Shadow Capitalism

Market Commentary by Naufal Sanaullah

Naufal Sanaullah
naufalsanaullah@gmail.com Data  misses  lead  to  small  range  in  risk  today,  while  silver  
www.shadowcapitalism.com
looks  toppish  after  almost  hitting  key  $50/oz  level  
 
Short  piece  today  due  to  the  lack  of  big  action.  More  weak  US  housing  price  data  were  released  
today,   as   March   new   home   sales   come   in   at   300k   SAAR,   amounting   to   11.1%   MoM   growth   vs  
12.0%   expected.   An   upward   revision   to   February’s   figure   led   to   the   MoM   figure   missing   estimates,  
while   the   absolute   figure   barely   nudged   past   expectations.   Further,   Dallas   Fed   activity   for   April  
came  in  at  a  low  10.5,  below  expectations  of  13.7.  After  weak  reports  from  both  Philly  &  Dallas  Fed  
indices,   it   appears   the   ISM   report   due   out   early   next   month   may   be   in   for   some   further   downward  
revisions  in  expectations.  Though  output  data  were  down  significantly  (though  growth  in  absolute  
terms  is  still  occurring,  as  represented  by  the  positive  figures),  employment  components  showed  
positive  signals.  ISM  &  GDP  reports  this  week  will  be  big  and  will  likely  move  markets.  

The   S&P   traded   only   about   six   handles   today,   to   end   down   0.16%.   The   bigger-­‐picture   chart  
patterns   remain   as   they   were,   with   the   inverted   head   &   shoulders   being   the   dominant   driver   from  
a   technical   perspective.   Earnings   could   lift   the   market   through   recent   highs,   which   (as   I   noted   in  
last   night’s   piece)   targets   a   sizable   100-­‐point   rally   in   the   S&P.   The   Fed   press   conference   on  
Wednesday  will  likely  bring  more  catalysts  for  more  price  action.  I  would  not  be  surprised  to  see  
the   market   rest   a   bit   more   at   current   levels,   but   my   expectations   for   new   highs   in   the   next   few  
weeks  remains  intact.  

A p r i l   2 6 ,   2 0 1 1 |  1  
 
 In  last  night’s  piece,  I  laid  out  my  bear  case  for  silver,  and  after  coming  within  eighteen  cents  of  the  
$50/oz  level  I  have  been  watching,  silver  has  fallen  dramatically,  down  almost  10%  from  intraday  
highs.  CME  hiking  initial  and  maintenance  margins  by  9%  surely  helped  the  fall.  My  overnight  short  
I  posted  in  last  night’s  commentary  is  working  out  well.  It  is  still  too  early  to  be  top-­‐calling,  but  with  
the  significant  volume  today  (>360%  average  volume  in  the  SLV  ETF)  and  the  spinning  top  candle,  
the  chart  is  suggesting  a  top  may  be  in  and  I  am  holding  short.  The  key  will  be  the  success  or  failure  
of  May  physical  delivery  that  is  approaching  fast.  Either  way,   the  long  upside  tail  in  today’s  candle  
is  very  bearish  and  suggests  that  silver  may  have  a  lot  of  downside  to  go  from  here.  The  divergence  
between  silver  and  miner  equities  may  end  up  being  the  harbinger  many  have  been  claiming  it  is.  I  
shorted  some  PAAS  as  well  today.  

Copper   continues   to   be   the   lagging   commodity,   which   could   spell   more   downside   for   risk   to   come.  
After  failing  at  the  $4.40/lb  level,  copper  has  put  in  a  lower  high  and  is  poised  for  a  big  move  one  
way  or  the  other,  as  it  sits  right  on  its  trendline  support  and  quickly  approaches  its  triangle  apex.  
The   implications   on   Chinese   &   Australian   markets   will   likely   be   dramatic,   whichever   way   copper  
moves.  Volatility  looks  set  to  expand  in  the  coming  weeks.  

A p r i l   2 6 ,   2 0 1 1 |  2  
 
 Geopolitical   news   was   ablaze   over   the   weekend,   with   Syria   seeing   an   all-­‐out   massacre,   resulting   in  
over   100   civilian   deaths,   during   post-­‐Friday   prayer   protests.   President   Assad   continues   his  
crackdown   on   protestors,   ordering   tanks   into   Daraa,   resulting   in   twenty   more   deaths   today.   It   is  
evident  that  MENA  risks  to  commodities  prices  are  not  going  away  anytime  soon.  Add  reports  of  
China   planning   a   new   fund   to   diversify   more   of   its   FX   reserves   into   commodities   and   precious  
metals,  and  the  current  oil  bull  market  appears  poised  for  further  upside.  Resistance  around  $113-­‐
114/bbl   looms   heavily   overhead,   and   it   may   take   several   weeks   of   rest   and   consolidation   before  
crude  makes  a  run  for  new  highs,  but  I  don’t  expect  a  move  back  to  double  digits  anytime  soon.  

