This is a quick update following another day of drubbing for the precious metals. The uptrend I drew in my previous post has been broken although streetTRACKS Gold Shares (GLD) has remained above its 50 dma of $89.84. An optimist might argue that GLD is sitting at another more important trend line. Nonetheless, it's prudent to listen to the price action.If GLD closes below the 50 dma, it will be a good short given how gold trades.

One may argue that the negative COT positions presaged this decline. This is another indicator to pay attention to in the future!

Please bear with me, I don't mean to be facetious here. Now that oil is over $140/barrel and everyone has a theory about why the price is so high, I thought I'd join the party and throw in my two cents as well.

All day Friday CNBC pundits were screaming about how this is the worst June since the Great Depression and how the DOW was already in bear market territory (intraday). If you recall, I have been leaning towards seeing the March lows hold for the rest of this year. Although I based that statement on the S&P which is still above the March low of 1257, all indications are that it will join the DOW and financials in dropping to a new low. Fortunately for me, it wasn't a conjecture that I base my investment decisions on. The emphasis in my portfolio has always been on precious metals, commodities, and the global growth story. This has worked well this year, and is continuing to work in this difficult environment.

That said, I did some bottom picking this week, mostly during the last hour on Thursday. I picked up some Citi (C) during the last hour on Thursday. It slid further on Friday and at one point was below $17, before recovering to close at $17.25. I intended this to be a short term trade - I'm betting on that some of the selling was due to quarter end window dressing and it will recover some ground next week.

On Thursday, China dropped a bombshell with the news that it was raising prices on refined products, gasoline and diesel. Detailed reports are confusing, not the least due to the currency and weight units used. The best I could find is gasoline from 5980 to 6980 yuan/ton, diesel from 5520 to 6520 yuan/ton, and jet fuel from 5950 to 7420 yuan/ton. However, those appear to be the wholesale price. The new retail prices are reported to be 7540 and 7040 Yuan/ton for gasoline and diesel, respectively, and represent an increase of 0.8 and 0.92 Yuan/liter.

According to this website, 1 metric ton of gasoline is 1356 liters or 357.8 U.S. gallons (1 gallon = 3.79 liters). Therefore, at the exchange rate of $1 = 6.9 yuan, the new retail price in China (5.56 yuan/liter) is equivalent to $3.05/gallon. While it's over a dollar cheaper than the prices in the U.S., it's reportedly an 18% increase. (As of last December, the price was equivalent to $2.65/gallon, but the Yuan has strengthened since then). The price increase was about 40% for diesel since the same price increase of 1000 yuan/ton is spread over a smaller number of liters (diesel is denser at about 1190 liters/ton).

In the last post, I posed the question "Safe to dip in the gold pool again?" as the Amex Gold BUGS Index (HUI) was on the verge of breaking out of a down trend. The answer since has been an emphatic "No". Despite the awful employment number last Friday the expectation for Fed tightening has never been higher. Although I have been quite dismissive of the jawboning, a convincing case for tightening can be made on the following:

1. The primary argument against tightening has been the weak economy which has entered the political center stage in this election year. However, one may well argue that energy and food inflation brings an economic pain as pressing as any to the middle class. Therefore, there is plenty of political cover for tightening.
2. As far as the credit crisis is concerned, the alphabet soup of new credit facilities are more powerful and precise than the blunt instrument of the Fed funds rate.
3. Perhaps more importantly, the bond market has spoken, and the expectation is definitely higher rates by October.

What transpired on Thursday and Friday was simply stunning. The Dow was up 200 points then down 400, while crude gained $17 in the same time span. The S&P has now broken decisively to the downside. I can easily see the 1325 level gets tested, and 1310 would be the next resistance level. After that, it's straight to the March low. For me to continue holding my sanguine view on the market for the balance of 2008, the March low absolutely must hold.

Of course I don't structure my portfolio based on a "second half recovery." My commodity heavy portfolio only experienced a minor set back last week, and I expect it to outdistance the general market further. I have not touched my core precious metal holdings which I think are on the verge of breaking out to the upside. One thing that the exploding unemployment number did was to call the bluff on the newfound hawkish stance of the "Bearded One." Although gold was among the few red spots in a sea of green on Thursday, it jumped over $24 on Friday to end the week above $900 once again. The chart on Amex Gold Bugs Index (HUI) shows an impending break out. The MACD is very slightly negative and the stochastics have already crossed over to the upside.

