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Friday, April 19, 2024

Monday Market Meltdown – Down Goes Copper!

It wasn't Ali who shocked the World knocking Joe Frazier down it was George Foreman.

In 1973 the undefeated Frazier had beat the unbeatable Muhammad Ali (everyone's favorite Muslim) to take the title and had defended it twice in 1972 before being knocked out in just 2 rounds by Foreman (everyone's favorite grill salesman).  Frazier had 29 consecutive victories up to that point and seemed unstoppable but then, suddenly… unexpectedly… he was stopped.  Giving Frazier huge credit he was knocked down 6 times before they stopped the fight but it was a beating nonetheless.

This morning copper has been knocked down and is leading commodities lower after coming off an earlier knockdown at $200 and another at $150 –  having started its run way down at $125 back in December.  Of course, after a 100% run to almost $250 we can certainly forgive them a 20% pullback to $225 per our 5% rule and we're not going to call the fight just yet but Oil is also pulling back off a 100% run while gold has only moved 17.5% over the same time period, already double-topping at $1,007 and $989 in February and May respectively.  

As recently as May 26th, we had looked to copper as a bullish sign as they broke out over $200 but oil was only $60 at the time.  Since then, both copper and oil have rocketed 25% to the point at which I warned of hyperinflation in a special post last Thursday.  Let's take this move VERY seriously as it took days after I started worrying about copper for the commodity to finally drop and my observation on May 12th was that investors had finally realized that "China buying copper to stack it up in warehouses wasn’t a buying premise."  That gave us a great week last options expirations as we took bearish stances on Agriculture, Oil and Metals right into Monday's mega-pump as the Dow then gave up 600 points between that Monday's post, where I called for a meltdown, and that expiration day Friday when I said: "We are already on vacation, having followed our plan to cash out at the bottom yesterday anticipating some short covering today that would take up the markets."

That gave us a very happy holiday weekend and we did get our rally on light volume during the next, short week but that took us to 8,800 on June 1st and, since then, we've been waiting and waiting and waiting and waiting for the market to break one way or the other.  On the bullish side, we could say that the S&P, SOX and NYSE are catching up while the other indexes hover at their breakout zones.  We do, however, need to take multiple rejections of the S&P at 946 and our first rejection of the NYSE at 6,232 coupled with oil and copper simultaneously being rejected from their 100% gains off the bottom as a pretty good sign that a correction is coming – perhaps 20% of the runs we've had.

That would be copper $225, oil $66.6, gold $940, Dow 7,980, S&P 900, Nasdaq 1,740, NYSE 5,840, Russell 488, SOX 262 and Transports 1,730 – those are our new breakdown points to watch.  Hopefully, we can hold those but also HOPEFULLY we can test these levels as we would feel much better about going long after we get a proper test of some support levels WITHOUT these BS stick saves that distort the market and, in fact, end up keeping money on the sidelines.  It's very hard to get motivated to invest in stocks that get yanked up and down 5% a day – sometimes up and down 5% on the SAME day!

Allegations of vote fraud in Iran may be able to sustain oil for another few days but if it doesn't REALLY disrupt supply soon the oil bulls are in trouble as they are running our of things to scare us with.  This rally has been very much driven by the energy and materials sector and, if they do crack, we WILL get a proper test of our pullback targets.  The WSJ is poking holes in the coal premise today as cheap and plentiful natural gas has electricity producers seeking cleaner, cheaper alternate fuel.  This is, of course, the same WSJ that ran a ridiculous "peak coal" article last week but now that the MSM has herded all the sheeple into the sector – it must be time to pull the rug out.  We'll see if BTU can hold $35 as a turn signal but I like shorting FCL anyway as they are up 120% since April and the June $35 puts at $3.65 are a good way to play them short with little option premium with a stop at $32, something that would be a neat trick for FCL this week.  Jim Cramer, of course, strongly disagrees with me.

