Martin Kronicle

One of my acquaintances (who’s not a pro) emailed me today saying “THE BULLS ARE BACK BABY!” He said he saw it in one of the headlines.

Besides the all caps faux pas, he’s a jackass. One day doesn’t make a trend. And China is the least of our worries at this point.

Big up day in the market, but the trend is still down. I don’t believe any of the “recovery” stories either. There are no jobs. November is coming.

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My blog insights about markets are more about my own thought process and the battle between verification and falsification. It’s more about playing good defense than making market calls. My blog posts aren’t trade recommendations for you to make money, per se. If I did feel a need to do that, I’d probably join the club at StockTwits for example, and make my humble contributions there.

With that in mind, I feel that the world is raising cash right now b/c they are in great fear of the markets and the global banking system. Trends in everything in the near-term might go out the window when a great many market participants offset their positions.

Which brings me to the point of this post. When I see the world in fear mode, and gold selling off at the same time, it tells me that the global sense of fear is at its highest levels. When that occurs, cash is king for the near-term, and I’d want to have as much dry powder as possible. That’s before the fear of a run on the bank kicks in…

What’s the end game for the global currency morass? Is it Global Depression? Is it hyperinflation? The world has voted on the Euro Bailout Package and they’ve voted it out of office along with Arlen Spector, and that was just for Greece.

We still have to contend with bits and pieces of Ireland and Italy (the part of their economy we know about). Then there’s Portugal and Spain. IMO, austerity measures implemented at this very moment are too little, too late. Same goes for the US, where…

…we have to deal with fiscal obesity and incompetent lawmakers. President Obama’s team is the same team that had a big hand in getting us in this mess. I would count on them to do the one thing that bureaucrats do very well: preserve their own self-interests and vote along partisan lines.

I’m no-doubt very bearish on USD-denominated assets. The bumper crop of USD printed is at catastrophic levels and no empire has had an easy time of annulling the effects of such recklessness.

I think of all those dollars as little financial al Qaeda’s out there. In the short term, the USD is “the evil of about 5 lessers” so the focus has been shifted to the Euro. Not mine.

Therefore, prop traders should cut their portfolio heat, especially if they keep positions overnight.

My post yesterday was about gold trendlines. Today’s post is about interpreting what’s happening with gold as it relates to the rest of the world.

There are several benefits for larger positions in cash:

- You inadvertently play better defense, b/c you have to offset positions to raise the cash. If you have losers in your portfolio, don’t create bandaids by legging into spreads to lower margin or creating synthetic positions. That goes for options, futures, and equity traders.

- IMO, it’s ok to “go discretionary” to preserve clients $$$ even if you’re a committed system trader. If you are trading with scared money get out, even if that means before your stops get hit.

- Defense is job #1 for a prop trader and PM

- If there is a flash-crash, market crash, market selloff, or currency intervention, you will have ample margin to go the other way

- You cut the volatility in your portfolio

- You sidestep the unintended consequence of correlations between trading vehicles going to 1 when panic sets in. If you have smaller positions, or zero positions, this won’t affect you (and that’s a good thing)

Lastly, I never have a position in anything I blog about so I will never have any conflicts of interest to disclose. When and if you trade, you trade at your own risk.

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June Comex Gold is ever so slightly still in an uptrend after having gone parabolic. The recent selloff, to me, is not a downtrend the way I define them – just profit taking. June futures would have to sell below 1180, else the steeper trendline is holding. Once it’s broken though, you’ll probably see a reversal back up before the lower trendline at 1130 broken. Either way, it’s going to be volatile.

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The SPDR Gold Trust (NYSE: GLD) is still in an uptrend too. IMO, I don’t think anyone would want to be short GLD nor gold futures. Maybe day trade on the short side, but that’s it. I don’t know anyone who’s taking shorts home with them.

The world is raising cash TODAY. That IMO is what gold traders should be focused on for any severe sell-off. In other words, I don’t think that the fundamental reasons why you’d want to be a gold bull are changing, but you have to manage risk TODAY, not based upon your 5-year thesis about how gold gets to $300 on the GLD or $3,000 basis December 2012 futures.

Traders should be incorporating a “dry powder” mode more than ever. If there’s a “flash crash,” currency intervention, and bona fide market crash, you want to be on the other side of the dysfunction.