Immediately Heebner is peppering Fox with questions about where all this sovereign dough is going, wondering, for instance, whether Goldman is now recommending "short-busting" strategies to its worldwide clientele. (Short-busting involves trying to drive up the prices of stocks that a lot of investors have sold short.)

Speculation aside, I think we're not quite out of the recession woods yet even though I believe the market will end flat to positive from here till year end and that the bear market won't resume in force until 2009. For one thing, I think the retail figures released yesterday morning were telegraphed by the expansion in consumer credit and reflects spending/pre-spending of the stimulus checks. The effect will temporarily mask the real and deep-seeded troubles in housing and credit markets. Plainly, in this election year, monetary and fiscal policies are geared towards "rescuing the consumer," "alleviating the pay at gas pump," or whatever catch phrase of the day may be. Sadly, I believe some rule change restricting the "speculators" in commodities will also take place. It will likely produce an excellent buying opportunity.

I've been meaning to add some financials to my portfolio ever since the subprime crisis began. I traded Goldman Sachs (GS)  for some short-term profit recently, but in general found the headlines a little too hard to handle. Okay, so that was a bit tongue in cheek. I actually have a couple names in this sector on my short shopping list again. But the point I'm trying to make is that there is a less risky way to play the financials -  through their preferred shares, or you can do even better through closed-end funds of those preferreds that are trading at a discount to NAV.

I've been meaning to write about Darling International (DAR) for a while. Since I picked it up in March, it's been one of my better performers. Here's the business summary from Yahoo Finance:

Darling International, Inc. provides rendering, recycling, and recovery solutions to the food industry worldwide. It operates in two segments, Rendering and Restaurant Services. The Rendering segment engages in the collection and processing of animal by-products, including hides, from butcher shops, grocery stores, food service industry, and meat and poultry processors. It converts these products principally into useable oils and proteins utilized by the agricultural, leather, and oleo-chemical industries. The Restaurant Services segment involves in the collection of used cooking oils from food service establishments and recycling them into similar products, such as high-energy animal feed ingredients and industrial oils. It also provides grease trap collection services and sells equipment to restaurants. Darling International sells its products through commodities brokers and company agents, as well as directly to customers. The company was founded in 1882. It was formerly known as Darling-Delaware Company, Inc. and changed its name to Darling International, Inc. in 1993. The company is headquartered in Irving, Texas.

It's been a while since I showed a chart on the Amex Gold BUGS Index (HUI). The correction from the peak of 519.68 achieved in March has been nothing short of devastating. In the chart below, the HUI is examined in the weekly time frame that smooth out the higher frequency wiggles.

The journey from 285 to 520 is labeled wave i of 3 of III, a clear upward 5-wave impulse wave. The 3-wave down correction to the 50-week MA is equally recognizable. This wave assignment implies that the most powerful iii of 3 of III will arrive shortly, if it is not already here.

Long time readers know that I'm pretty stubborn in that I hold on to my opinion unless incontrovertibly proven otherwise. Two views that I've expressed for a while are:

We made an interim bottom (basis the S&P) on March 17.

We're still in phase 3 of III of the Precious Metals [PM] bull market that should see much loftier heights.

In the S&P chart below I drew a potential inverse head and shoulder pattern. The most recent low came last Friday when, technically speaking, the market had a good reason to drop another 20 S&P points. Naturally short covering was a part of Tuesday's rally, but the materials/energy names were too strong to be dismissed. My read here is that for now the bulls are in control as money on the sidelines rushing in. I have 1475-1500 as my first upside target.

The February edition of the Harper's Magazine featured an article by Eric Janszen titled "The next bubble: Priming the markets for tomorrow's big crash." Eric Janszen, a venture capitalist, is also the proprietor of iTulip.com, a site originally devoted to chronicling the tech bubble, but has since been focusing on the one in housing. For those interested in longer term investment trends, this article is a must-read.

The gist of the article is best summed up by the chart below where Janszen plotted the (actual and predicted) trajectories of the bubbles of past, present and future, namely the tech bubble, the housing bubble and the coming bubble in alternative energy and infrastructure.

Continuing on with the notion that we've made an interim bottom in the S&P, in this post I want to take a quick look at both the Chinese (the Shanghai index) and Indian (the Bombay Sensex). Unsurprisingly, they both appear to have bottomed based on extremely over sold RSI and stochastics.

The Shanghai Stock Exchange Composite Index [SSEC] declined from a high of 6124 in October to a low of 3271 or 46.6% in a little over five months. Measured from the 2005 low just under 1000, it has given back over 50% of the gains. The low of 3271 was between the 50% retracement and a very strong support at around 3000 that went back to Feb.and Mar. 2007. Back then, a 9% one day drop in the SSEC was the shot heard around the world, but it's hardly noticeable in this chart.

