QE or not QE, that is the question

I've been looking for a good entry point to make another aggressive play in the PMs since the May gold correction and silver collapse. It's been about 8 weeks. Given the rising commodity prices and the bad rap QE2 got, there was an idea going around (Marc Faber, for one) that the Fed would dramatically announce an end to QE3, leading to a 2008-like collapse of the stock (and commodities) markets, giving them an excuse to print more money. After Bernanke's talk today, that's looking less likely to me now. The path of least resistance is the one you bet on, and my guess is that they're going to keep flooding the system with liquidity while trying to implement a slow, managed rise in commodity prices by whatever means at their disposal.

For one thing, the chart of the CRB Commodities Index does not appear to be poised for a 2008-type collapse. Keep in mind, for 5 years, from September 2001 until September 2006, the CRB rose at a steady rate of 17% (orange lines), at the end of which, it stood 10% higher than where it's at now (see upper red/green horizontal line). It then corrected for ~6 months before beginning a truly hyperbolic ascent that led to the 2008 collapse.

In the only 2.5 years since the bottom of that collapse, the CRB has been rising steadily at 23% (bright green lines), and its 200-day moving average (purple) is currently where it was in May 2006 (see lower red/green horizontal line). So, I find it hard to believe that TPTB would intentionally risk the chaos of a market crash at this point, including a further decline in housing, to "control" an inflation that they don't feel compelled to concede even exists, as of yet.

On the other hand, the CCI Commodity Index, which weighs oil prices much less, is about 5% over its 2008 peak. Note that, unlike the CRB, this index went up steadily for about 7 years (2001-2008) without a serious correction, before the 2008 collapse. Interestingly, using the "Raff Regression Tool," you see that the slope of the trend since the collapse (blue lines) has not changed at all from the slope before the collapse (grey lines). It's as if the entire graph was simply shifted down, to continue its ascent. I could see it moving up all the way to the top blue line again before people really get alarmed.

Also, note that the orange 233-day moving average (we use Fibonacci numbers here at Screwtape - we're sophisticated like that) appears to be a very strong basis of support for almost a decade. Well, that moving average is right around the level of the 2008 peak that proved to be resistance last November (see red/green horizontal line). If the CCI falls another 5% to that point, that to me would be a bullish signal for re-entry.

On the other hand, I wouldn't be surprised at a breakout from here. For one thing, the mining stocks have woken up. In poker terms, I think we've been dealt a Q-10 or K-9 right now. I'm going to see how things play out this week, and wait at least until options expiration Monday to go back in aggressively.

1 comment:

Louis Cypher said...

Very nice Mr. Jenkins.
The notion doing the rounds on the intertubes that the all seeing and all powerful Oz will engineer a market crash to usher in QE3 is a little silly IMO. Another whiff of a 2008 would have people cashing in whats left of their 401K's etc.
All confidence in the markets would vanish and possibly never return. 2008 put us so close to the edge it would be insane to try and replicate it. Nor do I believe 2008 was engineered. 2008 was the year TBTB lost control.