May 21, 2016, Weekly Summary: Frozen in the FED’s Headlights
Frozen in the FED’s Headlights
The FED minutes this week high-lighted the intention to force-feed the markets with a rate hike as early as June. Formally dovish regional FED Presidents Evans and Rosengren have morphed into hawks and are suggesting 2-3 rate hikes before the end of the year. The dollar, gold, bonds, and the equities all took the threat seriously; dollar up, while the rest were down to some degree. The CME FED tool now calculates a 26% probability of a hike in June and a 52% of at least one hike by July. We have been pointing out for the last several months that the market’s certainty that the FED would not raise rates this year was misguided and responsible for the mispricing of both gold and the dollar. This mispricing is starting to be rectified.
Our Price Modelling System continues to give a bearish reading for both equities and gold. The market sentiment based on the allocation of funds by bears and bulls continues to suggest a down market (chart below).
The sentiment based on investor opinion is also showing a downward bias (chart below). We do have an eye on the very low bull sentiment reading of 19.3 which is more typical of bottoms, but the fact that the bear reading is still not very high and the ratio of bear and bull allocation of funds (above) keep the probability of a down move for the market in play. We assign more meaning to where investment funds are actually being allocated than what the stated opinions of investors are.
The divergence between the Rydex Bull funds and the S&P 500 is still in effect (chart below), which maintains the probability of a lower market.
The balance of probabilities continues to point to lower equity markets.
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Gold Caught in the FED’s Headlights
We saw the dollar get a boost and gold decline, for the third week in a row, as a result of the FED minutes this week.
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For the last couple of weeks, gold had been trading with a negative correlation to the 30-year bond which usually precedes a change in the direction of the gold price (chart below). However, we had pointed out last week that if the bond turned around, then gold could maintain its downward trend. That is exactly what happened following the FED minutes.
The futures traders once again increased their positions on both sides of the market after last week’s slight reduction. The commercials are 77% short, and the large speculators are 82% long.
This situation continues to imply a breakdown in gold, and not just any type of breakdown; the crowded long side of the speculators has the potential to cause a panicked exit. Granted, the huge short position held by the commercials could cause a panic in the other direction if they decide to start covering, but with gold caught in the FED‘s headlights, the odds are against this.
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ANG Traders
Quelle: Nicholas Gomez
