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November 23, 2020
  The Return of the Hobbit  

The Chinese equity market rose over a percent overnight but still remains well below its July and August highs. The offshore dollar/yuan jumped half a percent. The dollar also firmed vs. other emerging market currencies too, which has me watching EEM for a potential double top. Gold in yuan slumped over a percent to a new low for the correction and back below its old 2011 all-timer it broke out over earlier this year.

Elsewhere in Asia, Hong Kong rose a touch. Japan fell nearly half a percent, and JGB yields were unch at 0.02%.

European equity markets began the day higher and then finished on their lows with losses of just a freckle. German 10yr yields rose 1 bp to -0.58%.

Over in the US, the equity futures were up a touch after yet another drug company released covid vaccine results that were "OK" but not near as robust as the results we saw on the prior two "Vaccine Mondays." (not that efficacy is equal to upside for spoos or anything) The dollar was mixed vs. other colored paper but was down via the dollar index. Gold was flat, and yields were a little higher.

The S&Ps opened up a touch and immediately began to slide as the dollar index exploded off its lows of the day for no particular reason that I'm aware of?

As the dollar index soared from negative territory to positive territory, the S&Ps tumbled into the red, and both the S&Ps and the dollar index would hit their inverse extremes (a low in the S&Ps and a high in the dollar index) around mid-morning.

Fro there, the S&Ps began to slowly creep their way higher as the dollar index backed off its highs, and with a little over an hour to go, the S&Ps had managed to recover back to the unchanged mark.

Then, it hit the wires that none other than Janet Yellen (who I lovingly call "the Hobbit" for obvious reasons) would be Biden's pick for Treasury Secretary according to the WSJ.

For some unknown reason, stock punters reacted by chasing the S&Ps to a new high for the day, and the forex market knocked the dollar index a tiny bit lower as well?

I suppose because people have such fond memories of the never-ending stock meltup during her Fed chair days that they associate her return to a position of power with potentially repeating those good times? It's not as if the Treasury Secretary has the power to tax and spend or set Fed policy. That is still the jobs of Congress and the Fed (respectively), last I checked.

In any event, the dollar index would quickly recover most of the tiny loss that it experienced on the headlines, while the S&Ps would likewise give back about half of the kneejerk to the upside in the wake of the headline.

For the close, the S&Ps would still manage to go out near the better levels of the day with a gain of over half a percent. The NDX, however, would go out unch.

Volume was light once again. Breadth was over 3 to 1 positive on the NYSE and just under 2 to 1 positive on the NASDAQ. New highs swamped new lows on both exchanges (202 to 3 on the NYSE and 292 to 12 on the NASDAQ).

Stocks Were Higher:

Stocks were mostly higher in no particular pattern, other than the fact that large cap tech (AAPL, AMZN, NFLX, GOOGL) was curiously lower.

Commodities Were Mixed:

Brent crude rose over a percent to just shy of its August high. The oil stock ETFs exploded by 7 to 9 percent across the board to new highs for the move since their October lows (although still well below their June highs). Copper fell a percent, and the other base metals were lower too, with zinc notably sliding about 4 percent.

The copper stocks, however, were higher, with the COPX rallying over a percent to a new 52-week high. Steel rose over 3 percent to a new 9-month high. Palladium popped 2 percent, and platinum fell over 2 percent.

Silver fell over 2 percent to just shy of its uptrend since the September low, which I suspect it will snap very soon. The CCI equal-weighted commodity index ETF (GCC) rose half a percent to just shy of its recent 10-month high. The energy-heavy DBC commodity ETF also rose a touch to just shy of its November and September highs.

Gold Finally Slumped Below $1850:

Spot gold rallied a few bucks overnight as the dollar index weakened to its lowest level since its 52-week low back in early September. Despite that dollar weakness though, the yellow metal then weakened ahead of the US open to be down about $2 and closer to $1868.

While the metal completely ignored the usual Monday vaccine news, it did then react rather violently to a sudden surge in the dollar after the equity market opened, and the result was that the yellow metal collapsed below $1850 to as low as $1830.

As the dollar index hit its high for the day and backed off, gold similarly hit its low and bounced. That bounce would only carry the metal back to around $1840 though, and it would then weaken again into the equity close to go out closer to $1835 for a loss of 2 percent.

Gold Stocks Slumped:

The GDX gapped down slightly on the open and then collapsed below the 200 dma to a new low for the correction as the yellow metal collapsed below $1850. After hitting a low with the metal around mid-morning, the GDX proceeded to chop sideways for the remainder of the session until a closing dump appeared in the final 30 minutes to send the GDX out on the worst levels of the day with a loss of over 4 percent. Volume finally picked up but was only slightly above the 60-day average.

