Shanghai Reverses, High Volatility in Asian Markets

Overnight the Shanghai Composite traded as low as 2,023, making a new 52 week low (Dec lows = 2,126) on trading to levels last seen in early January of 2009. The 5 year lows on the Shanghai Composite is around 1,640. There was a V shaped recovery during the session and their market closed flat on the day (after being down 5+%).

Copper, which from a consumption standpoint is tethered to Chinese appetite/growth traded through the $3.00 level again before bouncing (currently $3.08 and near session highs). To say things have been volatile in the Far East would be a gross understatement.

Taking any positions in this type of environment can be unsettling.

S&P futures had a 25 handle range before cash opened this morning.

Here's a visual on the past 30 days in the S&Ps. Bernanke testimony on 5/22 and FOMC decision/press conference on 6/19.

These moves are on the heels of the Fed just starting to discuss/consider a timetable to SLOW their stimulus. We have had almost constant Central Bank support since late 2008 (8-9 months in the past 5+ years without an active Bond/MBS buying program). Unfortunately, I believe the global economy is still too weak to see the Fed, BoJ, BoE, SNB, ECB step back and/or remove the proverbial training wheels. Then again, I could be very wrong.

If you believe we'll just get a "garden variety" correction if the Fed stops intervening in the Bond market I think you could be left holding a lot of in the money puts.

In other news, speculative shorts in the Gold market made another new high. The ship just gets more crowded.

Gold made 20 year lows in August of 1999 around $250/oz before when sentiment was roundly bearish because of the British announcement to sell a considerable amount of their gold into the market (May 1999 - I.E. one of the worst trades ever).

A. September 26: European Central Banks Announcement of Moratorium on New Gold Sales

As noted above, on Sunday, September 26, 1999, 15 European central banks announced a surprise five-year moratorium on all new sales of gold held in official reserves. Prior to this announcement, gold prices had been pressured by worries about central bank gold selling, caused by a May 1999 British Treasury announcement of plans to unload more than half of its $6.5 billion in gold reserves in exchange for world currencies. The May announcement had triggered concern that governments and central banks would soon be dumping bullion reserves, flooding the market and driving prices lower. Gold prices had reacted by falling swiftly and sharply. By July 6, 1999, the August 1999 futures contract had settled at a 20-year low of $257.80 per ounce.

There are significantly MORE SHORTS in the Gold market than there were in Summer/Fall of 1999. Granted, the price of Gold has quintupled in the interim, but I like to periodically remind readers that Commodities often become crowded rooms with very small doors. The trend can certainly be your friend, but don't become myopic.

In a less pronounced, but similar vein, sentiment on the Aussie Dollar is "heavy".

Tread carefully.

It looks like perhaps risk crested (short term) on Friday/Monday. Keep an eye on Asian markets and China in particular. Watch US Bonds.

If you're considering a short term tactical trade, Gasoline (August) looks like it could gain relative to Heating Oil (August). In early April, that spread traded out to 14.17 cents wide. This morning it traded 13.90 wide. I would consider creative ways to play a move back toward the 5-7 cent wide range over the coming weeks.

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