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Macro Market Monitor July 2010 By Matt Blackman Mid-Year Market Roundup Enter 800-Pound Market Gorilla Number 1 Separating Seasonality from Cycles …And Gorilla Number 2 Tortoise Transport Tale Gorillas on Holiday? Pattern Telltales Free Report – See the market thru the eyes of trader Dan Zanger Market Gorilla Number 3? Final Thoughts – Why gold should not be the currency of last resort Let's Get Real – S&P500 in Gold Get free daily market commentaries here Suggested Reading – Useful Resources
Quote of the Month: “The U.S. turned 234 years old…, and yet over half of the nation’s money supply was created since Helicopter Ben took over the flight controls four years ago. No wonder gold is in a full fledged bull market. The annual output of gold has declined 12% in the past decade while the marginal cost has more than doubled, to $500, according to David Hale. Moreover, David points out in his recent report that since 1900, more than 80% of the world’s proven reserves have ready been mined. The marginal cost of pressing on Dr. Bernanke’s printing machine is basically zero, and, the prospects of a re-expansion of QE by the Fed as double-dip risks rise with each and every passing data-point are rather high. Gold has corrected to the 50-day moving average in recent weeks, which in the past has been a terrific entry point — for the past six months, each low has been higher and each high has been higher too. Nice upward channel that is to be respected and to be bought.” – David Rosenberg - First paragraph July 5, 2010 ‘Breakfast with Dave’ letter. Now that the first half of 2010 is over, we thought a macro market view was in order. Dave Rosenberg provided the best overview we’ve seen recently making a strong case for gold in the opening paragraph of Breakfast with Dave the day following July 4 celebrations. Yes, it will encounter corrections but it is difficult to imagine, given the current fiscal challenges together with the tools available to bureaucrats like Ben Bernanke to pump out fiat paper money (and credit) at next to zero cost, that any drop in the price of the yellow metal will be anything other than fleeting. So how are gold and other important commodities performing relative to stock markets around the world? What factors are driving markets and of greater interest to traders and active investors, what trends can we expect from here? Enter 800-Pound Market Gorilla Number 1 In the next two charts, chart 1 showing international stock indexes and chart 2 showing some key commodity prices, we compare performances since April 2008. The CRB Index, which measures the composite price of a basket of 17 commodities (lime green), has been added to both charts. The three vertical lines from left to right show 1) the bottom of the Chinese Shanghai Shenzen Composite Index (SSE) October 31, 2008 (left red-dashed line), 2) the bottom of the S&P500 Index March 6, 2009 (blue-dashed line) and 3) the most recent top of the Shanghai Composite July 31, 2009 (right red-dashed line). Note from chart 2 that the industrial commodities like silver, copper and crude oil bottomed around or just after the SSE. So did gold. What stands out is that after the peak in the Shanghai Composite, commodities continued to rally until the peak in copper in the second week in April 2010. Oil peaked two weeks later. However, both silver and gold continued to move higher. 
Charts 1 and 2 – Weekly charts showing international stock indexes (upper chart) and some key commodities (lower chart). The three vertical lines show the bottom of the Shanghai Composite October 31, 2008, the bottom in the S&P500 Index March 6, 2009 and the latest peak in the Shanghai Composite more than a year ago July 31, 2009. Chart courtesy of www.genesisft.com The $64 million question is how much is Chinese demand driving both commodity prices and stocks around the globe? Separating Seasonality from Cycles
But before we can answer that question, it is first important to examine ‘normal’ seasonal periods of strength and weakness. As the next graph shows, gold tends to do best between June 24 and October 3 according to Don Vialoux CMT of EquityClock.com. Much of this seasonality is due to Christmas season jewelry demand. But as we see, nearly every sector experiences seasonal price fluctuations. 
