Gold and Financials

Gold and Financials
From Richard Russell:

The best comment on gold that I have seen comes from my old friend, Ian McAvity in his latest mailing of Deliberations : "The latest run on gold came from the early April breakout through the area around 1425, which becomes a logical support area for a corrective pullback. Gold first crossed $1400 in November and fought it for 21 weeks. The prior significant breakout was through the $1260 level, first touched in early December, 2009, and penetrated 22 weeks later with more follow-through, and finally resolved with conviction in September, 2010, 42 weeks after the first touch.

"Measuring swings with intra-day Comex extremes, this run gained $268 in 14 weeks from the late January low to the $1577 high this week. The prior two rallies (to $13451 & $1262) gained $275 in 19 weeks and $220 in 20 weeks. With recent runs and corrective phases running about 20 weeks in duration, it's possible this run could extend further. But the blowoff and turbulence in silver in the past two weeks, and the lousy relative behavior of the gold and silver shares prompts me to speculate an intermediate top may have been put in, and we may need another period of 20 weeks or so to correct, digest, cool off and set-up the next leg."

Below, a chart covering two years of gold action illustrates gold's repeated periods of correction, a period of consolidation lasting roughly 14 to 20 weeks, and then an upside breakout to new highs. The current situation may be a repeat of this same action that has occurred repeatedly over the last two years.

Russell advice -- Be patient with your gold, and sit tight.

Lowry's statistics remain bullish. My PTI remains bullish. The Dow and the Transports recently bettered their April highs, which (from a Dow Theory standpoint) is bullish. But I remain nervous regarding this market. One reason is seen through the chart below.

This is the ETF for the Financials, and it has formed a bearish descending triangle. It's hard to envision this market as being healthy with the financials in such poor shape.

I didn't fully trust the ETF above so I looked for confirmation, and I found it. Below we see the NYSE Financial Index, which contains ALL the financial stocks on the NYSE -- banks, S&Ls, small loan companies -- and this chart looks no better. It's hard to see the market climbing without the financials. The financials have been one of the big success stories since the 2009 lows. The Financials now appear to be under distribution. Best, we keep an eye on them.

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GBP/USD Technical Analysis

Cable Technical Analysis

GBP/USD Technical Analysis

Recovery in the Pound today sees the pair back above 1.6266. Visible topping on the daily chart combined with the pairs inability to post a close above 1.6400 keeps the outlook bearish. Watch for a further run at 1.6426 high.

1.6222 provides initial support, with a break of 1.6140 targeting 1.5935.
GBP/USD Technical Analysis

Short Interest NYSE vs SPX

Short Interest NYSE vs SPX

courtesy of zerohedge.com

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Commodities VaRy extreme right now

Commodities VaRy extreme right now

Posted by Tracy Alloway on May 06 11:14.

Hark — the standard deviation devils sing (again).

As Reuters columnist John Kemp pointed out yesterday, recent swings in the commodities complex have produced some impressive probabilities figures. The kind you can wheel out in dinner party conversation. For instance, front-month Brent crude futures sank almost $12 per barrel (or over 9 per cent) on Thursday, leading the market down from over $120 at the start of the day to under $110.

That's a price change of more than four standard deviations — which is a statistical way of saying it's something that should be seen on average only once in every 63 years, assuming a normal bell-curve distribution. Kemp also points out that at times on Thursday the move also approached five standard deviations — something which should only occur once every 7,000 years.

Now, who wants to bet that algorithmic trading models, or banks' risk management ones, don't extend to this kind of (rare-ish) movement? After all, these models tend to be based on recent history and banks rarely feel the need to take into account extreme events which have never happened. Such was most famously the case, of course, in credit risk management ahead of the subprime crisis.

It's certainly the thinking behind graphics like the below — from Reuters on Thursday:

That's Value-at-Risk (VaR) for major US banks. In words it would mean, for example, that there's a one in 20 chance that Goldman Sachs' daily commodities trading net revenues would fall below expected daily trading net revenues by an amount at least as large as the reported VaR — or about $37bn in the first quarter. Note that VaR predictions, however, tend to be a poor predictor of actual losses. And banks have the ability to ignore them somewhat, as Goldman Sachs did during the subprime crisis.

Here's Kenneth Posner in his book, Stalking the Black Swan:

The company shorted the ABX index just like the hedge fund in Chapeter 4, earning more than $1 billion in profits during 2007. During this period, senior executives were monitoring the value-at-risk … associated with the firm's mortgage position, as well as grilling the mortgage traders on the rationale for their bets. On separate occasions, the executives forced the traders to downsize their positions, even though the trades were profitable, in order to keep the VaR in check. At other times they allowed the VaR to rise to an all-time high.

Given Goldman Sachs called for Brent to return to $105 a barrel just three weeks ago — much to the amusement of some other banks (likeBarclays Capital) — we're guessing there won't be too much Goldman hand-wringing over size able commodities VaR. If the bank followed its own published advice, it should be well-positioned (once again).

Barclays, incidentally, is one of the few European banks that does not break out its quarterly commodities VaR.

Related links:
Fat tail of the day, oil edition - Felix Salmon
Commodities sell-off 2011: is this it? – FT Alphaville
Glencore has bigger risk appetite than Wall St – FT

This entry was posted by Tracy Alloway on Friday, May 6th, 2011 at 11:14 and is filed under Capital markets. Tagged with black swan,commodities, fat tails, goldman sachs, hedging, modelling, standard deviations, Var.

http://ftalphaville.ft.com/blog/2011/05/06/561671/commodities-vary-extreme-right-now/