Our Wall Street Angle site seems to be off to an auspicious start. We are fairly new and will “feel our way” around, so to speak, as we try different formats, content, and orientation. Due to our relationship with our sister site, siliconangle.com, and our base location in Silicon Valley, we will always have an orientation towards the technology sectors of the markets. However, a weekly look at the overall markets in general and other aspects of the markets besides technology, especially from an investing or trading point of view, should help to provide a somewhat broader perspective and service the Wall Street reference in our name.
To anyone paying even minimal attention to overall market action, it will be no surprise to note that the markets continued their unrelenting march upwards this past week, continuing to defy gravity with the Russell 2000 index of small cap stocks setting a new all time high and up more than 150% from its’ March, 2009 nadir while the larger cap indexes such as the Dow and the S&P 500 have posted multiyear highs of over 12,800 and 1360, respectively, up more than 100% from their respective bottoms reached just over two years ago in March, 2009. The reaction of traders to this week’s Federal Reserve announcement that they will continue their easy money accommodative stance, and the first ever press conference by a Fed chairman to follow up on the announcement, was to continue to increase the speculative activity which has been promoted by near zero interest rates and the money printing in which the Fed has been engaged for some time now.
The speculative frenzy is probably most evident in the silver market as seen in the exchange traded fund (ETF) for silver (ticker symbol SLV), a proxy for the spot price of the silver futures contract. The sponsor of SLV actually buys the physical metal and stores it, I believe in a vault somewhere in London. The shares of SLV are up almost 80% since January and some 30% for the month of April alone and have nearly tripled since this time last year. The massive increase in volume in both SLV, which was quadruple its’ daily norm just this past Thursday, and the 20 fold increase in volume of shares of the Proshares Ultra Short Silver etf (ticker ZSL) this past week from levels of just a month ago, are evidence of the sheer wackiness currently prevailing in this market. The shares of the ultra short silver etf will increase in price when the price of silver declines by a multiple of the actual price decline of the metal due to the leverage it employs through the use of derivatives (futures contracts and related options) related to silver. The churning effect of huge increases in volume with little to no net change for this past week in the price of the SLV etf is often the sign of a top in a market. While there is no guarantee of anything, and this market has been in a huge uptrend for a long time now, look for a correction in the price of silver in the not too distant future.
Alan Greenspan’s (former Fed chairman prior to Ben Bernanke) easy money policies in the wake of the Long Term Capital Management hedge fund blow up in 1998 and coming out of the recession at the beginning of the new millenium led to bubbles and subsequent busts in the tech stock market (the “dot com” bubble) and the housing market, respectively. Maybe this time is different, as is often the chorus of those riding and benefitting from the formation of investment and trading bubbles, but most likely it isn’t. It won’t be a housing or tech stock bust this time, it will be something else, and the most likely candidate currently evident is the silver market.
Excuse the technical jargon which I will be prone to lapse into from time to time given my familiarity with reading stock charts. A technical chart formation known as an inverse head and shoulders pattern was confirmed this past week in the S&P 500 index price (SPX) by a break of the so called resistance neckline of the pattern. This is considered to be a highly reliable pattern by stock chart technical analysis aficionados. Given the parameters of the pattern, a target in the area of 1425-1430 for SPX is fairly predictable, although it is unlikely to be reached in a straight line ascension. A so called “re-test” of the 1340-1345 area of SPX is to be expected in the not too distant future before the march to 1425-1430 can fully proceed. The close for the S&P 500 this past Friday was 1363.
Author’s note: this was written and posted on Saturday, April 30, 2011. On Monday, May 2, the price of SLV gapped down from its’ close on Friday, April 29, and closed at $42.83, down nearly 9% from its’ prior closing price.