Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21
UK Covid-19 Booster Jabs Moderna, Pfizer Are They Worth the Risk of Side effects, Illness? - 22nd Nov 21
US Dollar vs Yields vs Stock Market Trends - 20th Nov 21
Inflation Risk: Milton Friedman Would Buy Gold Right Now - 20th Nov 21
How to Determine if It’s Time for You to Outsource Your Packaging Requirements to a Contract Packer - 20th Nov 21
2 easy ways to play Facebook’s Metaverse Spending Spree - 20th Nov 21
Stock Market Margin Debt WARNING! - 19th Nov 21
Gold Mid-Tier Stocks Q3’21 Fundamentals - 19th Nov 21
Protect Your Wealth From PERMANENT Transitory Inflation - 19th Nov 21
Investors Expect High Inflation. Golden Inquisition Ahead? - 19th Nov 21
Will the Senate Confirm a Marxist to Oversee the U.S. Currency System? - 19th Nov 21
When Even Stock Market Bears Act Bullishly (What It May Mean) - 19th Nov 21
Chinese People do NOT Eat Dogs Newspeak - 18th Nov 21
CHINOBLE! Evergrande Reality Exposes China Fiction! - 18th Nov 21
Kondratieff Full-Season Stock Market Sector Rotation - 18th Nov 21
What Stock Market Trends Will Drive Through To 2022? - 18th Nov 21
How to Jump Start Your Motherboard Without a Power Button With Just a Screwdriver - 18th Nov 21
Bitcoin & Ethereum 2021 Trend - 18th Nov 21
FREE TRADE How to Get 2 FREE SHARES Fractional Investing Platform and ISA Specs - 18th Nov 21
Inflation Ain’t Transitory – But the Fed’s Credibility Is - 18th Nov 21
The real reason Facebook just went “all in” on the metaverse - 18th Nov 21
Biden Signs a Bill to Revive Infrastructure… and Gold! - 18th Nov 21
Silver vs US Dollar - 17th Nov 21
Silver Supply and Demand Balance - 17th Nov 21
Sentiment Speaks: This Stock Market Makes Absolutely No Sense - 17th Nov 21
Biden Spending to Build Back Stagflation - 17th Nov 21
Meshing Cryptocurrency Wealth Generation With Global Fiat Money Demise - 17th Nov 21
Dow Stock Market Trend Forecast Into Mid 2022 - 16th Nov 21
Stock Market Minor Cycle Correcting - 16th Nov 21
The INFLATION MEGA-TREND - Ripples of Deflation on an Ocean of Inflation! - 16th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Gold and Stocks Playing the Quantitative Easing Guessing Game

Commodities / Gold and Silver 2010 Oct 22, 2010 - 04:33 AM GMT

By: Clif_Droke

Commodities Best Financial Markets Analysis ArticleThe headline discussion in the financial press of late has been about the recently announced quantitative easing program that the Federal Reserve has said it will undertake in order to further stimulate the economy. Financial commentators have bled their pens dry in speculating what impact the so-called “QE2” will have on stock and commodity prices.

The chart featured below shows the CRB commodity price index compared to the S&P 500. Commodity prices, as you can see, have rallied vigorously in the last several weeks and have received the benefit of speculation over quantitative easing, in which the Fed buys up big chunks of government debt. The consensus view is that quantitative easing would most likely put more pressure on the dollar and create another incentive for investors to turn to commodities as a safe haven for a weak dollar.

Writing in the latest issue of Barron’s in response to quantitative easing, Anna Raff writes, “The problem is that if the Fed really does crank up the printing presses, it will be a sign that the economy is in worse shape than many had thought….In other words, the recent runup may well be unsustainable.”

Another example of the guessing game being played by the pundits can be seen in the latest commentary by Newsweek columnist Robert Samuelson. He writes, “Banks have excess reserves of roughly $1 trillion. But if all the cheap money eventually spurred much higher economic growth, many of these reserves would turn into loans and raise the specter of higher inflation – ‘too much money chasing too few goods.’” He goes on to quote economist Allan Meltzer of Carnegie Mellon University, who said: “Sooner or later, we’ll have a big inflation but not right away because there’s no demand right now.”

This seems to be the conclusion of many analysts, who view with skepticism the rally since early September. The guessing game of trying to figure out what the market’s next move will be is even more prevalent than questioning the sustainability of the current rally. The problem with trying to use reason or logic to justify the market’s response (or anticipated response) to monetary policy is that you can never rely on the market to be totally logical for very long. The rules of the game have changed in just the last few years and the days of “buy and hold” are over. To win on today’s Wall Street you must be prepared to adapt quickly to the seemingly illogical movements of the stock market. This is where technical trading gives us a distinct edge over investors who insist on trying to outthink the market (which is never a good idea).

