What a Day!!! Let’s see if market logic, “tough Fed” logic, holds water today. Before the market opened for trading on Tuesday, the BLS announced that the “Core” PPI was 0.1% higher than expectations. Shortly into the trading day, the stock market was actually sporting pretty good sized gains with the Dow up about 70 points. But, that was the high of the day. [Near the opening bell, CNN Money had a headline that read “Fear Takes Hold of Wall Street”. Of course, right under the headline were the green (positive) stock market indexes.] From there the Tough Fed trade seemed to take over. The Dow ended down 86 points on those interest rate increase fears we have been talking about recently. No, 86 points doesn’t seem like much but the Dow is now down on the Year.
What’s your guess as to what happened in the dollar? Yes, that’s correct the dollar was strong, across the board. What happened to the precious metals sector? Well, we’re glad you asked and we are glad we are out. With the prospect of higher interest rates, precious metals don’t glitter as much and gold was down over $44 an ounce and, as I check it tonight, gold is down another $12 an ounce for a one day drubbing of $56 or about 9%. But, the real story was in the silver, which was down 13% during the day and tonight is down another 4%. We don’t think a 0.1% extra inflation for the month should make that much difference to gold but the Tough Fed trade was carried pretty far in these two commodities.
What did the bonds do? They were basically flat on the day.
Getting back to the precious metals sector, we were extremely tempted to jump into PAAS during the day on Tuesday but work got in the way and by the end of the day we were glad not to be there anyway. The HUI gold mining index we follow dropped 14 to 273 down 5% on the day. Even though that is bad, it was no where near as bad as it should have been based on the drop in gold. Looking to the True Contrarian, one of the links to the left, we see he is expecting a drop in that index down to about 248 which is still another 10% down from here. We are still getting trigger happy with some of those gold stocks. We are hoping to get in at some very nice prices. That index, the HUI, traded at 401.69 on May 11th so with the close of 273.73 tonight, it has dropped 32% in little over a month. Ouch and we’re glad not to be in these stocks the last month.
The reason you pay us here at the Wednesday Update is to provide clear thinking in the face of the stock markets gyrations. We have been short the stock market for some time and in the last month, those trades have really paid off. What to do now? We think that the onus is on the bulls to provide a decent corrective rally so we can sell into it. We are not prone to covering our shorts at the present time. When we get closer to the Relaxed Fed trade, we will consider unwinding some of those shorts. There is very little fear out there. There may be a little angst, but no fear.
As trading came around the globe to the US on Tuesday, there was significant global drops as the Japanese market dropped over 4% for the largest drop in a couple of years. The rest of the global markets were red on the day (save a few) and most of them were down well over 1%. There is some global fear and apparently in the precious metals, but the trading here in the US is calm and cool. This is seen in the overnight futures being up again this evening as we write this. Unbelievable!
Be careful out there…
Dow Industrials: 10,706.14 -86.44