Commodities set to rebound

The dark cloud of financial Armageddon was lifted last week. Or so the market was told. Whether systemic failure was imminent will be left for the historians, but certainly the overlords of the U.S. financial system had a compelling and frightening storyline for the stewards of the American taxpayer. The end result is a massive backstopping of U.S. credit markets by the U.S. Treasury and Federal Reserve, an intervention that seeks to put the financial system back on its feet. The worrisome prospect of a 1930s style bank-run was the picture painted, and the crippling flight at mid-week toward U.S. Treasuries at the expense of money market funds gave Thursday night’s bipartisan bailout commitment the sombre resolution of a nation at war, fighting for its own survival. The stock market breathed a huge sigh of relief. Of course, the sound of the U.S. printing press revving up was sweet music for the recently toppled commodities market. The smell of inflation is in the air –crude oil rebounded above $100 and gold bullion rallied 14% to close at $864.70. The TSX bounced mightily on Friday an astounding 7%! Indeed, the U.S. move is a game-changer – it puts a quick stop in the global credit crunch and opens the stage for a new round of money flow as the consequences – both good and bad -bear fruit.

The dramatic shift in the market that has resulted from this prospective rehabilitation (socialization) of the credit market has traders embracing the short-term volatility. The incredible shift in late-week trading made for some exciting and profitable trades. But now that the house of cards has been cleared and shoved off onto the books of the U.S. taxpayer, what can we make of the current trend situation? Although last week may have ushered in a stock market bottom, there are – as always – lingering questions about the consequences of this government solution. Regardless of whether the bailout costs the American taxpayer as much as it is feared - $700-billion to $1-trillion estimated now, who knows if that is a lowball or exaggerated figure – there will be huge shifts in capital flows as nimble capital market participants deal with this huge shift in financial liability to the U.S. Treasury. Illiquidity triggered the intervention. Renewed liquidity will cap the knees of the greenback. Investors can expect the TSX and other global markets to revive.

The S&P/TSX Composite Index currently remains firmly in Stock Trends Bearish territory. The Stock Trends TSX Bull/Bear Ratio is 0.3, with 60% of trending stocks categorized as (strong) Bearish. That trend picture will not be reversed so easily. The cathartic moment of last Friday will be defining – the tremendous amount of trading is testimony to that. The Sector Select SPDR Fund (AMEX:SPY) recorded over 5.2-million trades last week, just short of the 5.7-million trades the entire Toronto Stock Exchange logged in (which is a considerable increase over its recent weekly average). As an indication of just how wild the market was last week – especially for financial stocks - the SPDR Financial ETF (AMEX:XLF) had over 2.7-billion shares traded! And the turmoil knew no borders. The iShares S&P/TSX Financial Fund (TSX:XFN) had a 326% increase in average weekly trading volume. The tremendous price swing that occurred over a very short period of time, ignited by the panic and frenzy that accompanied the collapse of the credit market and systemic failure of venerable financial institutions, was capped by the white knight appearance of public money. Although this moment may prove to be the bottom for many financial stocks, the Stock Trends barometer tells us to remain indoors. Our trend following approach dictates that others take the lead.

Gold stocks were the winning TSX sector last week. The S&P/TSX Global Gold Index jumped 12.5%, with Kinross Gold (TSX:K) leading the blue chip precious metal stocks with a 22% gain. But the sector has much ground to make up before it triggers our trend interest. With the prospect of a U.S. dollar weakening looking a renewed probability, gold bullion should develop solid price momentum. We should see $1,000 gold soon. The flight to safety last week – U.S. T-Bills were yielding close to 0%! – was an indication of the crisis of confidence that gripped money markets. But the move to shore up the financial system has an almost certain implication – the greenback will lose the shallow footing it had gained over recent months. Commodity inflation appears imminent. Investors will again look for safety in a world where dollar inflation has once again been triggered. Nevertheless, this expectation is not our game. Trend followers must wait for the forces of momentum to build. The gold sector is still down 14% in the last three months and qualitatively in a bear trend. The S&P/TSX Global Gold Index`s primary trend line is flat, so only a sustained move over the final quarter of the year will change that picture.