At least Asia agrees with me as energy and mining stocks led the downturn this morning.  The Nikkei fell 1% but held the line at 10,000 (although maybe saved by the bell) while the Hang Seng blew 18,500 (down 2%) despite a rare double stick day (one after lunch and one at the close).  Commodity stocks were starting to give back some ground after their recent gains, with metal prices slightly lower. Fortescue was down 7.2% in Sydney, with BHP Billiton off 2.7% and Rio Tinto down 2.2%. Sumitomo Metal Mining slipped 4.6% in Tokyo and Jiangxi Copper was down 4.5% in Hong Kong.  Oil-related shares also lost ground. In Hong Kong, PetroChina fell 3.3% while China Oilfield Services lost 4.3%. Japan's Inpex was down 1.9%.  "The trend is still sideways with no important data out in the U.S. Friday. I expect the market to just drift along for the next few days," said AmFraser's senior vice president of equity sales, Gabriel Gan

Despite the love-fest for China's economy, which is supposed to lead the world out of recession, by the MSM – foreign investment in China fell for the 8th consecutive month in May.  Why are investors not putting their money where the media's mouth is?  China attracted $6.379 Billion in actual Foreign Direct Investment in May, down 17.8% from a year earlier but narrowing from April's 22.51% drop, Ministry of Commerce data showed Monday.  Actual FDI in the January-May period fell 20.4% from a year earlier to $34.05 Billion.  Because foreign investors account for around one in 10 jobs in China and more than half of trade, the continued fall in FDI could weigh on employment and growth.  Actual FDI in China's western and central regions fell more than 30% in the January-May period from a year earlier, sharper than the drop for the overall country.

9 am Update:  Kudos to NYMEX pre-market pumpers who reversed a steady decline in oil from Friday's last NYMEX pump into the close at $72.57 (2:15 on Friday) to $70.66 at 4am this morning as Asian traders dumped it heavily but, suddenly, you'll be happy to know that between 7:35 am and 8:55 am, they managed to get back to just under $72 just ahead of the NYMEX open.  So amazing it's criminal!  Of course this is great fun if you play the futures as we get to play these silly moves on both sides (short at $72 again of course) but, for the average American trader – you are just screwed so happy Monday!

Europe is off about 1.5-2% at 9am with the DAX failing the 5,000 mark.  The Paris air show is far, far less than exciting as there is nothing more depressing than a gathering of airline exectives looking down the barrel of $70 oil once again.  Oil and mining stocks are also leading the EU lower as EU employment numbers posted the largest decline since record-keeping began in 1995.  The number of active workers in the euro zone fell 0.8% in the first quarter (1.9M people), according to data released by the European Union statistics agency Eurostat. It was the third-straight quarter in which employment fell, and marked a substantial pick-up in the rate of job losses. In the fourth quarter of 2008, employment fell by 0.4% on a quarter-to-quarter basis, while in the third quarter it fell by 0.2%.

The dollar is picking up some steam again and big trouble for commodities if it breaks back over 80.  Even Russia had some nice things to say about the Dollar and it won't be much of a stretch for the Dollar to complete a 5% move back to 83 this week.  Meanwhile, our NY Empire Manufacturing Index came in at a TERRIBLE -9.41% for June.  That's 100% worse than -4.55% in May and 90% worse than the -5% expected by the "expert" economists that they, for some reason, continue to bother asking the opinions of.  Even more fun data, our own US TIC inflows were no better than China with just $11.2Bn coming in for April.  This is a factor of 4 worse than March's $55.4Bn and a factor of 5 worse than the $60Bn expected by our always-on-the-ball "expert economists."

This is the stuff we talk about every single day – how can the economic expectations be so entirely divorced from reality.  Those expectations are baked into the stress tests and, sadly, into Obama's budget forecasts and they also influence things like Friday's Michigan Consumer Sentiment reading of 69 as the consumers tend to believe what they read in the papers and hear on TV. 

So the Government tells you there is a Tooth Fairy and the MSM tells you there's a Tooth Fairy and 69% of the people surveyed believe there is a Tooth Fairy and they go out and buy something nice for their kids when they lose a tooth and that's a great way to boost the economy but when the reality is that the parents are losing their jobs and they were counting on that tooth money to pay for what they bought – isn't the government and the MSM perhaps doing more harm than good?

Let's watch our levels and continue to be careful out there!

 

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