XME mining ETF: Support becomes resistance

These miners have been repelled by a previous support line from last year, after a kiss of death that I noticed last week:

Prophet.net

Jim Chanos: China = Dubai X 1000

According to Bloomberg, the big bears are circling China.

Marc Faber, publisher of the Gloom, Boom & Doom Report, says China is overdoing it. “It does not make sense for China to build more empty buildings and add to capacities in industries where you already have overcapacity,” Faber told Bloomberg Television on Feb. 11. “I think the Chinese economy will decelerate very substantially in 2010 and could even crash.”…

…The costs of wasteful investments in empty offices and shopping malls and in underutilized infrastructure will weigh on China, Chanos, president of New York-based Kynikos Associates Ltd., said in a speech at the London School of Economics. “We may find that that’s what pops the Chinese bubble sooner rather than later.”…

Risk for Commodities

Last month, banks lent a further 1.39 trillion yuan — almost one-fifth of the target amount for the whole of 2010. Also in January, foreign direct investment climbed 7.8 percent to $8.13 billion. Retail sales during last week’s Lunar New Year holiday rose 17.2 percent from the same period in 2009, according to the Ministry of Commerce.

While China’s resilience has helped support the world economy, raising demand for energy and raw materials, the bursting of a bubble would have the opposite effect. Government efforts to wean the economy off its extraordinary support may roil markets.

In January, the central government ordered banks to curb lending, which put China’s stock market into reverse. In a sign, in part, of how dependent the world has become on China, stocks and currencies slumped in places such as Australia and Brazil that supply commodities to the People’s Republic. On Feb. 12, the eve of the one-week Lunar New Year holiday, China for the second time in a month ordered banks to set aside more deposits as reserves. The Shanghai Composite Index has fallen 8 percent year-to-date, after gaining 80 percent in 2009.

Bidding Up Prices

“If the Chinese economy decelerates or crashes, what you have is a disastrous environment for industrial commodities,” said Faber, who oversees $300 million at Hong Kong-based Marc Faber Ltd.

The stimulus tap that Beijing turned on has flowed to projects such as its 2 trillion yuan high-speed-rail network. The 221 billion yuan Beijing-Shanghai line has surpassed the Three Gorges Dam as the single most expensive engineering project in Chinese history.

Some beneficiaries of the government efforts have plowed their loans into real estate and stocks. Property prices across 70 cities jumped 9.5 percent in January from a year earlier, according to government data.

…Chanos, a short-seller who was early to warn about Enron Corp., is one of a growing number of investors sounding the alarm. “Right now, the Chinese market is overheating,” George Soros said in a Jan. 28 interview.

Wait, I thought Soros was a Keynesian. Isn’t printing and spending the way to perpetual prosperity?

Another example Chanos has cited is the city of Ordos, where party officials have built an entire new downtown on the windswept grasslands of Inner Mongolia, 25 kilometers (15 miles) outside the existing municipality of 1.5 million people.

Ordos is really comedic. Check out this video:

The bubble down under

5-year view of the ASX 200:

Source: Bloomberg

Australia has a huge property bubble that has yet to burst. The average home there, at AU$502,492, is priced at eight times average household income, compared to about three times income at the height of the US bubble (though higher in places like California and Florida). This is a country with a population density of just 7.3 per square mile, compared to 83 for the US!

Aussies are still in the denial stage, which says a lot about the nature of group-think, since they can look at the rest of the world and see the exact same dynamic at play, though a couple of years ahead.

China appears to be in about the same place, with prices even more out of whack with incomes and rents, twice as overvalued as the most overvalued California houses in some cases. Australia and China also have plenty of froth in their equity markets, though those resemble the US and the rest of the world.

What would happen to Australia if housing prices, stock prices and commodity prices all collapsed at once? Come to think of it, Canada is in a very similar position, and their housing bubble, while not as wild, has still yet to deflate.

S&P update

Not a bad spot for a rally to stall:

Prophet.net

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Retracements have a tendency to move into the territory of previous rapid price changes, such as the drop from 1100 to 1080 several sessions ago.

