Is Another Banker Bust Coming?
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, February 2, 2015.
So we got a sell signal on the January Barometer this year yet again, with stocks being down on the month; however, as speculated previously, it may not be a contrary indicator this time around. As you may know, the stock market was down Friday because of a hawkish statement out of a chief Fed mouthpiece, James Bullard. The question then arises, why did he do this if he knew stocks would not like what they heard? Answer: Because given the truly fragile state of the US economy, being almost completely hollowed out, the bond market is more important, bonds and the dollar($). The liquidity junkie the US economy has become is now at a point where it needs a fix every day.
And just about everybody in the money game knows this by now, or at least they should. Certainly those expecting never-ending money printing do, expecting the party to go on forever. And it's the third year of the Presidential Cycle, with the odds heavily in favor of gains into the September area; not to mention it's a year ending in 5, where stocks have been up for the past 100-years with no exceptions. So, on the surface there are good reasons to think stocks should be up again this year if one is naïve. Because when not scripting official storyline for the mainstream media, even Fed members know they can't keep this act up forever, not once they lose dollar hegemony demand.
Because again, money flow is imperative in a vibrant economy, and if it's not coming from constituents, central authorities must make up the difference via fiat. Another aspect, which is not discussed anywhere near as much, but is equally important, is the integrity of market mechanisms, where it should be understood that with high frequency trading (HFT) machines programmed to exploit human frailties (sentiment), along with the interventions, for all intents and purposes Western markets are completely broken today in terms of real world supply / demand price discovery function. Thus, if the wrong cocktail were to finally arrive for Western price managers one day, worldly constraints that finally supercede manmade (paper / contrived) machinations, the status quo could be put on life support far quicker than officials can envision at the moment.
Below is analysis on how a lasting turn off developments in the tech sector appear to developing for last week I want to include again because they remain germane, as follows:
"And while increasing measures to thwart a lasting turn lower in stocks should be expected by the status quo; and, speculators may act predictably by returning to negative betting practices, still, 2015 is shaping up to be a transition year back to secular real trends, which are (on a macro level) stocks down and precious metals higher, as not only will the populous lose faith in government at some point (which is what causes gold to go up), but this will also lead to higher prices as the world eventually begins to lose faith in America, and its currency, the dollar($). Therein, at some point the fact the US looks like the safest room in a burning house won't matter because decentralization forces, forces that will bring on more regionalized trading relationships, will take over. This has been my thesis for some time now.
In terms of the coming week, with the marked increase in the NDX open interest put / call ratio last week, we are likely to see more sideways price action in the broads until options expiry this coming Friday. After that, we have a five-week options cycle running into February, which means anything can happen up until month's end no matter what the larger options related world says about sentiment. Updated short interest numbers will be out on Thursday this week, making them particularly important this time around because they should govern the trade between then and month's end given options influence will be curtailed with the extended cycle for the February series.
Therein, if we see a preponderance of continued declines in key short interest ratios, this would suggest a higher probability of weakness running into month's end, especially if the NDX (NASDAQ 100) / Dow Ratio is still sporting a head and shoulders pattern at that time. (i.e. now it's a double top.) Such an outcome could trigger the head and shoulders pattern (H&SP) (now it's a diamond, which could be more profound than originally contemplated) in the SPX (measuring to who knows what now) that could be go slanted, if the S&P 500 (SPX) decides to go to new highs this week in testing the bottom of the long-term growth channel (see Figure 3), which is unlikely. This could happen latter on, beginning next month if the $ decides to continue spiking higher (this is unlikely now with its continued strength), meaning a decline in equity markets of this degree could spark a rush out of other currencies / economies / equities, which would benefit the US once again."
