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Buzz on the Street: What Traders Are Saying About Gold Miners, High-Yield Bonds, and the S&P 500


A look back at the happenings on Wall Street this week, as seen by Minyanville's contributors.

These articles were originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO.

Here's a small sampling of the 120+ posts seen on the Buzz & Banter this week:

Monday, July 7, 2014

Miners Without Memory?
Jeff Cooper

The Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) 10-minute chart below shows how on Wednesday (July 2), the GDXJ plunged on the run-off followed by an opening spike low on Thursday (July 3) setting up an upside reversal.
Click to enlarge

GDXJ exploded on the run-off Thursday after offsetting the gap open; however, it looks like GDXJ is showing a third misdirection run-off as it is giving back all the late gains from Thursday.

With two large-range outside up days last week suggesting a breakout from what looks like a Bull Flag, it will be interesting to see if GDXJ turns around from a down open again this morning or whether a short-term bearish Reversal of a Reversal plays out.

Below, see a daily GDXJ chart.
Click to enlarge

Tuesday, July 8, 2014

High Yield Bonds Asleep
Michael Sedacca

High-yield CDX (HY22) has widened by eight basis points to 300 basis points over the past two days, while the Russell 2000 (INDEXRUSSELL:RUT) has been whacked -- it's down 4%. The story is the same for high-yield spreads, which has moved six basis points wider to 333 basis points. Quite frankly, that says the equity sell-off is a whole bunch of nothing.

Until those spreads start freaking out, I wouldn't be running for the exits. It's always the first thing I look for when I see sectoral breakdowns like the ones that occurred yesterday (July 7).

In my opinion, this activity seems like last Thursday's (July 3) overbought conditions are being worked off. The NASDAQ 100 (INDEXNASDAQ:NDX) reached a nine-day Relative Strength Index (RSI) reading of 87, nosebleed territory. Additionally, considering the swift move lower, the CBOE Russell 2000 Volatility Index (INDEXCBOE:RVX) (the RUT volatility index) has not bounced a lot.

Taking the other side of that view, yesterday, the energy, industrials, health care, and materials sectors all experienced greater than 90% down days with the broad index only down 39 basis points, a rare feat if you ask me, considering they make up the majority of the S&P 500. The major European stock indices also experienced similar negative breadth yesterday. That signals a sharp breakdown in the underlying securities. Energy and industrials have been leaders since the beginning of May and are overdue for some profit-taking. Consumer durables has taken the torch as the leader.

The weakness in Italy's FTSE MIB Index (INDEXBIT:FTSEMIB) also concerns me because it is the de facto gauge of the market's reasoning on whether or not the European Central Bank (ECB) can synthetically create inflation. Are they rejecting it, or is this just burn-off?

For the sake of full disclosure, my only equity position is in China via iShares FTSE/Xinhua China 25 Index ETF (NYSEARCA:FXI).

Wednesday, July 9, 2014

What Has Happened To Mortgage Applications?
GaveKal Capital

The first of half of 2014 saw the lowest average level of mortgage applications in the United States since the second half of 2000. This has occurred in tandem with a 44-basis-point drop in mortgage rates since the beginning of the year. The inverse relationship between mortgage applications and rates has actually been quite strong over the last 25 years.
Click to enlarge

Click to enlarge

Refinancing drove the mortgage application index higher from 2009 to mid-2013. This index has fallen by nearly 75% since the middle of 2013 when mortgage rates sharply rose. However, as we at GaveKal Capital have mentioned above, we haven't seen any rebound even though mortgage rates have been falling again.

Something seems to have structurally changed since 2009 for the purchase application index. The purchase index has been basically flat now for four years even as there has been an increase in new home sales and existing home sales. From 1990 to 2008, the purchase application index had a -0.86 correlation to mortgage rates. However, since 2009, that correlation has actually flipped to a positive correlation of 0.51.
Click to enlarge
Click to enlarge

Thursday, July 10, 2014

Thursday Pre-Market: Pullback Mode Continues
Adam Sarhan

As of this writing, 8 a.m. EDT, US stock futures are down by almost 0.9% in the pre-market, and European stock markets are down much more (1% to 4%). The selling is being attributed to economic weakness in China and to financial woes in Europe (mainly Italy and Portugal). In my Wednesday (July 9) update yesterday [subscription required], I signaled caution and mentioned that the Biotechs and Small Caps were dragging the market lower. I said, "At this point, the action in the market and leading stocks looks perfectly normal as the major averages are extended from logical areas of support (prior chart highs and their 50-day moving average lines), and they are way overdue for a nice pullback."
Click to enlarge

It appears that pullback is exactly what is happening right now. Additionally, I noticed that the market opened last quarter on a weak note then turned around and rallied after earnings season in the latter half of the quarter. This could easily happen again as investors are now wary of valuations and earnings due to a softer economy. Since investors are concerned, they typically reduce their risk ahead of earnings to protect themselves from any big downside surprises. I want to see how the market closes the week tomorrow, and I will have a full report for you this weekend. As of now, suffice it to say, defense is paramount as the market remains in pullback mode.

Friday, July 11, 2014

Ferdinand Magellan
Jeff Saut

"The church says the earth is flat, but I know that it is round, for I have seen the shadow on the moon, and I have more faith in a shadow than in the church."
- Ferdinand Magellan

The shot heard around the world is a phrase referring to several historical incidents, including the opening of the American Revolutionary War in 1775 and the assassination of Archduke Franz Ferdinand of Austria in 1914. Interestingly, there is the name Ferdinand again, but yesterday, the shot heard around the world came from Portugal as worries about the country's banking complex sunk stocks on the global market. As a Raymond James economist wrote:,

By itself, the Portugal credit story is not enough to drive a major correction in U.S. stocks (although a short-term decline appears to be in the cards this morning, perhaps more as an excuse). Still, Europe is not out of the woods yet on its credit crisis, and bears are watching closely. The FOMC minutes showed little new news. Fed officials will end asset purchases after October and are debating the mechanics (tools and timing) of how they will begin to remove policy accommodation. It will still be some time before they start raising short-term interest rates. Comments from some of the more hawkish Fed officials (not the majority) could rattle the markets off and on over the next few months."

And rattle the markets they did with yesterday's initial decline in the S&P 500 of almost 20 points before rallying to finish eight points down.

The decline, however, should have come as no surprise to readers of my missives on the Buzz. For over the past three weeks, I have advised that with the S&P 500 having achieved its upside trading objective of 1,950 to 1,975, targeted from the April 15, 2014 upside reversal session at 1,816 on the S&P, the upside going forward was limited. And I do not care if the reason was the Fed, Portugal, Iraq, Ukraine, the economy, etc. The equity markets were due for at least a pause, if not the 10% to 12% pullback that the historical odds call for. As stated in yesterday's comments [subscription required], I think the equity markets will remain on the defensive into the week's end and then attempt a rally next week. If in that attempt, the S&P fails to achieve a new high, then the markets will become more vulnerable to the 10% to 12% decline called for by the historical odds sometime this year. Surely the private equity folks are worried since they are selling. See the chart below.
Click to enlarge

Twitter: @Minyanville
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