Chart 3 – Seasonal chart showing periods of seasonal strength for stocks and commodities based on the work of Don Vialoux CMT courtesy of www.EquityClock.com This next chart shows gold (and silver) seasonality in more detail. The strongest rally occurs from early July through the end of September but there are other times when gold rallies as well. Over the last 20 years gold has averaged a gain of nearly 10% per year. Looking back at chart 2 we see that in the last year gold (orange) peaked at the end of November 2009, dropped to an interim low in the first week of February followed by another rally to a new high in mid-June. Then in early July when gold normally takes off, it was still drifting lower. This is anything but normal seasonal behavior but not surprising under the circumstances. 
Chart 4 – Twenty-year composite chart showing seasonal performance of gold and silver throughout the year. Chart courtesy www.EquityClock.com Copper is behaving oddly as well. Copper recently peaked April 9 compared to the normal seasonality showing weakness at that time. And since instead of rallying in May, copper dropped. 
Chart 5 – Seasonal chart of copper showing a low in January and peak at the end of July. Chart courtesy of www.equityclock.com …And Gorilla Number 2 As David Rosenberg alluded in the opening quote, the economic situation in the last 30 months has been anything but normal. The U.S. government (and the governments of nearly every other major industrialized nation around the globe) worked tirelessly to calm the credit-crisis with the unpleasant but very real side-effect of devaluing paper currency relative to gold. And as Chart 2 shows, gold hit another new high above $1200/oz in mid-June. Chart 6, the monthly chart of Adjusted Monetary Base (updated to include June data), shows that the Fed more than doubled money in circulation to combat the effects of the credit crisis by pushing it to a peak of $2.141 trillion in February 2010 up from $871 billion in August 2008. This is an increase of nearly 150%! It is a powerful force that worked against the shorts as the market began to rally with a vengeance in March 2009. In effect, this wall of money was a freight train that hit the shorts head-on. However, it looks like the Fed has been cutting the printing presses back. By June the total AMB had dropped marginally to $2.021 trillion. It is interesting to note that stocks and a number of economic indicators peaked just two months later in April 2010. Now traders and investors must determine how changes in money supply will impact stock and commodity prices. It is clear from chart 6 and 7 below, that money is being taken out of the economy and this reality is beginning to be reflected in lower prices. 
Chart 6 – Monthly chart of the Adjusted Monetary Base (money in circulation) that peaked in February 2010 after soaring 146% since August 2008. Data from the St Louis Federal Reserve. As chart 7 shows, rates of growth for the three measures of money supply have all been falling. Granted the Fed could kick the printing presses back into high gear, which is a strong likelihood if the economy weakens significantly, especially given the current ‘Sugar Daddy’ herd mentality on Capitol Hill. But according to the latest data, the Fed/government is cutting back the cash-creation machine, a component of the current quantitative easing program and this is being felt in equities and commodities markets.  Chart 7 – Three different money supply measures showing peaks the rate of increase in 2008 and 2009 and a decline in the growth rates since then. Chart courtesy of ShadowStats.com Tortoise Transport Tale But the market downdraft is not limited to government activity. China, a growing manufacturing powerhouse with a voracious appetite has been increasingly driving commodity demand, especially industrial metals. Its stock market, the Shanghai Composite, has dropped nearly 30% in the last year with few signs that a reversal is imminent. A slowing Chinese economy will continue to impact stock markets and commodity prices around the globe. Any cutbacks in quantitative easing by government will only compound this problem. What other indicators can we check to see what impact the Chinese slowdown in having? 
