Weekly Wrap

Late on Friday, markets turned. I have noted over the years that many important turns are made in the closing few hours of the week when many traders have headed home. It’s as if the market wants to play a prank and fool most people. Monday’s opening should be interesting.

And with Abe’s Rocket the previous week, I am wondering if that is the last hurrah for QE. The ‘unintended’ consequences of it are apparent to even the shoeshine boys, from the record gap between the haves and have-nots, the distortions in asset and property markets, the race to the currency bottom, and the destruction of the will to save for productive purposes (the real basis of capitalism) with real rates now negative. Financial engineering is the name of the game today.

To keep the illusion of wealth creation alive, central banks are splitting a gut to ramp inflation up to their impossible-to-achieve 2% rate, all the while the trend is heading down and close to zero in the EZ. And the recent sharp falls in crude will only push the rate even lower. I believe that when we see negative CPI and other consumer inflation figures, as we will – meaning the dreaded deflation is here – the central bank emperor will be revealed as a toothless paper tiger and the repercussions against them will be severe. Their credibility will vanish like a Will o’ the wisp.

And when that happens, their dominant power over interest rates will be seen to be nothing more than sleight of hand. Then, people will realise again that it is the market, not diktats from politicians, that control markets. Of course, politicians try to manipulate markets to their advantage. But in the end, the market wins. Some call that a reversion to the mean. I call it a return to common sense.

The central banks’ desperation to raise inflation to 2% (why not 3%, or 5%, or even 10% – surely the higher the better?) is all you need to know that the authorities are determined to save their pals in finance and harm the public. With wages stagnant, a higher inflation would harm everyone – except the ludicrously well-paid and asset-rich of course (aka their pals). Germans know this, but others have amnesia.

GOLD

Made a new low at the $1130 area overnight on Friday, but then rallied back to my tramline and proceeded to break above it. The market had completed an impulsive five down and was primed for at least a major counter-trend rally.

Here is the chart I posted to my private clients around 11:30 am Friday:

The fifth wave sports a mini- five waves, and note the large positive momentum divergences.

We had covered our very profitable short position previously and on Friday, I recommended a long trade as it appeared the rally is capable of taking back at least $50 – $100 and possibly more. Why do I believe that?

The DSI last week reached a record low bullish reading of only 3%. For every bull, there were thirty-three bears! Just ponder than little ship with 33 on the starboard and only 3 on the port side. The list to starboard is very dangerous and is in danger of capsizing the craft.

The other clincher for me is the COT. The week ending last Tuesday saw a massive swing by the hedgies of about 25% to the bearish side (the small traders also made a similar bearish swing). Those are massive swings in sentiment in a week, which I guessed would occur before the data was released!

And late on Friday, the short squeeze I had anticipated was on and here are my two latest gold campaigns:

EURO

The dollar turned back down on Friday, completing a cracking rally. Every man and his dog believe the dollar will continue its strong rally. Huge particle are appearing in the MSM about how strong the dollar is and to do whatever it takes to adjust for this new reality. Was it only a few months ago when they were all crying the dollar was doomed?

The MSM is so predictable.

DSI reached 95% bulls, the highest since June 2010 – four and a half years ago. Doesn’t that tell you something? I am delighted to join the party when there are few in it. But when I can hardly move for the crowd, it is time for me to exit – and join the smaller party. That is why I went long EUR/USD yesterday:

We all know that the ECB has to start QE sometime, and the EZ economy is on the rack, while the US economy is firing on all cylinders. That, at least, is the conventional wisdom – and is utter hogwash. The EZ will find a way to get the next set of economic data looking better and provide a ‘reason’ for the euro to rally (it started on Friday).

In any case, I believe it is set for a multi-week rally to shake out the army of complacent bears.

I am now long from the 1.24 area. The wave 4 high is a very achievable first target.

DOW

Made all-time high at 17,600 early on Friday but closed down and broke a tramline: