Oil market in rally mode

The short trading portfolio is taking it on the chin today in part due to the overall rally in market, but primarily on the 3% gain in oil. I originally called for a short trade in oil back in October (for instance here) based on the technical setup and the increase in inventories. Here is the latest chart with today's price action of the United States Oil Fund (ticker USO).

As it stands right now, I am not ready to pull the plug on the trade and I continue to think that the USO and oil are heading lower. The USO is on track to trade less than 10 million shares in today's trading. This compares to the downdraft of 12 million and 17 million shares on October 19 and October 22, respectively. This is not enough demand to signal a reversal of trend in my mind. In addition, I think today's action alleviates some of the oversold conditions and closes the recent price gap, essentially building cause for lower price.

A comprehensive look at the shadow banking system

Soberlook.com highlighted the below working paper out of the Federal Reserve Bank of New York.

Shadow Banking



I have seen some of the information detailed in the report through other sources, but I think it could be well worth a read.

The earnings cliff is the cliff to be worried about

This video comes via the Reformed Broker Blog....

Ritholtz and the team have been warning about slowing earnings growth for a little while now. Q3 earnings were just abysmal, despite somewhat of an improvement (at least at the margin) in a number of economic indicators. For all the talk about the looming fiscal cliff, what I think is being ignored is the impending earnings and/or jobs cliff, a result of increased regulations and increased costs from the implementation of Obama's healthcare law.

Volume off the high 11/6

Not many names making new stocks or funds falling from their recent highs on volume. As reminder, this screen is based on research and past experience where investments selling off from near-term or 52-week highs on greater-than-average volume tend to underperform the market over the next 6-months to a year.

High volume highs 11/6

The number of companies hitting the screens is starting to subsidy. There does not appear to be any apparent theme in today's new high volume highs. As a reminder, the high volume list is compiled by looking at stocks and funds that are reaching new 3-month highs on higher than average volume. I have detailed in previous posts that investments showing this characteristic tend to outperform the market over a period of 6 months to a year.

Caveat for further downside in gold, A decline in the US dollar

One caveat for my call on further downside to gold is the possibility for a retracement in the gains experienced in the value of the dollar. The value of the dollar has risen as of late as investors reduced risk and on asset class rotation by institutional investors. In any event, the US dollar index and the Powershares US Dollar Bull Index have increased in value since mid-October. Looking at both are providing some mixed signals as to direction of the value of US dollar.

The following are the charts for the US dollar index and the Powershares US Dollar Index fund (ticker UUP).

What is interesting here is that the US dollar index has broken above both the 50-day and 200-day moving averages. This is while the RSI is in a rising trend and the MACD has turned positive, both indicators that the recent trend in the price of dollar will continue upward.

Turning to the UUP however, the fund is moving into the early September price range on lighter relative volume. To me this suggests a possible pullback, as sellers move into the market in order to take profits or more likely sell into strength in an attempt to break even.I would also note that both the dollar index and the UUP are overbought on their respective stochastic measure.

The dollar index is an important indicator to watch, as the value of dollar and commodity complex tend to move inversely. A pullback in the value of the dollar would likely lead to a rise in a price of gold.

Update on gold, more downside is growing more likely

As a followup to last Friday's All that Glitters post where I suggested watching the trading action in gold to gauge its future path, it is my opinion that the price of gold is likely to experience more downside from here.

Last Friday, gold fell by more than $40 while the Spider Gold Trust ETF (ticker GLD) fell $3.5 or 2.1% on 14.8 million shares. Flash forward to today, gold is trading marginally higher. However, the trading has been lackluster, as volume on the the GLD is on pace to trade less than 6 million shares. Since October 5, the GLD has experienced an expansion of volume on the downside while the MACD has gone negative.

The more that volume is light on the upside, it becomes increasingly likely that the 200-day moving average is broken. In my mind, this is being confirmed by the setup in the chart of GLD, with volume expanding on the downside from October 5 through October 24 and contracting on the counter-trend move from October 24 through November 1. I think this setup portends to a downside move on the GLD to around the $157 price point, or nearly 4% more downside. I will hold the short trading position in the GLD in the short trading portfolio and await a better buying opportunity to buy gold and precious metal stocks.