Gold: An Interesting Dynamic at Play

Includes: DGL, GLD, IAU
by: Macro Man

You gotta love financial markets, don'tcha? Thursday was supposed to be the quiet day, the day between the Fed and payrolls, the day when most of Asia and Europe were off. Instead, after the poor S&P close on Wednesday, the market decided to "grip it and rip it", with the SPX breaking through the heavily-watched 1400-1405 band of resistance.

While volume wasn't massive, it was still better than Monday's and Tuesday's, and there was some anecdotal evidence of real money managers putting cash to work with the new month. Not for them, this "sell in May and go away" nonsense! More interestingly, there was a pretty clear rotation out of erstwhile favorites like the energy sector, with the cash redeployed into the new leader, big-cap tech, and former laggards like the financials. The recent underperformance of energy versus financials is notable.

That having been said, this sort of correction is hardly unprecedented during this bear market. And while the chart of the Nasdaq looks pretty darned bullish, Macro Man remains wary. Growth in other regions of the world is starting to slow a bit, and nothing that Macro Man sees suggests that the US cycle is anywhere close to troughing. Low delta Nasdaq calls might be the play here.

Friday's payroll number is largely a random event, though for reasons expressed earlier in the week, Macro Man expects a healthy uptick in the unemployment rate. Thursday's jobless claims and ISM survey did little to dissuade him of this notion. That having been said, both the dollar and stocks were more than willing to ignore the macro figures Thursday; while this is probably unsustainable in the medium term, Macro Man wouldn't be massively surprised to see a horrible payroll number get trumped by dollar and equity fund buying.

On the dollar, we seem to have come full circle. A number of punters were bullish the buck early in the year, a call that could charitably be described as "mistimed." It seems that this bullishness has returned...though perhaps it is more a reflection of euro bearishness than dollar bullishness.

There's an interesting dynamic playing out in gold. While Macro Man has some sympathy for the Moldbugian structural bull view on gold, the near term outlook looks less than 24-carat. Indeed, price action since XAU breached $1000/oz has been more pyrite than golden; music to Cassandra's ears, no doubt. Chartists (an occasionally pejorative term of which, alas, your humble scribe has been on the receiving end) would point out that bullion appears to have broken through a head and shoulders neckline, a move that would be confirmed by a sustained break below the vital $850 area.

The pattern targets $725 or so, a move that would certainly cause the multitude of the product tourists in the commodity space to reach for the Pepto-Bismol. Given what other markets have done over the past couple of months, Macro Man wouldn't be shocked to see it happen. With vol having fallen recently, low delta puts look attractive, and Macro Man had a stab at the trade Thursday.