Chinese   internet   and   mobile   security   provider   Qihoo   360,   a   recent   IPO   from   late   last   month,   is  
joining  the  ranks  of  other  Chinese  ADRs  with  its  bullish  chart,  which  is  flagging  right  below  series  
highs.   With   SOHU   breaking   out   another   8.83%   today,   and   a   variety   of   other   bullish   Chinese   issues,  
QIHU   could   be   a   below-­‐the-­‐radar   candidate   for   some   big   gains   if   risk   continues   ascending.  
Overnight   selling   in   the   Shanghai   could   prove   to   be   bearish,   however,   as   the   3000   level   sees  
another  failure.  

A p r i l   2 6 ,   2 0 1 1 |  3  
 
 Financials  are  looking  like  a  good  value  play  again,  as  BAC  is  trading  back  down  to  0.53x  price-­‐to-­‐
book.   BAC   specifically   is   seeing   some   nice   support   coming   in   around   $12.15,   which   marked   a  
significant  low  last  September  and  a  breakout  pivot  last  December.  I’m  a  buyer  at  these  levels,  as  
both  a  cheap  value  play  in  a  rising  market  and  a  long  fin  hedge  to  my  GS  short.  

Ferts  are  looking  great  here,  as  commodity  sector  rotation  could  power  some  gains  back  into  ags  
after  taking  a  breather  all  year.  Potash  Corp  of  Saskatchewan,  a  perennial  monster  play,  is  quickly  
approaching   the   apex   of   its   terrific   symmetrical   triangle,   and   on   a   shorter   term   timeframe,   is  
showing  a  tight  flag  developing.  A  breakout  targets  $75,  an  almost  30%  potential  gain.  

Rounding   things   out   is   the   FXI   China   ETF,   which   showed   another   failure   at   this   month’s   highs.   I   am  
short  and  holding,  and  a  breakdown  from  the  200bp  range  it  is  developing  would  be  very  bearish    

A p r i l   2 6 ,   2 0 1 1 |  4  
 
 for   a   variety   of   markets,   including   base   metals   and   some   of   the   speculative   tech   plays.   Surging  
inflation  figures  should  continue  to  supply  the  PBoC  with  political  capital  to  receive  the  go-­‐ahead  
from  the  State  Council  to  hike  further.  After  seeing  the  first  quarterly  trade  deficit  this  quarter  in  
several   years,   CNY   appreciation   appears   less   likely   than   interest   rate-­‐based   tightening   in   the  
continued   fight   against   inflation.   This   is   much   more   bearish   for   risk   than   exchange   rate-­‐based  
tightening,   which   would   put   more   downward   pressure   on   USD,   as   well   as   not   directly   affect  
borrowing  costs.  

Tomorrow  brings:  

• February  US  S&P/Case-­‐Shiller  Composite-­‐20  housing  prices  (9:00am:  -­‐3.30%  consensus  vs  
-­‐3.06%  prior  –  YoY)  
• April  US  consumer  confidence  (10:00am:  64.5  consensus  vs  63.4  prior)  
• April  US  Richmond  Fed  (10:00am:  20.0  consensus  vs  20.0  prior)  
• March  Japanese  retail  trade  (7:50pm:  -­‐5.4%  consensus  vs  +0.8%  prior:  MoM  SA)  
• Q1  Australian  CPI  (+3.0%  consensus  vs  +2.7%  prior:  YoY)  

Good  luck  trading.  

   

