The gold market rallied on Friday for the third session in a row to end up 2% for the week. The major news was how the U.S. labor data points are going to affect the Fed's decision on monetary policy.
Prices Friday had advanced to as high as $1,272 an ounce after the Labor Department said nonfarm payrolls rose by 113,000 in January, well below the 190,000 consensus forecast from a MarketWatch survey of economists.
The market seems to be interpreting the Fed strategy to taper as a sign of rising interest rates. Year to date the S&P 500 is down about 4%--not horrific for one month but certainly not following last year's performance.
In a recent report published I wrote, "Even though the Fed has begun tapering off their bond buying, Sprott's John Embry does not believe that the economy is strong enough for the Fed to continue, let alone increase, the tapering policy. If they do, it will lead to higher interest rates. I think the Fed has basically lost control of monetary policy and this will become more evident as the time goes on. I foresee the economy weakening in the not so distant future and the tapering strategy being abandoned just to keep things together."
Embry believes that stocks offer a mixed picture for the future. He said, "If you have to print more and more money, one place money will go is the stock market." He argued that the purchasing power of bonds and CDs "will be rapidly eroded." Stocks however, should attract new money, although many stocks are very elevated. He warned that we face "extreme risk, in that we could have a flash crash in the stock market." He said that there are certain stocks he would like to own in such an environment, "but you have to be very selective."
The weak start to 2014 has resulted in a paper loss of $1.2 trillion for the broad stock market, says Wilshire Associates. It also left the Standard & Poor's 500 index down nearly 6% from its recent high. The S&P 500 hasn't suffered an official correction - a drop of 10% or more - since a 19.4% slide that ended Oct. 3, 2011.
But bears such as Michael Pento, president and founder of Pento Portfolio Strategies, think the market could drop as much as 20%.
Last year's big move in stocks was way overdone and artificially inflated by Fed stimulus, he says. The stock market shouldn't have gone up 30% when corporate earnings only grew 6% and economic growth, or GDP, was roughly 2%.
"Now that the Fed game is over, you will see the real economy revealed, and it is very weak," Pento warns, adding that the global nature of the economy also threatens the U.S. outlook. "The U.S. is not an island. If Japan and China are slowing down and emerging markets (are struggling), who will we export to."
In a recent report published on January 26 I said, "At the same time the stock indices completed major tops last week and are expected to drop sharply into the late February time frame.
Echoing my comments made on December 26 2013 regarding stock indices, "The rise in short and long-term rates does not bode well for the world bond and stock markets globally. It would serve well for those that are holding bonds or have substantial profits in stocks to begin taking some profits off the table or to hedge their positions as the low rates mentally inevitable will come to an end - sooner than later."
Metals trimmed gains as U.S. equities climbed in the wake of the data. Strategists questioned initial notions that the weak figures could cause the Fed to rethink its plan to continue slowing the pace of government bond purchases. This is very bullish for gold, silver and the stock markets.
In the February 3 report published on Seeking Alpha we made some very specific comments regarding the gold and silver markets. I said, The gold market came down to the bottom of the range projected by The VC Price Momentum Indicator documented on January 20, 2014. "Cover short on corrections at the 1242 to 1231 levels."
In the January 26 report I additionally made the following comments, "Since then we have seen a test of the 1181.4 low on December 31, and rallied to the high we saw last week of 1273.2. This validates the probabilities that the expected bottom has taken place. Any corrections towards the 1241 to 1215 price should be used to add to your long positions."
After making a second attempt to break above the 1273.2 resistance level, the yellow metal made a new high of 1279.8 before correcting to the lower end of the price range and subsequently triggering a Buy signal at 1241 for the February futures contract."
On February 5 the gold market rallied to a high of 1273.7 completing the first target as documented on last week's VC Price Momentum Indicator report. This was a gain of $29 per ounce or $2900 in the futures (paper) markets in 3 days. On this report I wrote, "Look to take some profits on longs, as we reach the 1270 to 1296 levels during the week." The 1280 to 1300 levels seem to indicate strong resistance. Once breached, these resistance levels could confirm and ignite the acceleration of this multi year cycle that we've been expecting to unfold since late December of 2013 into the late February 2014 time frame.
The silver market has completed a near-term pattern that confirms a Buy signal was triggered at 19.10 last week. This signal took profits this week at the 19.40 initial target and 19.63 our second target as published on the February 3 report.
This bottom should bring about a short term rally that could potentially take silver into the 22.50 or higher levels by the end of February before a correction period ensues towards the end of March.
Let's take a look at the weekly technical picture for gold, silver and the E-Mini S&P futures (paper) markets and see what trading opportunities we can identify.
The February gold futures contract closed at 1267. The market closing above the 9 MA (1242) is confirmation that the trend momentum is bullish. A close below the 9 MA would negate the weekly bullish short-term trend to neutral.
With the market closing above The VC Weekly Price Momentum Indicator of 1261, it confirms that the price momentum is bullish. A close below the VC Weekly, would negate the bullish signal to neutral.
Cover short on corrections at the 1247 to 1228 levels and go long on a weekly reversal stop. If long, use the 1228 level as a Stop Close Only and Good Till Cancelled order. Look to take some profits on longs, as we reach the 1280 to 1294 levels during the week.
The March Silver futures contract closed at 20.01. The market closing above the 9 day MA (19.87) is confirmation that the trend momentum is bullish. A close below the 9 MA would negate the weekly bullish short-term trend to neutral.
With the market closing above The VC Weekly Price Momentum Indicator of 19.80, it confirms that the price momentum is bullish. A close below the VC Weekly, it would negate the bullish signal to neutral.
Cover short on corrections at the 19.27 to 18.55 levels and go long on a weekly reversal stop. If long, use the 18.55 level as a Stop Close Only and Good Till Cancelled order. Look to take some profits on longs, as we reach the 20.54 to 21.07 levels during the week.
E MINI S&P 500
The March E Mini futures contract closed at 1.793. The market closing below the 9 day MA (1.803) is confirmation that the trend momentum is bearish. A close above the 9 MA would negate the weekly bearish short-term trend to neutral.
With the market closing below The VC Weekly Price Momentum Indicator of 1.773, it confirms that the price momentum is bearish. A close above the VC Weekly, it would negate the bearish signal to neutral.
Cover short on corrections at the 1.752 to 1.711 levels and go long on a weekly reversal stop. If long, use the 1.711 level as a Stop Close Only and Good Till Cancelled order. Look to take some profits on longs, as we reach the 1.814 to 1.835 levels during the week.
The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts
Trading derivatives, financial instruments and precious metals involves significant risk of loss and is not suitable for everyone. Past performance is not necessarily indicative of future results.