Chart 8 – Daily chart of the Baltic Dry Index showing the price for shipping dry goods by sea from late 2005 to mid-July 2010. Data courtesy of Capital Link Shipping. A useful measure of transport demand is the Baltic Dry Index that tracks shipping rates for dry-goods transported by sea and, since it is not traded on an exchange, is less subject to speculation and manipulation. It is a good measure of global demand for both raw material commodities and finished manufactured goods, making it an excellent economic bellwether. Although the BDI is well up from its lows in December 2008, it has struggled since first peaking in mid 2009. As the yellow rectangles in chart 8 show, the first six months of the year have typically been a time of increasing transport demand. Not so in 2010. As the black horizontal dashed line in chart 8 shows, dry-goods transport demand has been more or less stagnant since late May 2009 fluctuating in a rather loose trading range. Not a ringing endorsement of a sustained global recovery or government efforts to reflate the bubble. Two other indicators confirm the weakness. According to the latest data for June, LA Port traffic showed in increase in imports but a rather troubling drop in exports. It means a deepening U.S. trade deficit. Railcar traffic was also weaker than expected in June. Two Gorillas on Holiday? What happens when the two biggest forces that have been driving markets and economies in the last 18 months appear to be waning? Only time will tell if the trends in China and money creation are just short-term or more sustained. But as long as both are on holiday, stocks and commodity prices will continue to struggle. Pattern Telltales In our last three newsletters, we have examined the methods and approach of world-record stock trader Dan Zanger. Last month we saw how he combined technicals and fundamentals to find winning stocks. As we learned, Zanger looks at chart patterns to tell him what is going on. He doesn’t rely on fundamentals to get him in or out of positions because even forecasted earnings lag price. This month we begin to look at some of the chart patterns that helped him parlay $10,775 into $42 million in just under two years starting with the Head & Shoulders pattern, which is interesting given that the bearish top pattern has been popping up in a number of stocks and indexes lately. In his first newsletter of July, Zanger discussed the head & shoulders top pattern in the S&P500 Index. Here is the updated chart and comments from The Zanger Report on July 18. Chart 9 – Daily chart of the S&P500 Index from the July 18, 2010 The Zanger Report. Now let’s take a look at the same pattern from a slightly different perspective that includes perspectives on volume. 
Chart 10 – Daily chart of the S&P500 ($SP-500) showing the H&S top pattern with volume. Will it be confirmed or invalidated? Looking like the former as a complex double shoulder pattern at this point. Here is a link to the real-time chart http://fsc.bz/5Pk In the next four newsletters this month, Zanger also tracked the pattern on the Nasdaq Composite as well as some of his market-leading stocks such as Walter Energy Inc (WLT). In his July 7, 2010 he showed the COMPQ getting set to break back above its head & shoulders neckline, and warned that bear market rallies such as this could be powerful but were usually short. He was right as we see from this next chart showing the rally running out of steam leading up to July 16. 
Chart 11 – Daily chart of the Nasdaq Composite Index (COMPQ) from the July 18 The Zanger Report showing the index getting set to break above its head & shoulder neckline. Chart courtesy of The Zanger Report. Next we see the Nasdaq H&S from a slightly different perspective that includes volume with prices melting back toward the neckline. Note the Volume at Price indicator on the right-hand side of the chart showing the prices at which the highest volumes have occurred. They represent areas where support/resistance is greatest. 
Chart 12 – The Nasdaq Composite daily ($COMPQX) showing the head & shoulders pattern being temporarily invalidated (green arrow). But it could also be a more complex H&S double shoulder pattern. Was the move a fake-up or a sign of underlying strength? An invalidated H&S can indicate a reversal setting up. Chart courtesy of FreeStockCharts.com RT chart available at http://fsc.bz/5Pj The big down day on Friday (July 16) with the SPX losing 2.9% and the Nasdaq falling more than 3% was bearish to say the least, especially considering that both occurred on higher volume. Stocks could still rally from here. But will it be just another fleeting bear market rally or the beginning of a longer upside move? With earnings season now on, the reaction by investors to upcoming reports will tell much about the underlying health of this market. Head & Shoulders Report – The market thru the eyes of an expert Dan Zanger has graciously agreed to provide his new Head & Shoulders Educational module to subscribers to this newsletter free. Find out what he is seeing with some of the major indexes. He is still working on it so you will be getting it as soon as it is finished. To get The Dan Zanger’s Head & Shoulders Report hot off the press free, send an email to
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Market Gorilla Number 3? Other than central bank printing presses and China, what is the third biggest threats facing markets today? Be sure to read this latest report on the problem in the link at the end of suggested reading, What Happens If Things Go Really Badly? $15 Trillion of Sovereign Debt in Default. Final Thoughts Why gold should not be the currency of last resort We couldn’t end this month’s newsletter without a final word on gold from Hinde Capital's Ben Davies from a recent paper entitled, Gold: The Currency of First Resort (see link at the end of Suggested Reading). Here is a paragraph from that paper we thought was worth sharing, especially if you have been reading (and hopefully questioning) the drivel from the media that the current price of the precious metal and future price appreciation is unjustified.