Continuing into this week now, and again, as postulated in last week, we have the Dow / Gold Ratio (DGR) impulsing lower in what appears to be a larger degree five-wave affair off a triple top that could easily morph into a head and shoulders pattern, removing any possibility stocks can move to new highs once again within the present sequence. Therein, it should be noted that like the NDX and SPX, the Dow is also working on a diamond top, where if it were to break lower accompanied by the Bank Index (see below) putting in a bearish five-wave impulse lower, we would have true confirmation stocks are trending lower. (i.e. after the BKX goes back up to correct the five-waves down, meaning the diamond breakdown may appear false at first, similar to the year 2000 sequencing, where it took months of testing before the Dow accelerated lower.) As you will see below, the precious metals believe the breakdown in stocks is going to happen, possibly because our banker buddies and status quo have finally met their match in Greece (oops - looks like we can add France to what is likely to be a growing list). (See Figure 1)
All it would take to signal a lasting turn is a monthly breakout on the CBOE Volatility Index (VIX) to signal this, where as you can see below, it's poised to do so in February. In finishing above 20 this past month, it has, for the first time since 2011, triggered a buy signal. What's more, and another technical feat not witnessed since 2011, we also had the S&P 500 (SPX) / CBOE Volatility Index (VIX) Ratio close below the 21-month exponential moving average (EMA) two-months in a row, which historically has served as an early warning of a trend change. So, although 2015 is supposed to be an up year if you are reading the traders almanac, if early constraints and gambler betting practices are not aligned in the stars, the status quo boys could be in for quite a surprise this year. Therein, although this might not be a crash scenario for stocks with the Fed ready to jawbone them back up on a daily basis, still, it would not be good for an economy addicted to ever rising prices, never the less. (See Figure 2)
So if this is true, that the broad stock market could see declines this year, but well short of a crash, if the Dow / Gold Ratio (DGR) has turned lower for real (back on secular trend), then maybe, just maybe, the big money will be made in precious metals this year, and more specifically beaten down but well positioned juniors. Because I mean some of these stocks have been nothing short of obliterated due to an assortment of factors, not the least of which is solvency of course. This is why it's important to buy the good ones, companies with strong balance sheets that are positioned to springboard with a turn in sentiment. Up to this point I thought the juniors should be avoided until the CDNX got down to 400 (this is still my target led by the oils which are still overvalued), my long-term target based on the head and shoulders pattern in the trade, however I am not so sure this is such a good idea anymore considering the above reasoning, the monthly signals some of these stocks produced in January, and bullish looking technical formations in some of the charts discussed in our last meeting. (See Figure 3)
Further to this, what is particularly constructive about the current move higher in precious metal stocks in general is the fact the larger caps are leading, showing proper respect for risk has returned to the sector. Therein, the GDX has recovered the 200-day MA, where as the GDXJ has not. What's more, while the monthly candle for the GDX was strong, closing the month close to the highs, again, the GDXJ did not, compounded by the fact gamblers took the open interest put / call ratio up considerably on Thursday. Of course, this will make it very difficult for the bureaucracy's price managers to keep any kind of panic in the sector for very long - not if the shares catch a bid again - which is what will happen if the gamblers have turned bearish for real. You will remember I said it would take the gamblers turning bearish on the sector when the deflation talk started circulating, and here we are - the speculators continue to provide the correct contrary signal.
And on top of all that, based on the way gold bounced on Friday in spite of dismal COT numbers, like many stocks across the sector, this opens the possibility of an inverse head and shoulders pattern forming here too, measuring up to $1550. That being said, gold will need to continue consolidating for some time yet while the long futures speculators are burned off to a sufficient degree (think 50 to 70 thousand contracts) before this can become a reality no matter how bullish the fundamentals are getting. This does not mean gold has significant downside from here, however it will likely need to go sideways to somewhat lower in order to get the futures market aligned properly to support a continuation higher. It's the interplay between good and evil if you will, the manipulative influence of a faulty and fraudulent Western pricing mechanism (COMEX), against the fundamentals.
So, the idea is to be picky and patient here, going with the best prospects, because who knows, if COMEX speculators don't puke up their positions fast enough, and the heat comes off, failure could still occur. With the COT related raid on gold and silver last week (which we warned about several times), the status quo boys got what they wanted. Stocks didn't crash and precious metals are still contained, and they will do anything to keep it that way. (ex. the big margin increase on silver last week.) Again, this is why it's so important for the BKX to make that final drop in tracing out the larger degree five-wave pattern. (See above.) This will not only set the head in the potential triple top head and shoulders pattern in the DGR discussed these past weeks, but also, and more importantly, this would signal the bankers boys have lost control because their currency (stocks) would be trending lower in what could possibly be a fatal move for some.
Fast forward to today, and although the BKX may not make new highs along with the broad measures of stocks (because of not enough short sellers / put buyers to generate a dynamic short squeeze), still, the banker boys have escaped doom once again temporarily - but this pulling a money out of their collective butt business will end at some point (when short sellers / put buyers of broad stock measures become exhausted).
So in the interim, the banker boys and their ilk have yet another temporary reprieve.
Enjoy it because it won't last.