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TSX Venture Exchange and Gold

The CDNX declined for the fifth straight week, losing 51 points to close at 2038.  During that time the CDNX has lost a whopping 15%.  The Dow and the Nasdaq have each gained 1.7%, the resource-heavy TSX has fallen 5.8%, Gold has climbed $20 or 1.4%, Silver has lost 14% while copper has also had a rough time, dropping about 10%.

What are we to make of this clear divergence between the CDNX, Gold and the major exchanges?

The bottom line is that it’s a troubling sign.  It’s the opposite of what we saw in July of last year when the CDNX suddenly took off to the upside, leading all markets higher.  The divergence was quite pronounced and it suggested we were in for a buoyant period in the markets and that’s exactly what unfolded over the balance of the year.  The risk factor was very low.  Right now the CDNX, which has proven to be an incredibly accurate leading indicator, is not behaving in a way that gives us comfort regarding the broader markets and commodities.  The message the Index is giving us is that there’s trouble ahead – we’re not sure what but given the uncertain geopolitical climate at the moment, this is an ominous warning.  The risk factor has increased which is something we first pointed out last March.

Having said that, it’s important to point out that the long-term CDNX and commodities bull market remains intact.  The fundamentals and the technicals both support that view.  Within any bull market there are always pauses and corrections and they are necessary in order to recharge the market for the next leg up.  Ultimately during this cycle there’s a good chance the CDNX will hit new all-time highs which would mean a move of at least 70% from current levels, similar in scope to the run the Index enjoyed from July of last year to the 2465 high in early March.

While the CDNX has been hit hard over the last five weeks, we haven’t yet seen a capitulation in this market which means a break below 2000 in the near future has to be considered a  possibility especially with the 100-day moving average (SMA) beginning to roll over.  The November low of 1900, just above the 200-day SMA, would be the first major support area below 2000.  The Index actually dropped slightly below its 300-day SMA last July before the Big Move kicked in.  The 1000-day SMA is at 1800.

There is significant volatility in the markets right now which experienced and sophisticated traders can profit from.  For most of us, though, that’s a dangerous game.  Hold some cash to take advantage of special bargains that may come along and invest only in companies with strong balance sheets, superior properties, skilled management, and encouraging charts.

Weakness in Commodities

Big hedge funds and speculators cut their bullish bets on commodity markets by $17 billion in the week through Tuesday, the biggest bear turn since at least 2009, according to regulatory data released on Friday.

The so-called “managed money” funds cut their overall net long holdings in 22 U.S. futures markets by over 222,000 contracts or 13% in the five days ended May 10, according to Reuters calculations based on the Commodity Futures Trading Commission’s weekly Commitment of Traders (COT report).

The data, based on both futures and options positions, confirm that some big hedge funds, commodity trading advisors (CTAs) and other major speculators dramatically pared back long positions during a week in which prices abruptly collapsed before staging a modest rebound.

Gold

Gold bounced around on either side of $1,500 last week before finishing unchanged at $1,495.  Technically, Gold appears to be in a “distribution box”, as John outlined in one of his recent charts, and this may continue for several more weeks.  Silver was all over the map but closed Friday down just 32 cents for the week at $35.20.

The rally in the greenback continues as the U.S. Dollar Index closed the week at 75.71.  Extreme oversold conditions in the U.S. Dollar emerged at the end of last month, so a significant bounce has come as no surprise.  The Index is now within about 3 points of its declining 200-day SMA where there is major resistance.  Technically and fundamentally, the overall outlook for the U.S. Dollar is grim.  Below is a snapshot from usdebtclock.org, taken late in the afternoon Friday, which shows the horrible financial mess the United States is in.  It’s an ugly picture.  Congress at the moment is having trouble grappling with two major issues – raising the debt ceiling to avoid a default by August, and making the deep and real cuts to government spending that are necessary.

The fundamental case for Gold remains incredibly strong – currency instability and an overall lack of confidence in fiat currencies, an environment of historically low interest rates and negative real interest rates (inflation is greater than the nominal interest rate even in parts of the world where rates are increasing), massive government debt from the United States to Europe, central bank buying, flat mine supply, physical demand, investment demand, emerging market growth, geopolitical unrest and conflicts, and inflation concerns…the list goes on.  It’s hard to imagine Gold not performing well in this environment.  The Middle East is being turned on its head and that could ultimately have major positive consequences for Gold.