Hunting Elephant Profits (GLD, DBC)

Papa always told us, it takes a long time to get to know someone – a very long time. And unless you’ve either worked with him or gone through a crisis with him, chances are decades may pass before you see his true colors.

And so it is…

Commodities are falling – copper just fell to a new multi-year low – oil, well we all know the story there.

And it seems we’ve seen enough…

Look here –

copper

The weekly chart of copper shows the metal in the midst of a near-four year slide, with lower highs and lower lows being set with increasing rapidity.

And perhaps worst of all for copper-hopers is her RSI read, circled in blue, still trending a good distance from the deeply oversold 20 level, the point at which we’d expect technicians to begin placing buy orders in a meaningful way.

We note, too, that even after falling most recently from $3.34 to $2.68 since late July – a plunge of some 20% – copper has still yet to set an oversold read on the daily RSI. And that too speaks to more losses ahead.

thatsit

Could it be we’ve come to the end of our rope?

Are commodities getting flushed because demand is drying up – plain and simple? And is that a function of a contracting world economy – not expanding, as many are telling us?

And what of stocks?

Will they eventually have to succumb to the broader forces of the economy? After all, in investment circles, copper is known as Dr. Copper, (as in ‘”PhD in economic forecasting”). And true enough, as goes copper, often, too, goes the world economy.

Indeed, it appears we’re facing something altogether negative.


unless

Unless, of course, something different is at play here.

And we believe it is.

Sinister Conspirators Keep Key Markets Afloat!

 

It’s long been our contention that what’s moved equities higher during the nearly six year bull market is nothing more than a profound rise in global liquidity occasioned by the intervention of central banks after the demise of markets in the latter half of 2008.

We held that new and unprecedentedly vast infusions of cash into the global financial system would eventually wind their way into markets and make for the biggest ever blow off top that history had ever seen. We called for the Dow to strike 20,000 (not such a fantasy at today’s market levels) and for the U.S. to become the hub of global investment cash flows.

In large part, that’s all transpired. The question that the above chart of copper raises, however (along with the similar, recent meltdown in crude oil), is which side will win?

Will the underlying economic reality upset the equity apple-cart?

Or will rising markets infuse confidence and spur spending on the part of the general public – an integral component of economic growth?

The Matter is Neither Here nor There

 

Our feeling is that something altogether unconventional is unwinding here.

We believe that whereas commodity prices (including the most widely watched of them all – gold) were bid higher AS A FUNCTION OF INVESTOR INTEREST EXCLUSIVELY, and then fell off equally as a function of investors losing that interest, so, too, have oil and copper belatedly taken the boots.

Here’s a look at gold, as represented by the biggest bullion ETF of them all, the SPDR Gold Trust (NYSE:GLD). The case of gold is instructive, as it may point to what’s to come for the rest of the commodities –

gld113
GLD was bid to $190 a share before almost everyone agreed that a continued rise was unlikely. And as the profit-taking commenced and gathered steam, all those same billions of dollars in gold holdings had to be liquidated, driving prices lower by some 39% to date.

All told, one might say this has been the most widely participated-in conspiracy that has ever occurred, with investors large and small, ma and pa, eastern and western, riding a bull wave high into the stratosphere and then selling off en masse as the tide rolled out.

Nothing more.

Except, of course, that the added participation of all those extra bodies in the surf via ETFs and other easily-accessible vehicles, made for one hell of a tsunami in both directions – higher, then, as we’re seeing now, lower.

Give us The Normandy Truth!

 

The commodities, we contend, are not pointing to lower markets and a contracting economy ahead. Rather, they’re revealing the inevitable outflow of billions of investment dollars that coursed into these same assets over the last decade and more.

End of story.

Has the outflow ended?

It’s close, we think, but not yet complete.

So the stock market is still bullish?

Still bullish. And will remain so until the demise of the world’s major currencies, an eventuality that is inevitable, but whose date certain is unknown.

One thing is certain, however – that as we get nearer to those paper money implosions, commodities that are priced in those same currencies will become radically more expensive again, as the Russians, for instance, are finding out now that the Ruble has taken an elephant stomp to the solar plexus.

elephant

Yeeouch!

 

Good thing they stopped doing that.

Anyway, we’re still believers in the upward slope of the market and encourage all our readers to continue faithfully in their long positions until further notice.

And in the meantime, let’s make some money with the following trade.

We’re sticking with the commodities and using the Power Shares Deutsche Bank Commodity Tracking Index Fund (NYSE:DBC) as the basis for our trade.

A look at the chart will reveal where our thinking lies –

dbc
A 37% dump in seven months (in red) makes us think that an interim bounce may be at hand. Indeed, a look at the stock’s RSI indication (in blue) tells us we’ve likely reached the bottom of the doo-doo. Six full trading sessions below the oversold 20 line (in blue) portend stronger prices over the near term.

Weekly RSI (not shown) has also been oversold for some 10 weeks.

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Options Trader Elite recommends you consider buying the DBC April 18 CALL for $0.60 and selling the DBC 19 CALL for $0.20, for a total debit of $0.40 per pair.

 

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Options Trader Elite recommends you consider buying the DBC April 18 CALL for $0.60 and selling the DBC 19 CALL for $0.20, for a total debit of $0.40 per pair.

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With love of the (elephant) hunt,

Hugh L. O’Haynew, Senior Analyst, Normandy Research

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