There will be Margin Calls...

Ladies and gentlemen, this is that point in time when the whole  "margin debt on the NYSE at all time highs"  begins to matter.  (...For those of you I have heard only a few months ago say it never indicates anything).

So brief update; yesterday afternoon after the close gold began to slip a bit.  (at least thats the first thing I noticed.)  Later in the evening Brent and WTIC began plunging straight down.  (It seems now that WTIC is gonna catch at 80, but if that level is broken I think we might see them both meet up near 75)  Zerohedge had a posting last night mentioning that RSI on Brent was the most oversold ever. FF to this morning, around 8am EST Dow futures were down 60 and SPX was down 10.  By 8:40am EST Dow futures were down 150 and SPX was down over 20.  I made a comment prior to the open that this "Could get ugly"  and within a few mins of the open the Dow dropped over 300.  (This is where those margin calls come into play)

We now sit at about 1858 on the spx down 20. We need to hold this level at 1850.  We made a bounce off of 1840 at the open so that 10 point level between them might hold us, but fair warning, if it doesn't the SPX could drop quickly another 25 points to the 1825 before finding decent support.  From there its 25 point clips down to 1750.  And that is 100 points below where we are now. This can get ugly fast.  And don't fool yourself into thinking that it already has been.  The amount of money that can be dumped on this market by major institutions that have been in for 5 years now and looking to cash out, and the speed in which the computer systems can execute such a sizable order, are capable of sending the market straight down in hundreds of point clips.  We have seen it before and the computers have only gotten faster since then.

As usual right about the time every one is certain gold is a useless asset it proves otherwise.  Below is the 4hr chart on a day when there is not much that is green.

Gold miners are holding in there.  Barely positive with the Dow down 250 now and the SPX down 30 (*Putting it at 1847, so it broke the 1850 level already.  When I say it can drop 20 more points quickly, I mean today.)  I guess thats a win considering how miners have been acting for the last 2 years.

The headline on CNBC just said the 10 year note just fell below a 2% yield.

Dow now down $280  SPX down $34 (1845 now) and the Nasdaq is down $64.  Gold is gaining still now at 1245 up $13.  Miners are slowly climbing with it.  It's only Wednesday.  Good luck.

-Jonathan M Mergott

For comparison, the 4 major US indices

Just to get an idea of how ugly this is turning, take a look at the 4 major indices' charts.  First up, the Dow filled with monstrously large dividend paying companies. 

Next up, the SP-500.  500 of the largest, most important companies in the world.

Next, the trader's and amateur investors darling, the Nasdaq.  Filled with speculative Tech and Pharma stocks all with with very little in earnings and virtually no dividends whatsoever.  Today, the dow was down 115 points.  The nasdaq was down 102.  Reminder, the Nasdaq is less than 1/3 of the price of the Dow, yet was down nominally the same amount.

And last but not least, The Russell 2000.  The small caps that fly like Superman in a Bull market, but get squashed like a mosquito in a Bear Market.  Unlike the other 3 indices, The Russell has not been in an uptrend for a while.  It has been consolidating in a range that just broke down badly.  I'm zooming this one out more so you can see it better.

Moral of the story, safety is found in large dividend paying stocks, and the speculative crap is getting tossed away.  So as the markets all begin to break major support and half a decade long uptrend lines, I will leave you with this... Have a Nice Weekend!  (And try not to spend the whole thing worrying about what is gonna happen to your life savings come Mon morning)


-Jonathan M Mergott

P.S.   That was sarcasm for those of you who haven't mastered the art of detecting it in written form over the internet.  Cause I know damn well that is the ONLY thing Wall St. and every QE made "genius investor" is going to be thinking about all weekend.

Line in the sand

It's been an interesting time in the markets recently and I have been very absent from writing.  But one thing that will always get me back is interesting markets.  I will write this quickly before the things I am talking about COULD happen, do.

DEFLATION.  The scariest word in economics.  Commodities are plummeting, the stock market is getting shaky, and the fed is set to end QE in the same month that most market crashes have historically occurred.  Complacency has turned to fear overwhelmingly in the market and it has been a rather fast transition.  Let's just jump to the SPX chart.

As you can see above, we have had a violent back and forth consolidation in stocks for the last few days that has held at 1925 for now (*As I write this at 10:26am EST, we were flirting around 1920 and just let go, now already down to 1915.  I would be willing to bet we will probably drop another 10 today to 1905 before buyers come in.)  If this level just above 1900 does not hold, things will begin to look even shakier for stocks, as that would signify a break below a 5 year trendline.  (We'll get to that chart later)  We got a sell signal on the SPX about 1 month ago when the 10 day EMA crossed below the 20 day.  Indicators have all been trending lower confirming our sell signal.  As fear became the overwhelming emotion in the market, volume began to increase.  There is no reason to think that the 1900 level will not hold.  For 5 years straight now, the market has continued to make higher highs, so it would be foolish to expect anything different until the market SHOWS you otherwise, but in the event that it does, it will have broken major support, leaving a lot of space until about 1825 which could make for a fast, sharp, and very scary sell off.  It will also have made a lower low and that could be the start of something bad.

Lets take a quick look at the long term trend line I was talking about that a move below 1900 will break.  Pretty self explanatory.  But there is a lot of air between where we are and major support between 1400-1500.  That could mean for a 25% drop.

Lets quickly look at gold, and to do so we will use the GDXJ.  It has been interesting.  We received a sell signal in early Aug, around $40, which I pointed out and hopefully saved you from the losses for the next few months cause it is down about 25%.  We broke below the June low of 32 and and looked to be headed to test the low made back in Dec near 29 when the FOMC mins were released the other day and shot everything higher.  Since then, the SPX is right back to its prior lows (now breaking them) but gold and silver have held on, and so far (and just barely) so have the gold stocks.  It is hard to make an argument for higher gold in the face of all other commodities being taken to the wood shed UNLESS there is a major fearful event in stocks, which we could be seeing right now.  We still dont have a buy signal of any kind yet, but this is worth paying attention to as the miners are insanely cheap at these prices and can provide a much more profitable way of playing lower stock prices than just shorting the market.

Wrapping this up, today is Friday which means traders are closing positions.  Being that things have been mostly down for the week, I would venture to say this could mean a lift for everything by the close as short sellers rush to cover.  However, if we do see things close lower today, that should just reinforce to you the fear in the market right now.  I am expecting next week will be very interesting. 

-Jonathan M Mergott