All The Marbles
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, September 14, 2015.
As time passes, and although difficult to discern for those caught in the whirlwind, increasing numbers are starting to ask the right questions about our worsening economies - why and who is doing this to us? And as the economy continues to worsen and disenfranchise increasing numbers from the 'middle class', this trend should become stronger, finally arriving at a point of revolution. The rentier and political classes, which are the 'who', know this, and are attempting to take steps to preserve the neo-feudal status quo, which is the 'why'. However history has taught us that in circumstances such as this, with large swaths of the population experiencing increasing and extreme pain, even the most draconian measures eventually fail, and we have something along the lines of a French, or American Revolution.
Quite likely, all it would take this time around is a stock market crash, which would quickly bring to light the true state of affairs in the real economy and various strata of parasite classes. (i.e. political, bureaucrat, usury, etc.) For this reason, it's important for you to understand just how serious the fate of the stock market is to the parasites, from the lowly bank tellers to their oligarch bosses. The stock market has become such a large part of the economy now that if it were to fail, the entire system would fail, which is why we hear observers applying the 'to big to fail' meme here. And this is why you can expect these sorts to resort to increasingly desperate measures to stabilize the stock market moving forward because we are playing for all the marbles here - either stocks remain levitated or the financialized economy will be exposed for its fraud.
And the pressure is on in this regard, with everything from a global scale refugee crisis, to increasing military hostilities (see here, here and here), to a sluggish economy that work to put pressure on fiscal economies, monetary policy, and stock valuations. Just last week the ECB had to tweak monetary policy in response to recent turbulence in financial markets, and stocks are only down 10% from recent highs. Again, this would suggest the stock market is too big to fail, and that a garden-variety correction now has the effect of a market crash on consumer spending and other wealth effect related variables. This is why when you hear the Fed talking tough (strong economy, need to tighten, etc.), it's important to understand this is being done for political reasons and to keep the financialized economy moving, not because the economy is really strong. All this keeps traders confused and the machines busy - which might be the only true objective at this point. Because if they actually tighten anytime soon, then the gap between fiction and reality will likely close a lot faster than anyone imagined.
Because again, the real economy is growing increasingly fragile as it continues to be hollowed out by the parasites, meaning the next round of selling in stocks could be a real doozy. China has promised to stabilize its stock markets, which if unsuccessful (likely due to volume drying up), could act as the pin that pops the global credit bubble. We have already had a taste of this; however what we have experienced so far is nothing. Just try and imagine a world without QE moving forward. You can bet the parasites can't, which is why the smart money is getting out of the way. Gold and silver are becoming scarce. All this was inevitable. It's the fate of all fiat economies. According to Bob Shiller, fair value for the Dow lies at approximately 11,000, some 30% less than where it's trading today. As we pointed out sometime ago, and as can be seen below on the long-term weekly plot, once 17,000 was broken to the downside, the Dow could crash, and now it's happening. The 17,000 mark was 'broadening top negation support', where the break above this measure (the broadening top) implied a blow-off, but a failure back into the broadening top formation signals 'possible crash'. (i.e. because the break above resistance was a mistake, fiction, etc.) (See Figure 1)
Technical Note: Please notice the crash last month stopped right on significant monthly moving average (MA) support, which includes the all-important Fibonacci 233-month exponential moving average (EMA), suggestive if this node were to be breached on a closing monthly basis, a trend change, and possibly larger degree crash, would be signaled. Stocks must stay above last month's lows, which is why you can expect price managers to throw everything including the kitchen sink at the market(s) in order to maintain stability because, again, we are playing for all the marbles here. If stocks break below last month's lows, mankind's destiny will be set on a new event horizon of confusion, collapse and chaos.
