Gold was down 1% in overseas trading after a classic head-fake on news yesterday from the Fed. Monthly asset purchases will increase to an expected $85 billion and rates will not be raised until unemployment is reported below 6.5%, or in other words a hell of a long time from now. Gold mining stocks (GDX) surged yesterday, which to me implies massive speculation based on the announcement. Investors should all be aware that both gold (GLD) and the S&P 500 (SPY) are essentially flat since QE3 was announced just three months ago. Market action yesterday, highlighted by a massive buying surge in both stocks and precious metals followed by steady selling to close at the day's lows, is overwhelmingly bearish. Gold has since fallen below $1700/oz.
Markets may be starting to realize that easing measures pursued by the Fed have not stimulated overall economic activity effectively or sufficiently. In fact we no longer hear about "stimulus packages," only "QE." Corporate guidance from multinationals, energy companies, retailers and software companies has been.... soft.
Market watchers look to communist China as the driver of global economic growth, yet Chinese stocks currently trade near 5 year lows. America's favorite stock, Apple (AAPL), has lost a whopping $200,000,000,000 (that's 200 billion) in market cap since peaking in September, around the same time QE3 was announced. Not far behind Apple in terms of massive cult followings is gold and its highly opinionated bugs. While gold and AAPL have very different histories and in my opinion the former remains in a long term uptrend while the latter has seen its all-time peak, the two remained market darlings from 2009 for several years. Gold has never been recommended with so little objection as today, a time when a consensus is hard to come by. While QE3 bets were placed largely on GDX, down 10% since, and AAPL, down 25% since, QE6.5% bets have been placed on gold and silver (SLV). "Weak hands," traditionally characterized by low conviction or massive leverage, have yet to be shaken out of gold since late 2008. I expect gold to lose another $200/oz or more in the next month and favor shorting mining stocks to the metal itself for reasons explained in a recent Seeking Alpha article.
With consumer inflation subsiding in the last 18 months while commodities prices have broadly declined, it appears more and more as though the powers of deflation have grasped the global economic reigns. In addition to technical weakness- notably AAPL's widely discussed "death cross," demographics continue to deteriorate in the Middle East and Asia, the fiscal cliff looms in the United States and Europe "bottoming" is today's most compelling bullish argument.
Investors have every reason to spend some time on the sidelines or place bearish bets in the current environment. Puts on broad equity indexes such as SPY and QQQ offer leverage and diversification for those seeking to profit from a broad market decline accompanying a deflationary wave. For even more leverage consider calls on leveraged short ETFs such as Proshares Ultrashort Technology (QID) or Direxion Daily Bear Smallcap 3X (TZA). Due to excessive time premiums on options based on investor demand for portfolio hedges, shorter dates puts and active account management are highly advised. Less active investors should rather sell SPY or QQQ short without leverage or stay in cash.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.