Sentiment/Gold/Bonds
Trader Scott’s Market Blog
January 10, 2017
The bond market is the biggest market in the world, so it will always have very large influences on all other markets, but the correlations change over time. Sometimes bond prices and the stock market rally together, other times they move opposite. The stock market can “ignore” bonds for awhile, but eventually it won’t if the move in yields is big enough. And that is true in either direction – up or down in bonds – and stocks also can have some influence on bond prices, as this is all interrelated to some extent. Yield movements will also have an influence on other markets. It’s not likely to last, but currently bonds and gold are highly correlated. And while anecdotally, the sentiment on gold has become less bearish on the recent rally, there are still plenty of bears – “Investors are dumping gold“.While futures speculators continued to reduce their net long position. And the positioning in Treasuries continues to get even more extreme, as the10 yearfutures speculative short position hit another record high this past reporting week, adding onto the previous record.
The 30 year US Treasury is in a major bear market, but no market moves in a linear direction every month. For those people who own alot of bonds, this price rally can be a chance to reduce positions. Or it can also be used for lower mortgage rates, before much, much higher rates come into play over the years, so take advantage of it. But last month the selling, the technical situation, and the extreme bearishness in bonds provided a trading opportunity. One month ago, my belief was a counter trend rally in bond prices was setting up, as there was a fairly powerful selling climax and I bought the TLT ETF as a position trade, as laid out here and here. Of course even in a position trade (this certainly isn’t an investment), the rally in bond prices has allowed an opportunity to take partial profits, and reduce risk – an important part of my approach. I annotated the TLT selling climax in the post from last month – the original chart is with the December post. The rally in bond prices, or the drop in yields has helped gold. This correlation won’t always continue, but it’s intact presently, which is one reason why I’ve kept pointing out the current bond bearishness. Bonds are a massive market, which is why the bond market implosion is going to be a slow process, with lots of countertrend rallies. The move higher in yields will likely get aggressive again later in 2017 (3.05% will act like a magnet), especially in the second half, and that’s when the higher yields will begin being a help to the PMs.
About
Trader Scott has been involved with markets for over twenty years. Initially he was an individual floor trader and member of the Midwest Stock Exchange, which then led to a much better opportunity at the Chicago Board Options Exchange. By his early 30’s, he had become very successful in markets, but a health situation caused him to back away from the grind of being a full time floor trader. During this time away from markets, Scott was completely focused on educating himself about true overall health and natural healing which remains a passion to this day.Scott returned to markets over fifteen years ago where he continues as an independent trader.
'Trader Scott’s Market Blog – Sentiment/Gold/Bonds – January 10, 2017' have 12 comments
January 11, 2017 @ 2:41 am Dmitrii
GOLD have accurate correlation with USB and USD http://stockcharts.com/h-perf/ui?s=$USB:$USD&compare=$GOLD&id=p31906337814
January 11, 2017 @ 9:48 am traderscott
Good representation of the high correlation currently – they are all moving together currently. It’s on display today.That will change, but as market participants, the short term correlations can not be ignored. They can offer entry opportunities (or exit). And gold, once again, having trouble with $1191, and needs to back up to have a shot at it.
January 12, 2017 @ 10:42 am Easy Al
Gold and dollar index move in different direction (correlate negatively) in about 3/4 of the time. They move in the same direction about 1/4 of the time.
January 12, 2017 @ 11:35 am traderscott
Sounds about right. I’d like to know how you came up with that, but it certainly “feels” correct. Those non-correlations are the most important, as they’re usually around major bottoning and topping areas. Also, my bullishness on the S index itself is mainly about what a mess Europe is. Gold vs. other currencies rather than $ is important. Currently the selling waves in the $ are beginning the process to set it up for the next big rally. Some currencies like the Ruble have already had a major bottom vs. USD.
January 11, 2017 @ 4:50 am Larry Ducharme
Hi Scott,
The late Richard Russell of Dow Theory was big on P&F charts, said they gave a better picture without the noise. I noticed the the P&F chart on Silver is showing a bearish descending triple bottom breakdown as of November 14.
My question is two-fold: what do you think of P&F charts and do you think that this bearish signal is important to the intermediate to longer term prospects of silver?
January 11, 2017 @ 10:07 am traderscott
I use P&F charts extensively Larry. They are an incredible tool. But I don’t do chart “patterns” in markets, they confuse me, so i don’t know about the signal, per se. They would have kept me from buying silver, as a futures trade, on Thanksgiving (archived). And also from buying physical silver at $15.70 last month (also archived). But they are a great help in deciding how much potential a market or stock has. They also help me with time frame work, almost cyclish type of work. But for P&F, please google Richard Wyckoff.