Commodities and commodity currencies have had a great few days, and they have more than cleared their oversold conditions. The Euro even enjoyed a nice rally today, but it is moving closely with the S&P again.

Cocoa has broken out

Ok, cocoa is a pretty obscure market, but it tends to move with the rest of the commodities, which in turn behave like other risk assets including stocks and non-dollar, non-yen currencies. Cocoa futures, like copper, just broke out of the downtrend that contained their decline from the January highs:

Interactive Brokers

Day by day, the case for a top grows stronger

A market that ignores buy signals is a weak market. We continue down where we would have rallied during the past 6 months. The swiftness, uniformity and persistence of this decline hint that it is the start of a big one.

At the moment, I’m fairly neutral on stocks, since I don’t feel I have an edge either way. I would love a rally to lever up short again, but of course the market doesn’t owe us good entries. It often makes a point of leaving the bears in the dust at major turns.

Here’s the decline so far:

Source: prophet.net

RSI is not offering the bulls much hope. This is a grinding decline – each rally just goes far enough to reset things for a new low. Bearishness is nowhere near an extreme, so there is no support there either. As I have been thinking for some time, this decline shouldn’t find a rally of more than a few days until it has shaved 10% off the Dow, which would mean another 400 points down.

Commodities are coming undone also, with precious metals, base metals, energy, oil, softs and grains all weak. The dollar of course is strong, to the surprise of the vast majority of traders, as indicated by surveys taken this fall.

Looking at indexes from other world markets, I see lots of big, rounded tops forming. Things are just slowly rolling over, setting up for another crash some months from now.

This swift drop from a smooth, low vol rally reminds me of two cases from Dow history (I’m sure there are many more): February 2007 and April 1930:

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There is no question that the current climate is closer to that of 1930 than 2007.

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Probably no posts tomorrow. I’ll be riding the rails.

Platinum peaking?

Here is a 1-year view of platinum (blue) vs. gold (purple). PL made new recovery highs this week as gold and silver potentially finished up corrective rallies from their hard decline off their December highs. PL is the odd man out, and bullishness has been running very high here, mirroring the overall optimism about commodities. The parabolic rise in PL’s chart reminds me of gold’s peak last month. Also nice from a trading perspective is that there is a fairly tight stop available against the high.

Source: Interactive Brokers

Cocoa cooling off?

I follow all sorts of odd commodity futures, since the more you follow, the more set-ups you can potentially find. Cocoa got my attention a few weeks ago as it made a 30-year high on lower momentum than its previous high, and I took a short position when it stalled out at over $3400 per metric ton. It had a violent sell-off several sessions ago, and has so far failed to rebound, suggesting that animal spirits may be waning. This is a daily chart going back to August:

Source: futures.tradingcharts.com

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You can see in this monthly chart that if this new high does mark the end of the bull market, even a retracement of the last leg would take prices to the $2500 area:

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The 25-year view shows how cocoa futures are part and parcel of the larger commodities complex:

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Like other commodities, cocoa was very expensive in the mid-to-late 1970s, with inflation adjusted prices about triple or even quadruple today’s high prices (i.e., nominal prices ranged as high as $4000 in 1978-1979).

Is the commodities rally done?

Here’s the daily continuation chart of commodity index futures since July. Note the new highs on weakening momentum:

Source: futures.tradingcharts.com

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The oil and base metals markets are similar. Here’s the base metal index, from kitcometals.com:

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And oil futures, from stockcharts.com (3-year chart):

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See also:

Copper looks set to fall hard (12/21/09)

Commodities roundup

Hi all. Sorry for the long span between posts. I’m going to try to be a bit more diligent about daily postings, as I was in the earlier days of this blog, even though things aren’t as exciting as they were the second half of last year. After all, there is always market action somewhere, and government is an endless fount of stupidity.

The currency, cocoa, sugar, natural gas, and of course gold markets have been of interest lately.

Let’s start with King Dollar, sprung from the grave. This of course is a warning to all stock and commodity bulls to keep an eye on the exit. My target here is over 90, maybe even 110 (meaning the euro could fall under parity).

