Finally, we are past the important Bernanke commentary and GDP release. Both came in as anticipated. The markets quickly fell for a brief period only to rally even quicker and steadily into the close. This was a light volume day, so it can not be trusted, but even more shocking was that the markets rallied while gold rallied as well. That was very uncommon.
The rally in gold could be a combination of an oversold bounce after it fell strong the past few days and possible selling in treasuries deploying into gold. If it takes some time to finally receive QE3, I expect treasuries to move towards the market, possibly supporting higher gold and stock prices. This is something that will happen over time, not overnight though.
Bernanke basically punted the ball to President Obama and Congress. Now Obama is on the 1 yard-line claiming to have a magic play (jobs package) that might score him a long touchdown. If he can even get within field goal range, I’ll be happy with that jobs package as many others will be. For all of you non-football enthusiasts, Bernanke doesn’t seem ready to deploy QE3 unless Obama and Congress fail to help with anything worthwhile. QE3 will not fix our problems though, so Obama and Congress need to work hard on something beneficial. Many believe that more QE, whether it is QE3, QE4, or QE5 will end up crashing the markets rather than pumping them up.
The trade of the week now is to see what the real reaction to Friday will be this week. Friday is not a day we can trust due to the light volume and emotions, so it was not wise to make decisions on our future based on that single day. This week will provide the clarity needed to determine whether we might finally be seeing a stock pickers environment soon or if we are going to see more headline risk and concerned investors.
Hurricane Irene should be a non-event as it was less damaging than anticipated. We might see some morning weakness from it, but I don’t expect it to be discussed much more. We could rally into labor day on high hopes for President Obama, but as of Friday I am more short than long at the moment. I expect some weakness early this week to profit from my shorts and will gauge the sentiment to see if we can go long again. We have a good history of moving up into Labor day, but September is not much of a positive month for the markets.
As discussed previously, the Israeli border situation will come up and any non-peaceful headlines could create market concerns, but gold is very bullish in September when citizens of India tend to accumulate heavy.
On Friday, I initiated a short position via long ProShares UltraShort Russell2000 (TWM) and closed out my long position in ProShares Ultra Russell2000 (UWM) for profits. I closed out my short gold position in PowerShares DB Gold Short ETN (DGZ) and instead went long the gold miners in Market Vectors Gold Miners ETF (GDX). As long as gold moves up, unless I fear treasuries are selling hard, I will likely have a short tendency in the overall markets, but am still hedged both ways right now. If gold starts to fall again, I will sell down or close out my TWM quickly, even at a loss as gold falling is bullish to the markets. I’ll try to keep my portfolio updated here as much as possible starting Monday morning.
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Watch gold over the next few days to help determine our path on whether we should be bullish or bearish before the week is over. We also have a very action packed week for economic data, so be sure to review the calendar.
As always, do your own homework to see if you agree. Good luck out there,
Mike
At the time of publication, Kudrna was long TWM and GDX, but positions may change at any time.
