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Aaron Basile
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Contrarian Investor, Commodities Speculator, Technical Trader.
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Aaron Basile
  • Buy The Rumor, Sell The News 0 comments
    Apr 6, 2011 5:29 PM | about stocks: SLV, FXE, AG, UUP

    Based on the ECB rate hike which is scheduled for tomorrow and the sentiment that has been bullish for commodities and stocks and bearish on the dollar index for months now, the recent price movements in financial markets feel similar to the weeks leading into the QE II announcement. I see an extremely crowded trade in silver on the charts, a topping euro index, a topping S&P, and a bottoming dollar index. The managed money led retail investors into the rally then sold equity investments following QE II which lead to a minor correction a classic case of “buy the rumor, sell the news”. As a result, those who believed the hype ended up buying high and selling low.

    From ZH:

    Health of European banks is weaker when compared to US banks.

    European banks are highly leveraged compared to their US counterparts (11.1x versus 4.1x) and are undercapitalized with core capital ratio of 6.5x vs. 8.5x. Also, the profitability of European banks is lower with net interest margin of 1.2% compared with 3.3%. However, non-performing loans-to-total loans for European banks are slightly better off when compared to US with NPL/loans at 4.9% vs. 5.6%. Nonetheless, considering the backdrop of high exposure to sovereign debt in Euro peripheral countries, we could see substantial write-downs for Euro banks AFS and HTM portfolio, which would more than offsets the relative strength of loan portfolio.

    Linked in with the same article was this from the WSJ:

    LONDON—There is a significant risk that U.K. inflation could soon exceed 5%, but is still likely to fall back to target over the next couple of years, according to the minutes of the Bank of England’s Monetary Policy Committee’s March meeting, published Wednesday.

    The committee voted to keep the U.K.’s benchmark interest rate at a record low of 0.5% when they met March 9 and 10 and the bank’s stock of asset purchases at £200 billion ($327.58 billion). The minutes said that inflation was likely to rise above the 4% annual rate measured in January

    and Japan:

    Japan may be approaching 250 – 300% debt to GDP, the highest of any developed nation.
    Most already know Japan’s issues, which started when they were at a 200% debt to GDP ratio. Some say it will take $350 billion to dig them out of the hole which will make them the most indebted developed country in the world with a good portion of their infrastructure damaged.

    FXE gapped above resistance on bullish sentiment.

    Still the dollar index hasn’t made new lows since Bush even after ZIRP and QE programs, yet bearish sentiment is reaching fanaticism levels.

    Pivot high is at $145, it can rally to that level on news of a rate hike, but I don’t expect it to stay for long before there are physically no buyers left.

    I’m very bullish on silver long term but someone has to put their foot down and I don’t see many others doing it so I will. From August when silver was trading at $18 it took approximately 5 months for us to top out at $31, a $13 rally. When we bottomed out in late January, silver hit a low of $26.38. Today it closed at $39.57. Another $13 rally – but this time it only took 2 months and a week or two to do so.

    Some of us can forget easily but silver does need it to be linked to our economy like MBS or tech stocks were to be in a crowded trade. Remember, it’s all relative – micro cap silver stocks do not need to increase to $1B in MC to be “in a bubble”. Silver may still be a small market relative to the long term fundamentals but there are reasons as to why the size of the market for silver is in the range it is and has been.

    Moving on, I effectively called the reversal in AG two days ago, check out the intraday movement:

    I’m pretty sure that today’s trading was on all time record volume for the stock. Did you use a stop loss like I suggested? Or perhaps writing covered call options? In any case, still one of my favorite companies, but it’s been extremely overhyped as you can see by the chart.

    I recommend using a stop loss or covered call options on your silver plays. I’m still long here, but I am cautiously watching the markets. As an alternative hedge, you can buy call options or common shares of UUP, the dollar index bullish fund, or you can short or buy puts on Currency Shares EuroTrust (NYSEARCA:FXE) if and when confirmation of a reversal takes place.

    Stocks: SLV, FXE, AG, UUP
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