The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, June 9, 2014.
It's a funny thing, and something nobody else has noticed yet, but one does need wonder whether the US (West) has just repeated the fatal mistake made by both Napoleon and Hitler in strategically attacking Russia in an attempt to expand the empire, which in both previous instances marked the turning point in this regard. Up to this point the larger war has been economic (cold war like), with the US continually attempting to expand the reach of its hegemony (like Napoleon and Hitler), but one also need wonder if this will accelerate one day given the ferocity of fighting in the Ukraine going on at present. Most think such political aggression will predominantly limited to economic war as the oligarchs attempt to expand the empire, however it should be remembered the potential for accidents (think nuclear) and personalities (elitist and crazed fascists) involved today leave such thinking questionable to say the least.
In returning to the focus of this paper, and terms of the larger economic war, on the surface it may not appear that recent events in US / Russian relations will have a meaningful impact moving forward with Western stock markets still soaring, and commodities well contained. However, like the previous instances cited above, it could be argued that at the margin, the American / Anglo Empire has been weakened considerably, and that we are presently working our way towards a Battle of Waterloo type event that will mark the formal demise of US hegemony. What's more, it's ironic that with this being the 'information age', with the supposedly most educated populous in the history of mankind, that the 'powers that be' have apparently forgotten their history, or is it they are simply lost in their own delusion, avarice, and greed. Something tells me it's the latter.
Certainly, the periphery is suffering more from desperation than the vulgarities still shaping attitudes in New York and London, evidenced in continued debasement policies authorities hope vigilantes will not notice. And that's not the only thing they hope you don't notice that is being debased. They hope you don't notice the republic(s) (the West) has turned into a rapidly maturing soviet-style fascist state(s) owned by the oligarchs hell bent on defrauding an increasingly stupefied and debased proletariat. That's why it's so funny when a reprobate like Hillary Clinton comes out and says 'Putin has no sole' with Benghazi still fresh on people's mind. But of course this is just all role-playing for the powers that be - that closed circle of grifters and petty con artists inhabiting upper echelons in Washington.
And of course they are hoping you don't notice how fast prices are really going up aside from the stock market, which is flaunted. Like the days of bread and circuses in ancient Rome, a comparable to what America has become today (America conquered the world too), the stock market is both the distraction de jour and measure of the republic's health, a most dangerous condition regarding future prospects once it begins to roll over again. What's more, this makes the days of bread and circuses in Rome look tame in comparison, because the aftermath could be more profound. (i.e. think extinction threat degree.) And although we are not predicting this, the signs are there we are getting very close to the day this will in fact materialize, with one more good push higher for stocks still expected.
As you would know as a regular reader of our work, we are still expecting a blow-off in stocks and selling climax in precious metals this summer once 107 is breached on the S&P 500 (SPX) / iShares Silver Trust (SLV) Ratio and 309 is exceeded on the Nasdaq (COMP) / Nasdaq Volatility Index (VXN) Ratio (done), possibly (likely) taking the SPX / CBOE Volatility Index (VIX) Ratio to the top fan rail shown here in Figure 1, putting the SPX somewhere just shy of 2000 before it's all over. Therein, and as can be seen below, with extreme sine fan related resistance at 192, a move to 2000 with the VIX at 10.4 would do the trick, which is not far from present levels. Thus, it should be pointed out this target could come quicker than one may think as process unfolds, so be careful, because the blow-off is accelerating with the VIX pushing below 11, where we are now at the third fan rail on the monthly SPX / VIX Ratio plot, seen below. (See Figure 1)
Or is the SPX / VIX Ratio to blow right through extreme fan related resistance at 192, tripping the light fantastic for the crazies in the crowd as it were? While nobody knows for sure obviously, one thing is certain, it's safe to say market participants are definitely fully engulfed by the mania at this point, with delusion running rampant, making for a dangerous situation once the shorts have all been squeezed out. That's what the 192 level above, and 377 below, are supposed to measure, that point where all the short covering, and margin buying, and excitement, runs out. We already know that margin debt topped back in April (accounting for declining volumes), leaving an increasingly challenging macro backdrop to continue feeding the machines. (i.e. think algos.) So to answer the above question more directly, we say if the top fan rail is exceeded, it should definitely be faded. (See Figure 2)
What to expect directly ahead? Well, for one thing, if the VIX were to fall today like it did Friday, it would be pushing 10 already, which would bring a few clouds into the picture. Because it's unlikely the Comp / VXN Ratio would hit 377 under such circumstances, along with the fact the SPX / SLV Ratio (see below) would also break above 107 as a result of such strength in stocks (and perhaps deferential [manipulated] weakness in silver as well), signaling a far greater move up into the 115 area. Of course such breakouts are always subject to failure under the right conditions, where the rather large managed money (think hedge fund) short position in silver is at a record right now, needing to be covered at some point. With all this speculation, it makes you wonder how things will turn out (because you are speculating too), that's for sure. (See Figure 3)
Be that as it may, a good speculator waits for extremes and signs of reversals, which have been very difficult to discern this time around (this is the third manic stock market bubble in under 15 years), where only by watching what other speculators are not, does one stand a chance at picking a top here. As far as I know, we are the only market timing service watching the above ratios, which gives us an edge in this regard. So, use this knowledge to your benefit, whether it be for timing existing long positions, or speculating on downside in the broads, where again, a top could come as early as this week if the blow-off continues unabated. Central banks have been out in front of this bubble all along since 2009, which is why is has gotten so huge. Still however, at some point they (we) will get caught again, because they cannot anticipate every policy reaction, if not simple policy exhaustion, which is essentially how we think this episode will end - when nobody sees it coming.
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