A p r i l   2 6 ,   2 0 1 1 |  5  
 
   Trades  &  Positions  

Open   Long/Short   Ticker   Entry   Stop   Performance  

L   /ZC   550.00   541.90   +35.91%  
L   OIH   150.00   138.50   +6.82%  
L   TITN   21.30   20.45   +46.45%  
L   NE   37.65   40.70   +14.15%  
L   /CL   86.30   83.80   +26.41%  
L   UA   57.55   51.55   +36.32%  
L   MEE   55.55   51.00   +18.81%  
L   CRR   114.33   105.00   +21.51%  
L   SOHU   80.04   73.00   +19.01%  
L   SINA   87.55   72.60   +56.98%  
L   BIDU   118.30   109.30   +28.21%  
L   AMRN   8.85   6.75   +81.92%  
L   DECK   79.92   76.90   +20.21%  
L   LULU   75.15   71.45   +35.75%  
L   CMG   240.67   260.-­‐0   +13.22%  
L   DNR   21.60   21.50   +4.33%  
L   PCLN   440.72   409.10   +23.37%  
L   WLL   63.02   60.00   +15.22%  
L   MRCY   18.70   17.75   +12.00%  
L   PRGO   72.76   71.20   +21.32%  
L   CHK   30.65   28.50   +6.59%  
L   CTXS   69.61   65.05   +9.21%  
S   SCCO   41.25   42.65   +11.99%  
L   USD/JPY   78.85   81.20   +285  pips  
L   EUR/JPY   116.60   114.90   +240  pips  
L   CAD/JPY   81.30   79.70   +420  pips  
L   SGD/JPY   62.55   60.10   +360  pips  
L   EUR/USD   1.4230   1.4085   +325  pips  
L   RAX   35.55   33.45   +25.64%  
L   TSLA   26.15   21.70   +1.09%  
L   NFLX   220.40   202.15   +9.09%  
L   SD   10.35   9.15   +20.01%  
L   SHS   44.95   40.45   +29.30%  
L   EQIX   85.70   82.10   +8.98%  
L   VHC   21.12   18.65   +26.04%  
L   MSFT   26.05   24.60   –2.22%  
L   MO   25.90   25.30   +0.97%  
L   NZD/JPY   66.10   64.00   –80  pips  
L   WES   34.95   32.90   +2.22%  
L   SGMO   7.59   6.90   +3.98%  
L   N   29.04   26.75   +4.27%  
L   AMZN   178.38   169.90   +4.08%  
L   POT   55.38   50.20   +5.33%  
L   DHX   16.91   14.95   +3.47%  

A p r i l   2 6 ,   2 0 1 1 |  6  
 
   Trades  &  Positions  (cont’d)  

Open   Long/Short   Ticker   Entry   Stop   Performance  

L   LLNW   7.22   6.45   –6.79%  
L   EMC   26.44   25.25   +7.00%  
  S   GS   154.05   158.50   +1.38%  
L   KOG   7.05   5.65   +3.33%  
  L   CRM   131.91   115.60   +5.31%  
S   EJ   12.00   13.60   –5.95%  
L   QLIK   27.93   25.25   +7.28%  
  S   DAL   9.27   10.30   +2.86%  
S   UYG   66.63   74.00   –2.33%  
  S   FXI   45.40   47.05   –1.03%  
S   SCHN   58.36   61.05   –1.82%  
L   IMAX   30.10   28.55   +7.92%  
  L   MRCY   19.95   17.20   +3.61%  
L   GOOG   521.10   499.90   +1.59%  
  L   EUR/CHF   1.2820   1.2720   +20  pips  
  S   USD/CAD   0.9655   0.9715   +105  pips  
L   TBT   36.35   34.95   +0.09%  
  L   FFIV   98.83   89.85   +7.14%  
  L   JKS   24.00   19.60   +1.17%  
L   DNDN   41.20   39.15   –0.75%  
  L   JDSU   18.96   17.55   +3.29%  
  L   RHT   47.70   43.80   –1.33%  
L   GLNG   30.10   25.00   +1.66%  
  L   VRTX   48.05   45.65   +0.00%  
L   BORN   9.35   8.45   –1.60%  
  L   APKT   78.70   67.20   +0.37%  
L   BSFT   45.90   43.80   –3.16%  
L   NTAP   50.40   48.75   +3.06%  
  L   PCX   26.05   23.05   –0.67%  
L   WLT   132.85   125.80   +1.87%  
  L   XOM   86.25   81.80   –0.02%  
S   EUR/SGD   1.7995   1.8150   +20  pips  
L   EXEL   11.70   10.60   +2.99%  
  L   NVLS   35.15   33.00   –1.79%  
S   /SI   48.80   51.50   +7.17%  
   
Closed   Long/Short   Ticker   Entry   Stop   Performance  
         
           
         
   
New   Long/Short   Ticker   Entry   Stop   Performance  
L   ARUN   35.55   32.70    
A p r i l   2 6 ,   2 0 1 1 |  7  
 
    

         
         
 
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financial  advice,  suggestion,  or  recommendation.  Please  consult  a  financial  professional  and  do  due  diligence  
before  engaging  in  any  purchase  or  sale  of  securities.  

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