Existing home sales and what it means for gold and the stock market

Donald Trump once said: "Well, real estate is always good, as far as I'm concerned." This is from an individual point of view of course, but can we expect the Existing Home Sales numbers that will be released at 10:00 this morning to be good? Let's take a look at what we can expect and what will be the impact on gold and the stock market.

Existing Home Sales, for those who don't know, basically track the number of existing homes, condominiums and co-ops that have been sold during the month. It is considered a leading indicator for the economy, meaning that where it goes the economy goes (in theory). You can see on the chart above that in 2006 the Existing Home Sales started to collapsed before the financial crisis. The stock market followed right after.

The general expected Existing Home Sales figure is 4.92M for this morning. Generally, we can assume that the stock market and gold have already priced in this expectation. There are three scenarios possible this morning. The first one is that Existing Home Sales are in line with expectations, in which case we shouldn't see gold or the stock market react after the release of this indicator.

The second scenario is that there's a better reading that expected; let's say something around 5.2M. This would send the signal (in theory again) that the economy is improving. We could expect an outflow from gold to other assets in this case, because of the decrease in fear of investors. This, among other factors, could pump the stock market and make it run higher, for now.

The third scenario is a worst than expected reading; let's say around 4.6M. This could signal an economy that is stagnating or losing steam. This situation would be good for gold as investors would want to hedge against a stock market dip. The stock market, when not disconnected with economic reality, should in theory follow a bad Existing Home Sales reading down.

In reality, a lot of other factors are influencing whether gold and the stock market will go up or down. What I'm personally looking for is the second or third scenario, in which case I could profit from a surprising reading.

After hours trading summary

This was a roller-coaster day where the FED once again saved the market. The fear of a rates hike scared investors, but even if Yellen removed the word "patient" from her speech, rates will remain at their current level.

"The Fed was... far more dovish than what the market was looking for and that's why we rallied," said Krishna Memani, chief investment officer at Oppenheimer Funds. - Yahoo Finance

That automatically made everything from gold to oil to stocks surge. The only big loser was the US dollar against other currencies. 

That's why I transfered a lot of my US dollars in Canadian dollar to invest in oil stocks. I bought cos.to(cos.ca) at $8.97 CAD today, which already jumped 7%. What's even better is that when oil is moving up I'm profiting in two ways; first with the oil stock itself, and then with the strengthening of the Canadian dollar. For those of you who dont know, Canada's economy rely heavily on oil, so oil prices and their stock market are highly correlated.

The stock I bought yesterday, FIVE, didn't move a lot today, and I'm hoping for more action tommorow or friday.

Gold was on fire today after Yellen's speech, with miners up around 5% and NUGT up 15%. I may jump back in gold later this week or next week. 

How was trading for you today?

Banks stress test, stock market, and gold

You probably already heard of the Dodd-Frank Act Stress Test that puts 31 big banks through a crisis scenario. They basically test a wide array of scenarios that goes from a small drop in the stock market to a severe collapse of real estate, the stock market, and main street economy.

Such a scenario would include an unemployment rate of 10%; a 25% decline in home prices; a stock market drop of nearly 60% and "a notable rise in market volatility."   USA today

This test is the first half of the big test (the second one is a qualitative test), and the Federal Reserve concluded that it was a success for all 31 banks. 

All 31 U.S. banks passed a 5 percent minimum hurdle for top-tier capital in an annual health check by the Federal Reserve, the central bank said on Thursday, as the industry continues to rebuild buffers after the crisis. Yahoo Finance

You can access the complete test by clicking here.

Should we be surprised of that good result? I don’t think so. If we look at the chart below, we can see that Reserve Balances with Federal Reserve from banks are at an all time high.

In simple terms, after the crisis the Federal Reserve “printed” the money and sent it to reserve accounts. Banks can then expand the currency supply and create more chequebook money through Fractional Reserve Lending.

This newly created money is supposed to flow into main street economy, but the reality is that it has found its way in majority into some assets such as the stock market. Matter of fact, you can take a look at the velocity of M2 Money Stock on the chart below.

This shows that while banks get healthier and the stock market rises, money is not circulating in the real economy. So I’m not really surprised that banks passed the test with a good score. They have plenty of reserves to support a recession.

The stress tests are so named because they measure whether the banks have enough capital to withstand major economic stressors, such as the 2008 collapse of the housing market. A passing grade means they have enough capital to withstand, say, rising levels of unemployment or plunging commodity prices. - USA Today

Now, the real question that we can ask ourselves is if regular people would pass a stress test. Let’s take a look to Real Median Income to answer the question.

Since the crisis regular people earn less money. But at the same time it looks like they understand the importance of saving money since the crisis as you can see on the chart below.

However, I don’t think the majority of people would pass a stress test. If there was a major crisis, the system and banks would be ok for a certain period of time, but I think regular people would suffer.

Another interesting point is the correlation between Reserves Balances and the S&P500 as you can see on the first chart of this article. It basically shows that if the S&P500 would crash by 60%, banks have a big enough cushion. It also shows that when they’ll start pulling out the money from the stock market there will be a danger for inflation if they inject it in the real economy.

At that step, we may see a rush into gold to protect wealth. But before that turning point, I doubt gold will be traded at August 2012 levels. However, I believe gold will remain of strong value in the meantime.