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Here is a 25-year chart of cocoa, which clocked an all-time high this past week at nearly $3500 per metric ton (1000 kg):

Source: Indexmundi.com (a wonderful compendium of long-term charts and all sorts of data)

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I’ve got a short position in cocoa from 3406. Friday was a big down day, with a drop of as much as $130 per ton off of Wednesday’s record in the high 3400s). This is a very thin market, in which it’s impossible to finesse positions, so I’m just shorting and holding. Cocoa tends to move with the broader commodity complex, last having topped in mid-08 with the rest of the bunch. For its own reasons it has outpaced everything this year but our next feature, sugar:

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In this 2-year daily chart from stockcharts.com, you can see a classic 4th wave triangle consolidation over the last few months:

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As prices drifted slightly lower in an ever smaller range, DSI bullishness declined to about 20%, meaning that most traders believed that the highs were in. After all, sugar hadn’t been above 20 cents per pound since the 1970s, when it had gone from under a penny to 60 cents! Here’s a chart from 1961-2006 in which you can see those monster spikes (the 1974 peak would equal about $2.50 in today’s prices):

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Now, I’d stay out of the way of this blast-off (and maybe even participate if we get a pullback with a clean stop), but when it exhausts there will be nothing but air under this market.

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On to oil… I think $70 a barrel is nuts in this economy, and that this year’s rally is just the natural reaction to the $100 decline off the July 2008 peak.

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That doesn’t mean we can’t vault higher still, but even considering that global production is likely peaking, the price just doesn’t reflect the drop in demand. Don’t tell me about China — China is still due a major set-back to liquidate its own bubble. I highly recommend the preceding link to Mish’s site. Few understand the extent of debt-driven malinvestment in the People’s Republic.

Here’s a 1-year view of West Texas Intermediate crude. Note how it violated support last week, indicating flagging momentum. Once this bounce exhausts, there could be a very nice short set-up:

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Here’s a 25-year view of natural gas:

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What’s remarkable about this fuel is that because storage capabilities are so limited, and because of the nature of its use as a heating fuel and for electricity generation (gas plants are the most expensive to run, so many are only turned on during peak demand days), it is prone to tremendous spikes and deep valleys.

What the above chart makes clear is that 5-6 dollar winter gas is on the cheap side of things for this decade, so even if demand is soft (and it is), a spike is possible. That said, I don’t think it’s likely, because we’re not quite due for one yet. Gas has only been of interest to me lately because it formed a nice slope into a bottom this summer, then ramped up in September and re-tested the bottom this month. The re-test was a nice long entry, and I rode the futures from $4.50 to a shade over $5.00 (silly of me to tighten the stop too much and miss the last $0.80).

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I’d look to get back in here on a pull-back with a neat stop (tough to get in this volatile market), since there seems to be plenty of momentum left.

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Now onto everyone’s favorite commodity lately, gold. Here’s a chart from 1974 to present from kitco:

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You all know my opinion. I think this bull market has started a major set-back, similar to the ones that started in April 2006 and March 2008, the peaks of previous parabolic runs that ended after weeks of extreme bullish sentiment. I’m going to continue to trade the short side off of rallies. I covered my short from $1215 at $1150 last week, then traded a small bounce, and have since attempted a couple of long positions only to have them taken out. In past months, we would have had a nice snap-back rally by now, but like the euro and carry-trade currencies, this market is looking very weak. Note how it has now broken its 50-day moving average:

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For now though, I do like the long side of gold and hope that we get our corrective rally soon, firstly because I’d like to play it, but more importantly because it would provide such a nice short entry. Downside momentum seems to be stalling around the $1100 level, even as the dollar has chugged ever higher.

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RSI seems to be rounding out, and the $1095 is a pretty clear stop, so the short-term odds seem to favor a long position. Who knows, maybe the big rally isn’t dead yet. We still haven’t busted cleanly through the 50-day average, though with the dollar having turned with such gusto much of the impetus for the rally is gone.