The GDX/GLD ratio fell over 2 percent to its lowest level since the June nadir. The silver stocks were also clubded, with the SIL losing almost 4 percent to a new low for the correction. The SIL/SLV ratio fell over a percent to its lowest level since April. The GDXJ fell well over 4 percent to a new low for the correction and just shy of its 200 dma.

Gold was obviously heavy this morning even before the dollar rallied given how "ugly" the dollar index appeared to look on the charts (and arguably has looked for some time), and as I had remarked to a friend, that's never good in my experience. And that's exactly what happened when gold went from acting poorly with the dollar weak to acting like death when the dollar merely bounced.

In the past when I've seen this action, it normally means the dollar is bottoming (at least for a while), and that's been my suspicion ever since the low in the dollar index back in September when gold was already trading like death relative to a weak dollar. Typically what happens next is that after whatever downside there might be in gold exhausts, the metal then begins to rally despite a firm dollar, which signals that it is sold out.

Sometimes that process can take a while, and the metal can spend a lot of the time grinding around and not necessarily "freefallin" as it begins to turn in spite of a firmer dollar.

Obviously all of that assumes that today's higher low in the dollar index vs. its September nadir, which comes on the heels of the dollar retesting their nadirs that were made just a few weeks ago, continues to be a higher low. But that's really the only thing that makes sense given how weak the gold complex continues to be in spite of a good deal of dollar bearishness and just some plain old ugly looking charts of the dollar vs. just about everything.

Such a dollar bounce might also have some troubling near-term implications for what has become the "sure thing" that everyone (including my 15-year old neighbor down the street) is now betting on, which is inflation returning next year.

I tend to sympathize with this bet as well. However, the bet is so one-sided in the face of what are pretty obvious growing deflationary waves (governments clamping down on economies due to covid, ending of mortgage and rent forbearance and other support programs and the lack of stimulus), that I suspect we could be in for a reversion to the mean, which is what gold has obviously been signaling for a while now after its blowoff into the August high.

None of that means a whole low for the next day or couple days though that make up the rest of the week for gold and gold stocks. Tomorrow's big event is the DEC option expiration in the futures, and given that prices have obviously tanked into the expiration, it could set the stage for some sort of rebound tomorrow from today's levels or perhaps from even lower levels overnight. I seriously doubt that will be "THE" low though given how short commercials still were last week and the continued dumping of metal from the GLD and other ETFs (not to mention my model not signaling a low yet with a Tier 1 BUY).

With that said and given that one can never really know where an important low is until after the fact, I'm hopeful that the metal will find big buyers down around $1750 to $1800 spot, whenever and if we happen to see those levels.

Where the miners will trade if those prices are seen is anyone's guess, because I learned a long time ago that when it comes to gold mining stocks, no price is "too cheap" or "too low relative to gold" when people start dumping them in earnest. Speaking of which, I still don't understand why the large caps (AEM, NEM, GOLD, etc) and royalty names (RGLD, SAND, FNV, etc) trade so poorly, and that goes double for the royalty names given that they are just cash machines and don't have all the mining risks that the mining stocks do.

As I said though, in the short run the option expiration in the metal and the near term oversold condition of the gold stocks may set up some sort of rebound in the GDX after a potential gap down in the AM, but I'd be very wary of betting on "the bottom" if that sort of action does come together tomorrow.

My model remains neutral, and it still has quite a ways to go in order to generate a T1 BUY at this point, but today's move was certainly in the right direction. A bounce tomorrow, however, will only prolong the torture I suspect, as has been the case for several months now.

The Dollar Was Firmer:

The dollar was firmer vs. other colored paper, and especially firmer vs. the euro and yen. The dollar index dipped down to a new low for the month and to just shy of its 52-week low back in September before reversing to the upside for no particular reason to end up a touch.

Bitcoin fell a hair after peaking on Saturday and falling a percent yesterday. Again, given its proximity to its all-timer, it is likely to see some sort of correction soon I suspect. GBTC rose 4 percent to a new 52-week high.

Treasury Yields Rose:

Treasury yields rose 3 bps in the long end, leaving the 10yr yield at 0.86%.

Real yields in the 5yr area were a little higher, which is bearish for gold at the margin. Yields in the Fed sensitive 2yr were unch at 0.16%. Junk debt was a little firmer, with the HYG picking up a touch. LQD, which is the investment grade corp bond ETF, rose a hair.

To Sum Things Up:

Stocks still seem to be blissfully "looking over the valley" to the economy of the future that will appear "someday" on the other side of the vaccines, and now they even have a reminder of the "good old days" in the form of the Hobbit as the next treasury secretary.

But given that all the mob's bets rely on more dollar weakness and rising inflation (albeit not too much inflation), what happens if the dollar begins to rally and the wrecking ball is unleashed? That's certainly the warning that gold continues to give. Can the Hobbit (even before she takes office) merely command the dollar to weaken but to weaken gradually so as to not upset other apple carts? I don't think so...

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