In conclusion, I don’t think a crisis would crash the whole system and banks like some people say. However, I think it will be a much greater threat to regular people who could see their wealth be wiped out if they don’t protect it.

After hours trading summary and poker

I didn't give any news since "Catastrophic Monday" for gold and miners. Since then miners are continuing to sink so I'm trying to not look at it too much to don't get emotional. I entered NUGT monday morning at $16.08 (yes, the peak) and for once forgot to set a stop loss, which is totally against my trading strategy.

Well I'm paying a high price now with NUGT sitting at about $13, eating a chunk of my 85% profit YTD. It sounds pretty bad, but I'm still confident we will see gold heading way higher soon. I was expecting a pop this week, which didn't happened.

Some of my readers asked me if I got out at one point, mostly when NUGT hit $14. I didn't and I think many of them must be wondering why. To answer I will use a poker concept called being "pot committed". 

Basically, there's a point where you invested so much in the pot that even if odds are not favourable you have no choice but to continue to play the hand. If you fold at that point your expected value for profit turns negative. I am pot comited right now with NUGT.

The good news however is that I don't see miners down at these levels for a long period of time. Matter of fact, I don't see gold at $1,200 for a long period of time, but higher. 

I know that a lot of traders got caught in the same bull trap. Are you one of them? If you are, where do you see NUGT and gold heading?

Yellen Turning from Friend to Foe for Dollar Bulls: Good for gold?

From a long term perspective, gold and the dollar have an inverse relationship. If the Dollar gets stronger, people tend to drop gold. On the contrary, if the Dollar weakens people tend to buy gold to hedge, bidding the value up.

The Federal Reserve has encouraged a stronger Dollar these last couple of years, but this may be about to change.

“While Bloomberg’s Dollar Spot Index climbed to a record on Tuesday, the measure is rising at the slowest pace since June and speculators including hedge funds are paring bets on how much the currency will strengthen. Yellen told Congress last week she won’t be locked into a timetable for boosting borrowing costs, just days after minutes of the Fed’s January meeting underlined the damage a stronger dollar can do to the economy.” – Bloomberg

Of course, this won’t happen overnight. For the time being we can expect a strong Dollar in the short future. That being said, I think the picture could change quickly and drastically. The strength of the Dollar is a relative strength rather than a fundamental strength in my opinion.

Let’s take a look at an interesting cycle chart comparing UUP and GLD:

We can clearly see that GLD (in orange) has a lot of room to go up and UUP (in blue) will eventually be pulled by gravity.

 “While bullish-dollar bets remain the biggest position in the market, investors are reducing the amount they’re speculating, according to data from the Commodity Futures Trading Commission in Washington. Net longs on the dollar versus eight major peers fell for the past three weeks to 404,276 contracts as of Feb. 27, down from a record 448,675 in January.” - Bloomberg

I believe we will see GLD move above $120.00 in the months to come. 

After hours trading summary

What a massacre for gold today! Gold was trading above $1,220 last night and got smashed back down to the $1,205 level. This has been disastrous for many people as I saw on forums and stock twits.

Many US economic indicators were in the red, including a really worst than expected -1.1% in construction spending m/m. China interest rates cut was also in favor of gold. But what happened cant be changed and should not be over justified. Gold simply plummeted. 

NUGT was up pre-market, which was a confirmation for me, at that time, that my weekend analysis was accurate. NUGT was trading in between $16.00-$16.10 around 8:30 this morning, and so I jumped in at $16.08. I had stuff to do so I figured out I would come back in about an hour to set my stop loss at $15.50-$15.55. Congratulations to my readers who got out at that point! I know some of you did, and some of you didn't.

Well that didn't go according to plan for me. When I came back I saw NUGT in the low $15s, which was around a 7% loss. I hate being caught in those situations. They key however is to not panic, because it is already too late. Yes this could become a costly mistake. But at the same time it is an opportunity for me to explain some additional concepts here.

There is basically 3 choices in those situations:

1. Sell and take the loss

2. Average down if it continues to go down

3. Wait until it goes back up to either turn a profit or diminish the loss

(4.) You could also hedge your position

I still trust my analysis, and so I have decided to go with 3 until tomorrow. However, if NUGT hits $14.00 I will be out for a 15% loss. This is huge, and it's the first time I will post such a big loss if it happens. 

That being said, I'm not nervous because I'm a consistent profitable trader/investor, and I think remaining calm and logical is key. 

Have you already went through a loss like that? 

Pre-market trading plan summary

Gold jumped above $1,220 yesterday night and came back down a little bit this morning. I expect gold to rise this week, and GLD to hit about $118 at one point.

My probabilistic model for GDX shows about %80-%20 of going up. GLD however is more promising with a 90%-10% of going up.

Miners (GDX, GDXJ) should follow gold, but their upside potential is limited in my opinion. I’m looking for 3-4% return trades, not 10%.

I will probably enter NUGT this morning at around $16.00 for a day trade. Like I said, I will be quick to put a take profit order if I reach 3% profit. You can follow my moves on the “Past performance” page.

As usual, I will set a stop loss at -3%, which means I will exit the position if NUGT hits about $15.50.

I know there’s some news about gold from India. I will probably analyze that later today.

Will you be trading gold today?