The cover story of this week's Barron's was Guess who's behind commodities boom ($), with this quote on the cover:

More than half of all bullish bets on commodities have been made by speculators, both big and small. When these markets fall, they'll fall hard, perhaps by 30%.

That quote summarizes the article pretty well. The cornerstone of the author's argument was the current record net long position of speculators and the corresponding record net short position of the commercials who are considered the "smart money." Commitment of traders [COT] data is indeed a valuable tool in analyzing markets, but to ascribe the price run-up to speculative demand alone glosses over the very real bullish supply/demand fundamentals. For example, the chart below (source: FABRI world agricultural briefing book 2008) shows that the record run-up in wheat prices was accompanied by an equally significant decline in its stock-to-use ratio. Similarly bullish supply/demand picture for other agricultural commodities can be found in the same source. [These charts also predict future price declines for several major crops. Obviously, the level of confidence to be placed on future predictions vs. past data is quite different. At any rate, the point is that speculative demand cannot alone explain the price increase in many agricultural commodities.]

My post over the weekend outlined my concern with the durability of the recent bottom due to a broad sell-off in commodities and materials related stocks. So far this week, their recovery is cementing the notion that we have made an interim bottom (perhaps of several months in duration?). I'm still skeptic regarding the financials as a whole although the best of breed probably deserves some more attention.

I added to my agricultural and base metal positions Monday, and to my existing position in the PowerShares Clean Energy ETF (PBW) yesterday. I've been wanting to add some beaten-down solar energy stocks but haven't yet done the homework in this sector.

This past week was undoubtedly one of the most schizophrenic in recent memory, and given how 2008 has unfolded that's saying a lot! I have been calling for a break of the January lows before moving higher. Now that the first part of that prediction has come true, the pressing question is "How durable is this low going to be?"

Previously I thought that we would have an intermediate term low. My thinking has been wavering in view of the broad sell-off in commodities this week.

By now, a Friday swoon is all but de rigueur, nonetheless, the speed with with Bear Stearns (BSC) found itself in trouble was astounding. The Wall Street Journal had an excellent report on this. Looking at archives for this blog, I found this post I wrote on Bear right after the New Century debacle. Soon after writing I thought I was being too harsh, little did I know how much it would have fallen! I was shorting BSC then, at around 150 if my memory serves. All I can say is that I wish I kept those shorts!

A couple of days ago, I pointed out the record CBOE equity put/call ratio. Well, records are meant to be broken and this one stood for only a week. A new high of 1.16 (meaning 1.16 equity puts for call was traded) was reached on Friday.

Looking at the chart of the S&P, a case can be made that it has made a double bottom around 1270, especially given the positive price/MACD divergence. However, the benefit of doubt still belongs to the bearish side until the S&P can make a higher high above around 1390, more preferably above 1406. Until the market is definitively in an uptrend I'll maintain the view that the January low will be broken to the downside. To that end, Tuesday's Fed-induced rally is the start of wave iv of 5 by my count. In other words, I'm trying to stake out a middle ground between the bulls who have call a bottom for weeks and the bears who are calling a continuation of the bear market for years.

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That the market could rally again on another rumored Ambac (ABK) deal was well into the realm of absurdity. That said, it always frustrates the most people whenever possible. If the downward course were too well-lit and well-paved, there would be plenty of passengers with put protection, limiting the downside in the first place. On Monday, we reached an intraday low of 1307 that was lower than the closing low of 1310.5 on Jan 22, however, there was no climatic volume or other tell-tale signs of capitulation. Therefore, I am expecting more downside to come.

I found the following charts at the Financial Ninja, and they're scaring the bejesus out of me. I'm posting the first two and the rest can be found at the link above. The charts were from the St. Louis Fed and the commentary from Ben Bitrolff (also known the Financial Ninja). The first chart shows that total borrowing (by banks) is up from $16 billion in December to $46 billion in February. And if you think that is bad, look at the second where non-borrowed reserves dropped from $25 billion in December to LESS THAN ZERO! No wonder Bernanke is expecting bank failures.

The action in stocks continues to confound me. We had upside breakouts from widely observed triangle formations in both the Dow and S&P (graph below), however, both have been repelled by their 50 dma's. Wait a minute, was it just retesting the breakout? Either way, the tepid volume shows a lack of conviction in both bulls and bears.

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