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Metals Melt: What Does It Mean for Stocks?

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Taking the pulse of inflation vs. deflation.

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Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

Friday morning, following yet another string of all-time highs in the equity markets, we penned Red Rain on a Freaky Friday.

In that column, we touched on several dynamics: the record-setting buying stampede in stocks, the importance of the financials into - and more importantly, the reaction to - earnings (note Citigroup (NYSE:C) today), my short-side bias (for a trade in and around S&P (INDEXSP:.INX) 1580), and the importance of gold, as commodity volatility typically precedes equity movement.

There were other nuggets, such as the 12 Cognitive Biases That Endanger Investors, but let's stay on point today.

Gold, for purposes of perspective, was down about $80 at one point Friday, creating (but not pounding) deflationary pulses throughout global markets. This morning, gold was down an additional +/-$100, before the bounce attempt (as of this post, it's off $70 or so). Silver, for its part, is down somewhere between 6%-8% - or 17% since Thursday - fueling concerns that a large fund is liquidating its holdings.

The question therefore is twofold: First, is it an isolated incident of liquidation, or is it a precursor to The Return of the Phantom of Deflation?

Second, IF this is a large fund unwinding risk - we know the pain in Paulson-land, but there are many others in that camp - will it be contained (to one fund or a few institutions) or spread through counterparties like a series of dominoes laced with dynamite given the interconnected, derivative-laced finance-based global economy?

For those of you who giggled when I mentioned "deflation," I will remind you of the similar reaction when we dared to warn about the bubble in gold at $1900 (or, crude at $140, for that matter). Those weren't just giggles - the emails were ripe with vicious venom - but it speaks to the path of maximum frustration and the fragility of certainty in a marketplace that long ago lost its freedom. As I write this, the S&P futures are down six handles - not that bad, all things considered---but this is the start, not the end, of the session, and the script is still being written.

The answer, my friend, may be blowing in the wind, but we won't know for sure without the benefit of hindsight. As such, we must peer across the probability spectrum and manage risk in a manner consistent with "seeing all sides," protecting capital and positioning ourselves, if we so choose, to prosper if and as an advantageous risk-reward presents itself. It's not easy but it's not impossible, either, as long as you practice discipline over conviction.

I attended a funeral on Friday for a family friend who lost his dad; late in the afternoon, with the S&P down $6 and market breadth almost 3:1 negative, I tried to buy additional September SPY puts despite having a full position (I wasn't able to execute the order from my car, which was just as well as I had no business trading from a car with a smartphone). As such, I enter today's fray with the aforementioned SPY puts and the desire to "trade around" that concentrated risk under S&P 1600 or so (depending on the timing of when that level arrives when and if it arrives).

We will, of course, update that exposure all day in real-time on our Buzz & Banter (click here for a free two-week trial).

On a housekeeping note, I will be spending a few hours today at the Hospital for Special Surgery for (what I hope to be) the last batch of x-rays on my hip and a scheduled surgery to repair it. I'm told the procedure itself is no great shakes so I'm looking to get it locked down so I can walk without pain, pick up my daughter without wincing, coach the kids in their various sports, and do all the other things I once took for granted. It is what it is and I only bring it up because it will eat into my Monday availability before (what I expect will be) I spend the rest of the week glued to my turret.

Random Thoughts:
  • We spoke about the importance of the $14 level in JC Penney (NYSE:JCP) last week. With the news this morning that it is drawing down $850 million of its credit line, I'm not touching this puppy despite the fact that it fits my contrarian style (only three of 22 analysts rank it a buy).
  • Some strategists are opining that weak Chinese economic data is hitting the metals. That may have something to do with it but it's not THE reason for the outsized move. There's a big seller; I don't know if the name is Cyprus, John Paulson, or China itself (all speculation), but this ain't no boating accident and it's not in response to an economic release.
  • JPMorgan (NYSE:JPM), Bank of America (NYSE:BAC), and Goldman Sachs (NYSE:GS) are higher in the (very) early going; as go the piggies, so goes the poke, so pay attention to this complex even if you're not trading them.
  • Always remember when trading that there are Three Phases of Leave.
  • Past support is future resistance, so remember that if and when gold ever gets back to $1550.
  • The S&P 200-day moving average is at 1446, or roughly 10% below current levels. Just some perspective.
  • If you're looking for the very best of Hoofy & Boo, click here for our Emmy Award-winning bull and bear!
  • Good luck today and remember, profitability begins within!

R.P.

Twitter: @todd_harrison

Follow Todd and over 30 professional traders as they share their ideas in real-time with a FREE 14 day trial to Buzz & Banter.
Position in SPY.
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