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'Commoditized-Stock Market' to Disinflate Next?

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Might the commoditized US stock market be under intensified risk?

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I noted the lifting of Reserve Requirements by the People's Bank of China last week, and spotlighted the move by the Bank of India to tighten domestic liquidity conditions. My firm has persistently focused on the intensifying effort by the Chinese in particular, to drain an overwhelming excess of liquidity in the domestic system, largely an offshoot of the sterilizing campaign as relates to FX-trade-reserves flow.

With that in mind, I note the latest, delivered by Governor Zhou Xiaochuan who spoke with reporters covering the BIS meetings in Basel Switzerland:

"We have a little too much liquidity, so that is the purpose of our using some more policy changes to adjust to that. We are not ruling out the possibility of using more measures."


China drained 40 billion Yuan from the money markets last week and is facing a mini-flood of bills that mature this week, resulting in a sizable weekly offering at tomorrow's official auction, the results of which will be key in determining the 'liquidity' impact, over the rest of the week.

With all this in mind, in the context of offering some macro-monetary explanation for the seemingly sudden downside turbulence in most ALL commodities markets (from grains to pork, and from coffee and cocoa to cotton and copper), I begin to wonder. With energy shares - one-time stalwart raw material bull market leaders - on the ropes too, could the entire U.S. equity sector, along with Emerging Markets, be at risk of the same margin-call driven liquidation by investors and speculators alike?

Might the commoditized U.S. stock market be under intensified risk of a disinflation emanating from a subtle yet significant shift in global monetary conditions on the back of an inability of the Fed to ease in support of a defamed U.S. homeowner-consumer, and a tightening/tinkering from central banks attached to key output growth engines?

For clues, I am watching the Dow Jones Utilities Average, which is threatening to extend its mini-breakdown into a full-scale downside assault, a move that would be defined by a violation of the med-term 100-Day Moving Average.



Observe the Ratio spread chart on display below that plots the Dow Utilities Average versus the Dow Industrials Average on a longer-term daily basis. Since the Dow Utilities Average led is way higher during the bull market phase of 2004-2005 we must respect the potential macro-market message implied by this week's downside breakout in the spread. Simply, the Utilities are beginning to grab the torch of downside leadership.

Note that the longer-term 200-Day EXP-MA is now trending lower.



Signs of disinflation becoming increasingly dominant within the markets is demonstrated in the chart below that plots the weekly path of the AMEX Gold Bug Index. Indeed, the HUI has violated its longer-term 52-Week MA already this week, amid a plunge into overtly negative territory by the long-term ROC.



I shine the spotlight on the MSCI Emerging Market Index, or the Exchange Traded Fund EEM, seen in the daily chart exhibited below. Note the rapid reversal pattern, and violation of the uptrend line in place since the fall low. Most specifically, note the telling rally in Historic Volatility, coming in concert with the violent downside price action - a possible 'harbinger.'



Taking a closer look at the daily candlestick chart below. I spotlight the gap-down nature of the reversal posted in the last four sessions and the breakdown below the uptrend line. Clearly, a move below key underlying support defined just above $109 would be most bearish, from a short-term technical perspective.



Moreover, the GLD Gold Trust Fund has plunged in price and, more importantly, is currently testing key technical support provided by the longer-term 200-Day EXP-MA, as seen in the chart below.

More telling is the breakdown in the On-Balance-Volume indicator, in line with an upside spike in Volume itself, implying long liquidation.



In terms of my firm's timely 'call' in the Copper market, I follow up with a look at the price action in Freeport McMoran Copper and Gold, shown in the weekly chart below. Note that the share price is flirting with the long-term 2-Year Moving Average, an indicator that has acutely defined previous bear move lows.

However, this time I note a difference ala the breakdown in the On-Balance-Volume indicator. The OBV has violated its own long-term uptrend line, in place since late 2002, and a defining characteristic of the entire bull market in the metals sector.



Finally, I am now closely monitoring another industrial metal for macro-market clues as to whether disinflation can become the dominant theme in the commodities sector and the commoditized equity sector.

As noted in the weekly chart below, a move in nearby Platinum futures below the key underlying support exhibited at $1076 would be negative, technically speaking due to the downside violation of the 2006 swing low and penetration of the long-term 52-Week MA.

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