Equities: We Stand Corrected

The dramatic sell-off in equities across the globe - except for Shanghai, which eked out a quarter-point gain - sent gold up today, covering yesterday's losses.

We may be entering the period of correction that many have been predicting since last spring. Without argument, it has been a long time since the stock markets have corrected. Leading the way have been the Russell small caps, and developing economies' equities overall. Why those? The slowdown in China has affected many of the gears and pulleys in those economies, many of which depend on supplying components for finished Chinese manufactured wares.

Some observers are blaming various world crises such as the Russia-Ukraine standoff, the beginning of the battle with ISIS, and now the unrest in Hong Kong. The last of those is indeed a factor, as money will be drawn off the markets of the financial portal to Asia. The subtext is that less investment money will be poured into China.

The real key to the equities tumble lies in the strength of the U.S. economy, especially its manufacturing surge, which continued in September, albeit at a slightly slower growth rate than in August, which was, by any standard, red hot.

On top of that, ADP's private employment report showed the U.S. adding 200,000 jobs yet again in September (35,000 of which were in manufacturing). You would think this should add up to a rosier disposition for traders.

Not so. They are more fearful than ever that the Federal Reserve will raise interest rates soon. Very soon. But they are wrong. Very wrong. There is something called Election Day rolling right up on us and any overly-volatile action in markets will impact candidates on both sides of the aisle.

We still think, barring any enormous leap in inflation, that the Fed will not raise rates - at least significantly - until late summer of 2015.

In other markets, crude fell below $91 and seems to be packing more fundamental and technical momentum toward the downside. That drop was in spite of the fact that the dollar was relatively static today. Speaking of which, the 10-year bond in the U.S. fell below 2.40% on the yield. Normally that would tell us that people are not seeking that kind of haven. But, bonds could be waiting for a further correction in equities.

Surprisingly, silver was up significantly today, bucking its recent free-fall trend.

Earlier today, some traders were bidding up gold to what we see as an irrational level. They've backed off as the afternoon session draws to a close. We think there was some opportunism in that bid up, and some day trading that jumped gold quickly. But those who got in quick got out quick, leaving the laggards to take the loss from 1219+ down to 1214/1215. We're looking at a gain of roughly $5.00 at 4:45 New York time.

As always, wishing you good trading,