by John Galt
September 2, 2009
Ah yes, the banana party. Why are they celebrating?
Simple. It would appear some degree of normalcy is returning to the markets despite the best efforts of the market manipulators. Gold surged on a day where risk premium returned. The flight to safety out of the dollar and into the Aussie and Yen continued. The 1-3-6 rule holds true. What is the 1-3-6 rule you ask? Here is my best take on it…..
The 1-3-6 Rule
Years ago a trader explained to me that if the 1 month, 3 month and 6 month Treasury yields dove towards zero and out of their “normal” range during a bull or bear market that there was a fear of a huge risk to the markets or other financial event occurring and that meant the big money as it is called, wanted to be in the safest of short term instruments that could be cashed out at maturity or sold on short notice to raise cash or return to the markets should it prove to be a non-event. Well, let us look at the history of this over the last three years and since the crisis began in February of 2007 when the first of the mid-sized mortgage finance companies started to collapse and a lot of us went “oh crap” and knew what was coming with this credit market implosion and eventual financial system collapse.
Here is a 3 year chart of the 1 month Treasury continuous yield with notations:
As you can see from the notations and the chart, the yield has yet to return to anywhere close to the bull market levels of 2006-2007 and shows no indication of moving north to confirm the recent 50% plus retracement of the S&P 500 during this bear market rally. In fact today at 5 p.m. the 1 month was yielding a paltry 0.07% and has been on a steady decline for over 2 weeks now. If this sucker dives below 0.03% again that will be your siren blaring that another event is impending or has already happened and just not made public at the moment.
For a better perspective, let us look at the 18 month charts of the S&P 500 vs. the 1-3-6 rule:
As you can see from my comments all of this “sideline money” that was supposedly pouring into the markets looks quite happy to park and earn very meager yields on these three short term Treasuries and thus this rally has been suspect from day one as you would think, logically, that money would fall out of the short end and back into equities if they believed in the actions of this government and the validity of the “recovery” talk being promoted like an all Woman Nude Wrestlemania to be broadcast at halftime of the next Monday Night Football game.
If this rally was real, substantial and had the full faith and belief of every money manager, overseas investors trapped in the dollar at the moment or just your typical bankster, yields should be moving up and so should the S&P 500. Well the S&P 500 hit the ceiling and yields moved further down. Is this rule 100% locked in stone and steadfast? I would say no for now, but as this market progresses considering the condition of the U.S. economy, I think it is worth monitoring as large sums are parked to insure safe returns of capital instead of massive returns on capital.
Just for kicks, let us review the entire crisis and this graph since February 2007:
Pretty telling isn’t it? The smart money knew when to dive for safety in December and January of 2008 forward and pretty much has remained there since that time. Thus why I always preach watch the bond markets, not the equities for a hint as to what is happening in reality land as opposed to Bubblevisionland.
Gold Begins a Move; Is it Real?
I think this might be it due to several factors. First, the seasonality favors a major gold move as usually this is when they tend to start, especially if there is any whiff of international crisis or impending financial system stress. The graphs in the section above validate part of this theory but the volume in the gold ETF (GLD) says a lot also. To get an idea of what I mean by volume and major moves, first, let us review the stock chart for one year of the owners of the U.S. Government and Federal Reserve, Goldman Sachs:
Note the various volume spikes in the up and down moves in GS and corresponding price action. Now let us review the same for GLD:
Numerous spikes, large moves up and down then a long period since late March after the last volume spike until today where we had a nice move on triple the average volume and a decent price move upwards. If this validates by crossing the 1050 mark with more large volume moves with corresponding price confirmation like today, this sucker will hit 130 per share much faster than anyone can imagine and thus a corresponding bullion price well in excess of $1300 per oz. The current uptrend in the moving averages and price confirms in GLD and the bullion also:
The big news that moved the market is still a mystery. There were rumors yesterday of a major financial company having a rumored default (yet to be confirmed) and then today the discussion about the Chinese defaulting on some derivative contracts and then the news that they were buying $50 billion in IMF bonds had to unsettle holders of U.S. dollar denominated assets and the currency itself. As if we did not have enough to track with the US Dollar Index, and moves against the Euro, Yen, Sterling and Aussie we now have the IMF currency, er, SDR to track our dollars valuation against and it is doing worse against the non-existent existing SDR than the Euro and catching up the Sterling quickly:
While that is nothing I’m going to lose sleep over, I think I shall begin charting it along with the Euro, Yen, Aussie, Canadian dollar and other currencies to see just how much impact this could have should other nations like the oil cartels elect to divert holdings from Treasuries and into IMF investments.
Thursday could be a wild day if the weekly unemployment claims come in hot but I think we stay pretty close to the predictions of the experts and trade relatively flat until 0830 on Friday morning when the August unemployment report comes out. That is when the action should pick up rapidly and Sunday night’s Asian session will not be dull either.
P.S. – If you like the appearance of the webpage now, let me know; Thanks, John