November could have been a case study in why trading can be so difficult. It is easy to imagine how someone could have got caught in the euphoria at the beginning of the month, bought equities, gold, silver (everything!) just to get hammered midway through the month. Reverse their position just in time for a head fake of a rally and then get carried out at the end of the month.
The first week of November saw the greatest concentration of monetary policy action since October 2008. As expected, the Fed announced QE2—$600B in purchases of medium-term Treasuries by the end of June or around $75B a month—and the markets were off to the races.
By November 5th, equities markets were hitting 2 year highs.
Gold soared past $1400 and silver (as well as other commodities) looked like they were all going to the moon.
All the while, the US dollar index continued to get clobbered.
And the Australian Dollar broke parity with the USD.
All systems go. Right?
Not quite. Mid month, China signaled that is was tightening—requiring banks to set aside larger reserves (which in theory drains an overheating economy of fuel … cash)—and worries over the European sovereign debt crisis flared up again; this time with Ireland in the spotlight. Then North Korea bombed the South, and concerns over the success of Ireland’s bailout spread to Portugal, Italy and Spain. This all caused a flight to the US Dollar and reversed the trade that has worked so well over the last several months—USD down / everything else (equities, commodities, non-USD currencies) up.
To cap off the negative tone for the month, Wikileaks has thrown a wrench into closed door politics and, in my opinion, has turned a nearly impossible situation in the Middle East into an impossible one. What concerns me most are the documents that discuss King Abdullah of Saudi Arabia negative comments towards Iran. I do not know enough about the politics of the region to make an educated forecast of the repercussions, but it seems to me that in a region that is already so unstable these comments not only undermine relations at the political level but also create subversive tensions at the individual level within Saudi Arabia and across the region.
Looking forward: In December investors will likely play defensive in an attempt to hold onto gains made over the year. The markets seem a little toppy, however we continue with the thesis that as long as the US Fed is printing easy money, the dollar will continue its slide down and nearly everything else will go up. However, now we have all of our positions on a shorter leash. China's monetary policy will have significant short-term implications on the commodity and commodity related markets. Meanwhile, the Euro is displaying a fairly negative chart pattern—making lower highs and lower lows—which could temporarily stall the USD’s fall.
