A generally quiet session with some action, but not much. The S&P closed about flat at -1.41 or -.14%.

Overall, something seems not right with the market. Whatever that is may pass or it may lead to further volatility. As of now, there doesn’t seem to be an argument in town that can stop this thing. To that end, the S&P could potentially soar from here. All things are possible.

If the S&P does continue it’s ferocious march, it is VERY tough to know what to buy up here. Most of the breakouts I am seeing are concentrated in the stocks under $5 bin–the junk.

Gold seems to be on everyone’s radar. This is good. In a bull movement, it is best to have lots and lots of players interested in a market, betting on it as the next big thing. Good bull markets are born of enthusiastic participation. Whether the next 10% move in gold is to be up or down remains to be seen. Stay tuned. Spot gold closed the week at a high not seen since the week of March 17,2008 for a $1,004.86.

Treasuries were up slightly on the week. Treasury rates may find support here, but for my money, they must eventually head lower. That said, next week’s move in anyone’s call.

10 Year Rates

The S&P moved higher out of the gate. About midway through the session, it sold off about 10 points and found support at yesterday’s high. The pit was quiet all day, save a few minutes before and after the Fed beige book was released.

S&P Futures - 15 Minute

On the daily chart, the market has rebounded from it’s (ever so slight) sell off last week. Over the last four sessions, there has been a relative increase in volume in the pit traded contract. Any time volume veers from it’s average, it is worth noting.

S&P Pit Contract - Daily

All eyes are still on gold, which is consolidating after last week’s ascent.

Spot Gold

I am flying home from Singapore and will be back tomorrow.

And that’s a rap.

Volumes dropped to their lowest levels of the week today on the NYSE and the NASDAQ as traders hit the eject button earlier than normal ahead of the three day weekend in the US.

The S&P futures closed near their highs of the day as well as at the 50% retracement level from the highs of the week. The pit traded S&P showed a pick up in volume that was not seen in the e-mini contract.

S&P Pit Contract - Daily Chart

Gold traded within yesterday’s range and closed near the highs (but just below the $1,000 barrier). Traders continue to ponder the move in gold — whether it’s a fake out or breakout.

I spoke to several trading desks today. Not surprisingly, our conversations quickly veered to gold. From what I gathered, because of the sudden interest — be it a squeeze or not — traders are buying gold now and planning to ask questions later — a strategy that has a tendency to bite back hard if things don’t work out as planned.

Fed fund futures are pricing a 1.5% chance (extremely unlikely) of a fed funds rate rise by the December FOMC meeting, which could be the catalyst behind the sudden spike in gold prices. The longer the fed waits to raise rates, the larger the inflation problem will be.

For the time being, I reside in the deflation (versus inflation) camp. If gold does break above $1,000 and holds the line, I’ll buy gold futures faster than I can blink. My deflationary thesis is fundamental. A breakout in gold would be technical. When in doubt, I typically run with the technicals. Further, being long gold against my short equity/short commodity exposure will provide a decent hedge, which is not to imply that I am a fan of running a hedged portfolio.

Gold Futures - 15 Minute

Markets are closed in the states Monday, so I am jetting off to China in the next couple of hours to catch the Monday session in Shanghai. If I see anything worth pointing out, you’ll be the first to know.

And that’s a rap.

Shares of Moody’s Corporation (MCO) and McGraw-Hill (MHP), parent of Standard & Poor’s, were hit hard today after a federal judge ruled the companies will have to defend themselves in a fraud suit brought by Abu Dhabi Commercial Bank and King County, Washington.

In a timely unloading of shares, Warren Buffet’s Berkshire Hathaway filed today that it sold 747,000 shares of Moody’s (MCO) between Monday and Tuesday of this week at $27.22 a share.

When companies are vulnerable to litigation risks, it is best to sell first and ask questions later.

Moody's - Daily Chart

McGraw-Hill - Daily Chart

You never give me your money
You only give me your funny paper
And in the middle of negotiations
You break down
-The Beatles

The S&P traded around the midpoint of yesterday’s range the majority of the session. The indices bolted higher in the last hour and the S&P futures closed above yesterday’s high and above the  1,000 mark. The high volume ramp in equities in the last hour was not confirmed by the credit market as credit spreads were generally flat.

S&P e-mini 15 minute

Short Squeeze or Ominous Sign?

Gold remains the talk of the town.  Why is gold decoupling from the correlations in observance prior to yesterday? I find it next to impossible (though all things are possible) that gold is breaking out in anticipation of inflation. There are no signs of inflation as far as I can see. To the contrary, all signs point to deflation. If the inflation trade is on, why aren’t interest rates spiking?

Is the move in gold a flight to safety in anticipation of military action somewhere? If  so, why is oil not spiking?

Does someone know something the rest of us don’t?

Technically speaking, gold will not breakout with any conviction until it clears the $1,000 barrier and holds the line. Until then, we may be seeing a good old fashioned short squeeze. Hong Kong is pulling all it’s physical gold holdings from depositories in London. Are reserves sufficient enough to meet physical delivery?

Astrology or Numerology?

The number 9 has been a focus of these pages for some time. In what is termed a new moon, the sun and the moon will come together (The Beatles, Abbey Road, 1969) on September 18th, 2009. 6×3=18 and 6+3=9, which brings me back to 9-9-09.

Season I Episode II

On 9-9-09 at 9:09:09 Episode II of The Adventures of Mr. Volatility will be released. In Episode II, we are going to take a ride on The Errol Flynn circa 1976. Gold made a massive move higher in the late 70’s. I want to tell you a story about it.

Stay tuned.

Come Together