Thursday, August 23, 2012

Gold Breaking Out On Hopes Of More QE

Global markets were higher overnight on hopes that the Fed left the door open to more QE, even though I think with the S&P 500 near new highs it is unlikely that they move now.  I think they would rather wait for another rough spot in the markets, or possible if the economy gets hit by the fiscal cliff issues.

Asian markets were higher after China's HSBC PMI index rose to 47.8, even though this reading is still a 9-month low for the manufacturing sector.  In Beijing, Fed member Charles Evan suggested that QE3 would add confidence to the markets.  I'm not so sure I agree, as it would also send the signal that the Fed remains worried about the economy.  But it would reinforce the "Bernanke put" moral hazard.  On the flip side, Fed member Bullard threw some cold water on the whole idea.

Despite gains in Asian and Europe, markets in the US are lower this morning.  I think this is normal action after Tuesday's downside reversal.  So far this is just a normal pullback.

In economic news, new home sales for July hit a rate of 372,000, which is up from June's rate of 359k.

In earnings news, GES, HPQ, and BIG are all down a lot after missing earnings reports.  HAIN is a standout on the upside, up 18% after beating estimates and raising guidance.

Gold and silver prices continue to add to their recent breakouts, which many are interpreting to mean the market is anticipating more QE.  Gold prices are higher to $1676, and oil prices are up near $97.65.  Copper prices are higher as well.

The 10-year yield is falling back to its 20-day average near 1.67%.  And the VIX is rising +4.6% so far to 15.80, which is still a pretty low absolute level for the index.

Trading comment: On Monday I said that the market has had quite a string of weekly gains and I thought it was likely that markets would take a rest this week.  That call looked iffy on Tuesday as the market made new highs for the year.  But the inability to hold those levels, the downside reversal from there, and the pullback follow through action today are in-line with what I was expecting.  This action is actually healthy, as it allows the market to work off its overbought condition.  I think it is likely that underperforming investment managers and dip-buyers will come back in, but be patient in letting the market find some support.


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