The other important feature of the above chart is the breakout in the Bollinger Band Width (BBW) Indicator. This is bad news for the bulls because it's unlikely that such a pronounced breakout is fake, where once Fibonacci resistance metrics are exceeded, the crash will become a reality. Once you understand this, it should be no surprise then that the correction of last decade's fall in the Dow / Gold Ratio (DGR) was unable to reach the 38.2% retracement, no surprise at all. What's more, when you come to this understanding, that such large and profound relationships are exhibiting these tendencies, one realizes a break back above broadening top resistance is very unlikely. It's not impossible, especially if the Fed were to reverse course and announce QE4 soon, but what is the likelihood of this? This is unlikely until they are forced to do so, because with gold and silver in such scarce supply, such a move could spell big trouble for the dollar($), especially since its officially under attack from China and Russia now. Exclusion of China from IMF special drawing rights last month was the straw that broke the camel's back in this regard. (See Figure 2)
It's important to realize however, that with this happening, present circumstances are not a panacea for gold, at least not initially. It is (a good thing) if you are an accumulator, because as prices fall due to deflation fears one is able to buy on the cheap. However if you are a holder, it's important to realize any weakness in gold due to 'deflation scare' is temporary, and that if you were planning to buy more when prices were climbing, this is a better time. The trick is not to be afraid, which unfortunately, is a chief characteristic in small and unsophisticated investors. How far can gold fall from current prices? If observations on the weekly plot presented below have any merit, then $950ish should be the panic low, translating into an approximate 15% decline from present levels. So, if you are an accumulator one may wish to exhibit some patience and wait for the dip below four-digit ($1,000) support, where even if it falls further than $950, at least you are getting better value than today. There's no guarantee gold will fall this far, but at the same time, we have not seen a real panic in the equity complex just yet, which means widespread margin calls have not occurred, which must be factored into the formula. (See Figure 3)
And if 2008 taught us anything, it demonstrated that when margin calls are mounting, people are selling some of their gold and related equities to cover. So considering we have record high margin debt, levels never even approached previously, one must take seriously the implications. I don't know when this coming - tomorrow, next week, or next month, next year - who knows. But the point is it's coming - a complete liquidiation sale when it becomes obvious the status quo has failed (signaled by the Dow) - you can count on it. And again, the straw that could break the camel's back this time around is sentiment conditions are lining up for such an outcome. Conventional sentiment measurers are flashing false signals this time around as well (because investors remain almost fully invested), which is a large part of the reason open interest put / call ratios (the only true sentiment measure remaining) remain subdued. Most traders are looking for a test of the August lows, and no worse, which means it will be. So, get ready, by getting out of Dodge. Get out of the stock market, get more cash, and get ready to buy more precious metals on the cheap. This will be signaled when tech stocks, which are still trading at relatively elevated levels, turn south, as measured by a collapse in the NADSAQ / Dow Ratio, discussed and shown here in Figure 2.
This week will be a biggie based on how the markets react to the Fed decision. Weak markets going into Wednesday mean the Fed will be able to maneuver around their bullshit story (US economy strong) until its convenient to bring it back into the picture, citing foreign economy / market weakness as the reason not to tighten. This should sponsor a big bounce. However sometime, perhaps even before week's end, if speculators take this as an 'all clear', harebrained speculators should load up on calls, driving open interest put / call ratios lower, which would be the kiss of death for stocks around the world. This process could possibly be the set-up for a very ugly October all things considered (the real economy is imploding), which is similar to what happened in 1929 once the credit cycle had exhausted.
What if stocks are strong going into the Fed decision on Wednesday? Then the Fed might tighten - right? Hell, the JOLTS Index (Yellen's favorite labor market measure) was very strong last month. This means everything is hunky dory - right? They still won't be able to raise rates - don't kid yourself. And again, a favorable response to continued dovish policy should result in the stock market. If Yellen says something stupid at the press conference however, any euphoria could quickly be reversed. This will be the test - how stocks hold up going into options expiry on Friday. If open interest put / call ratios remain low and are worse, trending lower into Wednesday, then the weekly close in stocks could be interesting to say the least. Any way you stack up the situation, if speculators remain reticent to buying more puts on the indexes / ETF's, stocks remain vulnerable to more crashing.
Again, this is why I am recommending patience in precious metal position accumulation, because much better prices could be had in October if one of the above scenarios unfolds as described. This was the message a few weeks back, and it may remain the message a few weeks from now depending on how events unfold. The Amex Gold Bugs Index (HUI), which is still the most widely followed precious metals index, vexed the large round number at 100 on Friday, but was repelled in the last hour of trade because of speculators reacting to a semi-bullish COT report and equity strength. Any strength should not last long however, where the next attempt to break down into double digits should be successful. This should be accomplished in unison with a broad market liquidity contraction associated with stocks breaking below moving average support on the Dow cited above in conjunction with Figure 1.
With the Fed meeting this week volatility should be evident in both the broads and precious metals, so don't be surprised if your expectations appear out to lunch, because things could get crazy. In this regard, I would not be surprised to see the S&P 500 (SPX) break above 2000 at some point, only to end up below 1900. Such an outcome would be the set-up for the break in the HUI below 100, and with any luck a noticeable change in speculator betting practices. If this occurs, one should begin the accumulation process, keeping in mind volatility could last for months longer as leverage leaves the markets.
For this reason, we will be publishing a list of stocks that might provide an edge for one reason or another in the long run later this week.
The Fed decision is not coming until Thursday this time around (and likely to continue) so they can use the tension this creates to support stocks longer (shorts are squeezed under such conditions), so we will attempt to have our list out by Wednesday because although you should go very slow at accumulation until stocks officially break down, which is not the case yet, some may wish to nibble if core portfolio allocations are deficient. Accumulation past this point is not recommended until stocks turn lower for real, a bona fide margin debt purge occurs, and true sentiment in the sector improves, as measured by still depressed open interest put / call ratios. Until these three things occur, precious metal stocks remain vulnerable - so be careful.