January 12, 2017 @ 2:59 am Christopher Hageney
Hi Scott, a question – do you think we’ve seen the final lows in gold? I ask because to me it does not feel like we’ve seen a full capitulation sell off either in the last quarter 2016 or 2015. Is a capitulation still to come, or is it in fact not necessary at this stage in the accumulation process?
Thanks
Chris
January 12, 2017 @ 9:28 am traderscott
I absolutely do believe we saw a capitulation in 2015. Often the real capitulation is not at the very lows, but in a series of selling climaxes. I discussed that several times about how there were three bigger picture SCs before the December 2015 low – the final low is often a lower volume shakeout. Just look at what happened to GDX into the 1/19/16 low. Look at the big drop in volume – that’s a shakeout. So my belief for quite awhile was the late 2016 low and then the big rally out of December, would be a retest at a higher level than December 2015. Meaning, there would not need to be as violent of an SC in this time frame. I still believe there will be more selling waves this quarter – let’s let the market “tell” us. but my own approach, bigger picture, is to continue to accumulate miners and silver into weakness. A close tomorrow above $1191 would give me more confidence that the next selling wave/retest will be higher. The $1122 is the bigger buying area – markets are about probabilities, I have my beliefs, but I still use the big selloffs to buy in an accumulation area, new low or not. Like with silver for me last month. Without the good close in gold, I’m dubious of the low being in place. But a new low would be a buy.
January 12, 2017 @ 4:18 pm Chris
Right, I get it now. Thanks for clarifying and explaining it to me. I do wish I had been reading your blog back in 2015 whilst that low was unfolding. I am trying to emulate your mantra of selling into strength and buying into resistance, and your charts and analysis / explanations are incredibly useful.
I wish I had found this blog years ago. In the past I have been far too guilty of listening to the noise, and letting my emotions rule me – both leading to terrible timing!
Meanwhile today’s gains in Gold look to have nearly reversed by the end of the day. I’ll be watching that close tomorrow with interest. Thanks again.
January 12, 2017 @ 10:10 pm traderscott
“Buying into support” I think you meant, but Chris this business is a struggle every day. It gets easier over time, but it’s still tough. This is a long-winded answer, but as to gold, for several years I was unwavering in my belief of a major secular bottom in late 2015 (targeting September, but honed it as we got closer, and then said buy in December). I took alot of grief for several years from the gold permabulls, even though I was/am extremely bullish very long term, it was just the timing. And this whole time since that December secular low, I have been repeating the same darn thing. We’re now in a major bull market, but only buy into extreme weakness, and late 2016 would be the retest at a higher low. But this isn’t physics, it’s markets, and it’s only about probabilities – this has to be honed as we get closer. In the March post, I thought the secondary low in silver would be in October, but honed it as we went along. And we should always have a margin of error in our outlooks, since this is art, not science, even tho we need to make it as scientific as possible. All I can do is stick to my work, and be prepared every day – and plan for the weirdness, by including a margin of error. That’s why the great entry point is so very important, because it neutralizes alot of the uncontrollable factors in markets – it is just probabilities after all. There is no one who gets this right every time. I share with you what my view is, and my belief. But my most important “job” is to plan real well and if the great opportunity arises, no matter my belief of what “will” happen, I still have to step up to the plate. This business is not about predicting. It’s about recognizing the great opportunities, and having the “courage” to step into it, and do it every day/every time. What does it matter what I believe, it’s about the market telling us it’s “time”. There are market gurus all over the place, how many of them have actually made a living solely from markets, and absolutely nothing else, for 25 years. My mentor SW knew zero about charts, but was an oustanding trader. He just knew how to trade. That’s all we need to know – we need to know markets and what they really are. And they are nothing like the vast majority of know-it-alls think they are. We don’t need to be smart, we don’t need to sound like we know alot, we just need to know how to pull out profits from the market – consistently. We’re going to be wrong sometimes, and we need to learn from it, not obssess about it, and move on to the next opportunity. Learning this business is a process, it takes time. It’s never one thing that does it. It’s all of the little things every day which keep adding up. A “great’ method will not do it. It’s only a part of it. All of the nuances of understanding how to implement the method, what to do when things go wrong, how to plan, what to learn, etc. There’s the success.
January 12, 2017 @ 6:18 pm Chris
Thanks Scott, I can see where my thinking was wrong.
January 12, 2017 @ 6:33 pm traderscott
Of course Chris, I’m replying in more detail to your other comment in a bit.