A Melman Minute
By: Leonard Melman
August 8, 2008
We have heard that in some oriental cultures, the
number "8" is a symbol of prosperity plus good fortune and, therefore, today's
date of 8/8/08 should carry positive implications. Try telling that to the
world of natural resource development this morning! Quotes on natural
resources, from metals to grains to the petroleum complex to all currencies
outside of the U.S. Dollar, are being hit - and hit hard!
Not surprisingly, the American securities markets
are rallying strongly while the much more resource-dependent Canadian indexes
are in decline. As of 8:00 AM PDT, the Dow Industrials were up about 200 points
while the TSX had fallen close to 60. However, the real news was in commodities
and the losses so far this morning are truly noteworthy, with some examples
listed below: (all quotes US$)
| |
8:00 AM PDT |
TODAY"S CHANGE (so
far) |
| GOLD |
$856 |
-$17 |
| SILVER |
$15.41 |
-$0.85 |
| COPPER |
$3.32 |
-$0.09 |
| CRUDE OIL |
$116.68 |
-$3.34 |
| GASOLINE |
$2.93 |
-$0.07 |
| CDN. DLR. |
$.9367
|
-$.0137 |
| EURO |
$1.5012 |
-$.0282 |
| WHEAT |
$8.06 |
-$0.16 |
There are others that could be listed, such as
natural gas, soybeans, platinum and so forth - but the point is clear and that
point is this has been a resoundingly negative day - so far - for the natural
resources themselves and for junior mining shares as well. We say "so far"
because, in our opinion, the severity and depth of these declines suggests a
marked possibility that this early morning selling could be in the nature of a
'selling climax', marking the end of this period of resource declines. Time
will tell.
We recently noted that our attention had become
focused on the seemingly artificial nature of sudden bursts of buying which have
been supporting the U.S. securities markets of late, and this morning the same
feature occurred, but this time with exceptional suddenness. Please note on the
short term chart of the "Dow" that the market opened lower and fell to 11,390,
but then 'turned on a dime' and within 50 minutes had soared to 11,640 - a gain
of 250 points in less than one hour! Most of the important news such as
strength in the US Dollar and weakness in the petroleum complex was already
known before the markets opened, and yet they turned so swiftly. Once again,
our suspicions are aroused that some sort of outside intervention - perhaps by
government - is having a marked impact on the timeliness and direction of U.S.
market moves.
The chart on gold, using as a proxy the Exchange
Traded Fund GLD, appears to be entering an important trading area. If GLD
breaks decisively below clear support between 82 and 84 (about spot $835 to
$855), then our interpretation of this chart would indicate a growing
possibility of a move down to the "70" area (about $715 spot) before the gold
chart would encounter support from two sources. First, "70" represented
considerable resistance between early 2006 and late 2007 and resistance areas,
once broken, frequently become support areas for future trading. Second, when
the trading bottoms of "40" in mid-2005 and "65" in late 2007 are connected, the
resultant trendline comes in just above the "70" area. Until these zones are
violated, the long term uptrend would appear to be intact.
A second thought goes back to a historic market
'saw' that tells us that bull markets want to rise with few adherents on board,
while bear markets want to fall with as many market participants as possible.
As a consequence - if the old adage is indeed correct - bull markets are
frequently interrupted by scary selling waves which drive previous participants
to the sidelines - often just before the next powerful move upward is ready to
take place. The reverse is that bear markets, such as we have been observing in
U.S. securities markets since the 2007 Dow peak above 14,000, have periodic
rallies which are so convincing that those who have gone to the sidelines become
convinced that the danger is over and plough back in - just in time to get
slaughtered by the next down-leg.
We have previously noted that during the Great
Depression, the path downward which carried the Dow Industrials from a high of
over 380 to a low of 40 was interrupted no less than six times by periodic
rallies, many of which induced new participation in what quickly turned out to
be devastating losses.
In support of that thesis, we note the chart of
"Citigroup", the holding company for the world's largest bank, Citibank. Please
observe that on the way down from $55 to the present quote of near $19, there
were six distinct rallies; from 45 to 50, 31 to 36, 30 to 35, 23 to 30, 18 to 26
and, most recently, 14 to 21. While the verdict is not yet in regarding the
last rally, market participants who quickly jumped in on every previous rally
saw quotes head lower, not higher.
Regarding natural resource commodities and the
securities based upon them, today's markets can be interpreted in two particular
ways: either as massive breakdowns leading to further weakness, or that today
represents a huge 'capitulation' day, marking the end of the declines from the
top areas of just a few weeks ago.
Trading over the next few days and weeks should
provide us with a great deal of useful information.
One last thought. Today marks the beginning of
China's much-anticipated Summer Olympic Games. They have been counting on the
spectacle of the Games as their opportunity to shine in front of the world's
media and to present the most positive image imaginable. However, problems are
indeed possible, including the effects of pollution as well as the distinct
possibility of massive, well-planned demonstrations and disruptions.
Given that China is an autocratic power whose
leaders have unlimited authority, we wonder how they would react if the Games do
not proceed smoothly, if demonstrations mar their "day in the sun." Would they
want to exact some sort of retribution in world markets if their dream turns
into a nightmare? It is our personal hope that the Games proceed smoothly - but
it is worth contemplating what might happen is they do not.
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