Quote
“Slumps are like a soft bed. They’re easy to get into and hard to get out of.” – Johnny Bench

Of Interest
At last, Japan may be about to abandon its disastrous Keynesian consensus (Telegraph)
China splurges £100bn on infrastructure projects (Telegraph)

Commentary
US August Nonfarm Payrolls missed significantly – 96,000 vs. 125,000 or so expected. June and July payrolls were revised lower. Everyone is leaning towards more QE3. The euro is surging higher. Risk appetite is on. We are watching crude oil.

US August Nonfarm Payrolls missed significantly – 96,000 vs. 125,000 or so expected. June and July payrolls were revised lower. Everyone is leaning towards more QE3. The euro is surging higher. Risk appetite is on. We are watching crude oil.

Yesterday, on the back of the ECB announcement, crude oil was up big – more than 2%. But by the end of the day, it had given it all back after failing to test recent highs. We’ve been watching crude the last two weeks because it has approached a logical, technical stopping point. A downturn based on technicals would be playable; a downturn based on technicals and fundamentals would be substantial. [Note: price has generally moved sideways the last two weeks. The likelihood of a sharp downturn in crude decreases the longer this sideways consolidation pattern lasts.]

After yesterday’s big reversal we would expect to see follow-through weakness in crude. Before the report this morning, crude was higher. After the report, crude moved lower … perhaps the bears were pressuring price based on yesterday’s big reversal. But the bears are no longer in control at time of writing – crude is higher again. UPDATE AT TIME OF PUBLISHING: Crude oil has reversed again and is now notably lower.

Action
Crude oil has the clout to lead broad risk appetite, especially if it turns to the downside while markets are trading on the hope of QE3 sooner than later. We are watching for this potential. At 3:30 PM Eastern today we’ll see the latest Commitment of Traders report from the CFTC. Already the large speculators are nearing an extreme net long position in crude. Only February saw a larger position. February is when crude oil’s price topped out. The speculators tend to be wrong at extremes. We recommend keeping some skin in the game with the PowerShares DB Crude Oil Double Short ETN (DTO) to play for a downturn in crude price.

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