Wednesday, July 18, 2007

PM strength continues

Gold gained nearly $8 on the day but the stocks did even better. HUI jumped nearly 4% on very heavy volume. It broke out of a textbook flag pattern where the legs AB and CD are expected to be equal. This points to somewhere above 390. In view of the old high at 401, I'd say the HUI has a clear shot at 390-400 before looking back.

Major indexes were under pressure after Bear Stearns finally admitted that investors in its two troubled subprime funds lost just about everything. At their worst, all three indexes were down 1% or more. Yet they all bounced back snappily with the S&P cutting its loss to all but three points. While we marvel at the way HUI charged out of the gate and finished strong with the recovery in the general market, we shouldn't lose sight of how resilient this market continues to be.

Intraday chart of the S&P vs the HUI:

I remain sympathetic to the bear thesis as the worst case predictions about the housing market are coming true, but the market has a mind of its own. I continue to be torn between, on the one hand, weakening fundamentals catching up with this market, and on the other, wanton buying from those with too much money and too little sense. Since I'm not taking home a regular pay check anymore, I can't afford telling the market the right thing to do. So I wait and watch yields on the 10 yr and corporates like a hawk. I do take some solace in that PMs and the general market might revert to the inverse relationship that was in effect up until the end of 2002. In other words, the positive action of PMs is relieving my urge to do some hedging. Let's hope that continues.