not in any danger of being broken, so up is the path.
For the record, I was stopped out of my Nasdaq short for a very small profit yesterday and the same on my long VXX trade. Too bad they both had big open profits going into yesterday. However, that should show the virtue of selling the weak and buying the strong. Some of my fellow trades shorted the ES which had been much stronger and took full losses, where I actually had a slightly better than breakeven on mine in a trade where I was actually wrong. I love it when I am dead wrong and don't lose any money!