Dennis Slothower, writing in a recent issue of “Stealth Stocks,” commented, “The Fed should not be driving up commodities now and threatening to spend another trillion….They are trying to suck as many players into the markets as possible so the primary dealers have someone to feed on.” The consensus view agrees with Mr. Slothower that the Fed’s second quantitative easing program (QE2) will further fuel the rally in commodity prices and create a situation not unlike the one preceding the 2008 financial crisis. But it wouldn’t be wise to make any longer-term bets on this view since in today’s upside-down financial marketplace logic doesn’t dictate market moves. Hedge funds largely determine the short-term moves and there often doesn’t seem to be any logic behind these, either. The trick is to use the technical indicators to “shadow” the funds and follow their footsteps until the momentum reverses.

The past several weeks have unquestionably been tricky and few analysts predicted the September rally in advance. It seemed to come out of nowhere even as all signs pointed to a re-test of the early July lows. Yet the market always seems to have a built-in monkey wrench ready to be thrown into the machinery at a moment’s notice. So far nothing has been able to trip up this rally but the proverbial monkey wrench is easily identifiable: it’s the dominant interim momentum indicator, which is based on a rate of change in the NYSE new highs-new lows. This particular indicator has been stubbornly in decline since April and has kept us (rightly or wrongly) from becoming overly bullish on this market. We’ve ventured a few trades and have some profitable long positions in our trading portfolio but we’ve kept our long positions to a minimum until this important indicator reverses its downward trend. My expectation has been that the dominant interim momentum indicator would reverse soon after the bottoming of the 4-year cycle. The 4-year cycle has since bottomed. And while the NYSE hi-lo differential has shown substantial improvement since then, the dominant interim momentum indicator hasn’t yet reversed its decline.

The fact that this particular indicator is in a downtrend creates a potential problem for the stock market. The other components of the stock market’s internal momentum are mostly in uptrends, which is what has help to keep the market’s uptrend intact. It appears, though, that the negative internal current created by the intermediate-term indicator is being most strongly felt in the bank stocks, with one high profile stock in particular, Bank of America, bearing the brunt of the selling pressure. For this reason it would be wise to embrace a conservative stance toward the market, maintaining only a small number of trades and using conservative stops in case the broad market sharply reverses in the near term. Only when the interim momentum indicator shows decided improvement will the air be cleared enough to embrace an uninhibited bullish bias.

Gold ETF

After a magnificent run which saw the SPDR Gold ETF (GLD), our proxy for the gold price, rally from 117 to 135 over a 10-week period, the GLD finally broke its immediate-term uptrend earlier this week. It’s highly unusual to see the ETF rally more than six consecutive weeks without violating the 15-day moving average but this rally was a testimony to the relentless weakness in the U.S. dollar index as much as the strong demand for gold. The break of the immediate uptrend in the GLD was accompanied by a push above the main downtrend line in the dollar ETF (UUP). While this doesn’t formally break the interim downtrend in the dollar, it does send a “heads up” signal for the near term and suggests a relief rally could be imminent for the dollar.

The corresponding correction in the gold price is actually much to be desired as it will take much of the excess heat out of the market. The gold market never actually became “irrationally exuberant” during the past two month’s rally but it was becoming notably more frothy. A rash of mainstream news articles extolling the virtues of the yellow metal were making their appearance and in the process were enough to make a contrarian investor nervous. The gold price pullback will accordingly do much to remove the shine from the market – a desirable development from a contrarian standpoint.

Moving Averages

With the return of volatility anticipated in 2010, it will be important to have a technically sound trading discipline. Classical trend line methods can be useful but they aren’t particularly suited for a fast-moving, dynamic market environment. This is especially true where turning points occur rapidly in a market that is subject to cyclical crosscurrents as 2010 is likely to be. That’s where moving averages come in handy.

With a good moving average system a trader can be reasonably assured of catching most of the important moves in an actively traded stock or ETF while eliminating many of the whipsaws that attend trading choppy markets. In the book “Stock Trading with Moving Averages” we discuss some market-tested methods that have proven successful across most major stock sectors and industry groups, and is especially geared toward the gold and silver mining stocks and ETFs. Here’s what one reader had to say about the book: “ were the one who supercharged my charting with your moving average book ‘Stock Trading with Moving Averages’ and your constant analysis of the double and triple moving average series.”

Moving averages offer another advantage over trend lines in that they can be tailored to closely fit the dominant short-term and interim market cycles. They’re also more compatible with a trading range-type market…if you use the right moving average system. These and other strategies and tactics are discussed in “Stock Trading with Moving Averages.” Order your copy today and receive as an added bonus my two latest Special Reports on moving average trading and how to use stock market cycles for optimal timing. Click here for more info:

By Clif Droke

Clif Droke is the editor of the daily Gold & Silver Stock Report. Published daily since 2002, the report provides forecasts and analysis of the leading gold, silver, uranium and energy stocks from a short-term technical standpoint. He is also the author of numerous books, including 'How to Read Chart Patterns for Greater Profits.' For more information visit

Clif Droke Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in