Monday, August 11: Week in Review

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Includes: DIA, GLD, QQQ, SLV, SPY
by: Jonathan Cavuoto

Stock markets closed on a robust note last week, gaining between 3% (Dow Jones) and 5% (NASDAQ). However, the week's upbeat closing does not adequately convey the underlying volatility and turmoil. Most of the week's gains materialized on Tuesday and Friday.

The Dow, for example, advanced 675 points on three days and retreated 267 points on two other days to close the week up 408 points. The S&P500 --- 70 points up, 34 down, for a 36 point advance (3.6%). NASDAQ --- up 150 points, 47 points down, a net gain of 103. Changes of this magnitude were also seen the week before.

Volatility of this magnitude does not foretell the arrival of the next bull market in stocks. Rather, it confirms an abundance of uncertainty, uncertainty about the economy, the housing crisis, and the final regulatory format that will inevitably be imposed upon the country's financial system.

To repeat last week's caution --- trends like this suggest an absence of investor commitment to stocks.

The major international stock markets also rebounded last week, although Europe fared better than Asia (see Research Lab, end of report). The China and Hong Kong stock markets were the exceptions, both in negative territory. China, off another 7% last week, Olympics notwithstanding, is now down to levels not seen since 2006…!

And write-offs in the credit markets are far from over. Here's Alan Abelson, in the August 11th Barron's: "Citigroup and Merrill agreed to buy back $7.3 billion and $10 billion, respectively, of auction-rate securities." In addition, "Merrill agreed to sell $30.6 billion in (defaulted) paper for $6.7 billion (22 cents on the dollar)" to a private investment group, not only lending the investment group $5 billion to complete that transaction, but agreeing to take the defaulted paper back, if it sunk more in value…!

The general sell off in commodities reflects nothing more than seasonality emerging into the commodity markets. With agriculture, summer is the period between planting and harvest. In precious metals, it's the period in between the ramping up of demand in the fall.

To quote Adam Hamilton from Zeal Intelligence LLC:

If you can weather the summer doldrums without psychological damage, your prize is autumn. Autumn is the strongest time of the year for gold seasonally by far.

The same seasonality patterns are evident in both silver and platinum. So don't get spooked by the sell off in commodities. When oil drops, money goes into stocks, however, the fundamental deterioration of the US dollar paper currency continues.

Precious Metals

Gold opened the week at $901 an ounce --- below the $910 closing price of last week. It never surpassed that price, though traded as high as $908 and as low as $851 on Friday. Gold settled at $858 on Friday, down $52 for the week. Gold's next support levels on the downside: $854, $841 then $818. Gold resistance levels on the upside: $901, $911 then $927.

Platinum prices opened the week at $1,586, traded as high as $1,635 (Wednesday) and as low as $1,549 on Friday before settling at $1,563, down $99 for the week. Platinum's next support levels at $1,540 and $1,518 on the downside; on the upside, expect resistance at $1,560 then $1,610.

Silver prices opened the week at $17.26…traded as high as $17.40 on Monday, then lost ground all week, trading as low as $15.25 (Friday). The closing settlement price on Friday was $15.32, down $2.20 for the week. Silver support levels: $15.15…then $14.85 and $14.56. Expect resistance at $15.91, then $16.19.

In closing, we leave you with this thought about this week's market volatility from a website called Fire Dog Lake, which says that the best advice is to focus on the long term quality of your investment commitment, and never read the daily newspapers. Here's the link.

Tying it Together

Earlier, we mention the markets await the format of the regulatory system to be imposed upon financial institutions. Since the 1970s, monetary policy has governed the capital markets. Monetary policy consists of basically managing money supply and interest rates.

What the current financial crisis has told us is that monetary policy does not control credit policy…and credit-run-wild is precisely how this mess started. Some economists observe that when credit is by government policy (edict), it is not capitalism. From a recent article in The Economist "We trusted the rating agencies."

Bill Gross of PIMCO, in his August "Investment Outlook" probably says it best of all, in his commentary posted on the pimco.com website. Before you sell any precious metals, read these 3 paragraphs first:

Accustomed to the inevitable credit expansion spawned in the bowels of WWII finance, investors wonder why levered government agencies, banks and hedge funds must sell assets, raise capital or in the extreme, meet the market's grim reaper in bankruptcy court. Aside from cyclical contractions and a brief bout of deflationary monetary policy in the Volkerian 80s, credit has always been available and at a relatively cheap price.

Credit and debt finance is, in fact, the mother's milk of capitalism: without it, entrepreneurs may transact, but economic progress would be most difficult with seashells or gold bars for mediums of exchange. And so governments and modern day central banks do their best to provide just enough milk in the form of credit to their economies so that business and employment thrive, while the rancid taste of inflation is disguised.

Yet credit creation modeled after mother's milk is not always a predictable event. Almost always the milkmaid is blessed with an ever increasing pail of the white elixir. Occasionally, however, because of irritable bovine bowel syndrome or just bad grass, Old Bessie doesn't produce. So it is in today's financial markets. Debtors in need of more milk are squeezing and not much is coming out. This deflating supply of credit is in effect the financial market's version of Mad Cow disease. It can be deadly.

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