304 North Cardinal St.
Dorchester Center, MA 02124
Picking up where we left off on Tuesday, the powerful kinetic feedback loop that began in the currency markets – appears to be gaining the critical mass needed to take a few assets over the edge next week. Specifically, we are looking at the euro, Australian dollar, gold and silver. Although the US dollar is becoming considerably overbought on the daily measure and has extended its longest weekly rally since before 2000, look no further than what transpired – either in its last secular breakout leg, or the two previous occasions that exhibited similar drops in historic correlations. As we cautioned on Tuesday, the risk continuum in this environment extends beyond normal distribution; i.e. – those looking at mean reversion strategies, either from an oversold price or sentiment perspective – may find themselves in a barrel cascading over the edge.
As expected, the Australian dollar was rejected by long-term resistance in January – with the diminished correlation window (for an explanation see, Here) with gold resolving itself on the downside. Not surprisingly, this dynamic is most resemblant of the set-ups in gold and the Aussie in the summer of 2008.
Leading the charge lower in gold, the miners continue to underperform spot prices by a considerable margin. Until we see the structure and momentum profile within this ratio of a low – the highway down in spot prices in the precious metals sector remains as open as Route 66.
Continuing the theme of the next chapter in the great commodity unwind/deflation that has been in effect since QE3 was introduced in September; we do not consider it a mere coincidence that both the commodity markets and the commodity of momentum itself that became Apple – have been breaking down along similar lines. We feel that the old market adage, “Commodity market weakness presages equity market weakness” – rings especially true today, despite the resilient bid in the equity market indices.