“Governments have by and large managed to nullify the impact of gold’s fiduciary value in the mindset of society (mostly the ‘developed’ world). But now that individuals begin to obsess about the validity of the current capitalist structure, the weight of trillions upon trillions of printed money will eventually overwhelm a small and ultimately finite supply of gold (and silver). Government will not want to relinquish control of money, because under a gold-backed currency it cannot be increased, with which to 'confiscate' goods and assets. However the free market is once again dictating gold is money. This will ultimately overwhelm any governmental suppression. Since 1971 gold has had a 9% annualised return and throughout that time government has had the will and gold with which to hold back its ascent to fair value. Now western central banks are running low of gold whilst others wish to increase their holdings against the potential devaluation of their dollar currency reserves. Remember there are many governments in the world today who will ultimately pursue their own interests. It’s the nature of the beast – man is his own worst enemy. If they do not buy gold the man in the street will begin to. Gold is a universal currency, it is not an investment it is money. It is undervalued, under-owned and mis(understood). It is not only advisable to own gold, it is a must.” It is sage advice that warrants serious consideration for two reasons. First, a study of the history of fiat paper money dating back to 1100 AD reveals a singularly unpleasant economic finale experienced in all societies that have employed it. Second, there are growing expectations, the latest of which coming from James Grant, that Quantitative Easing 2 is a fait accompli. This will most certainly devalue the beleaguered dollar even further. (Be sure to read Jim Grant on the likelihood of QE2 in suggested reading). Let's Get Real – Stocks priced in gold Here are a couple of charts to demonstrate these points as well as those of David Rosenberg in the opening quote. Next time you listen to a stimulus-pushing Pollyanna (Wharton School's Jeremy Siegel immediately comes to mind) on financial TV, pull up the next two charts. First we see how stocks have performed relative to gold in the last decade which shows that they are down 84% in real terms. It demonstrates just how negatively government and central bank monetary policies have impacted the value of the dollar and stocks. In the last chart, we see the longer-term picture showing that stock prices are back to 1991 levels when priced in gold. 
Chart 13 - As this weekly chart of the S&P500 Index priced in gold clearly shows between 1999 and July 2010, stocks are still down more than 80% from their 1999 levels in terms of gold. Chart provided by GenesisFt.com 
Chart 14 - The same chart of the S&P500 priced in gold showing the incredible real rise in stocks between 1990 and 1999 then the give-back of nearly all those gains in real-terms. Chart provided by GenesisFt.com
Suggested Reading: Setting the Stage for the Seasonal Trade in Gold – June 15, 2010 http://www.equityclock.com/2010/06/15/setting-the-stage-for-the-seasonal-trade-in-gold-equities/ Copper Seasonal Chart http://www.equityclock.com/charts/copper-futures-hg-seasonal-chart/ Money Supply Chart http://www.shadowstats.com/alternate_data/money-supply-charts LA Port Traffic: Imports Surge, Exports Decline http://www.calculatedriskblog.com/2010/07/la-port-traffic-imports-surge-exports.html Dan Zanger’s 10 Golden Stock Trading Rules http://www.chartpattern.com/10_golden_rules.html What Happens If Things Go Really Badly? $15 Trillion of Sovereign Debt in Default http://www.calculatedriskblog.com/2010/07/part-5a-what-happens-if-things-go.html Hinde Capital's Ben Davies On The Gold Market http://www.scribd.com/doc/33184256/Hinde-Capital-June-2010 http://www.zerohedge.com/article/hinde-capitals-ben-davies-gold-market Jim Grant on the likelihood of QE2 by the Fed..
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