It's a Matter of Trust
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, January 18, 2016.
It's a new year, and people in Europe are trying to get over the 2015 hangover - literally. From the Charlie Hebdo incident at the beginning of the year in France, which was tragedy sparked by the locals poking fun at the wrong brand of extremists apparently, to the not so funny New Years celebration in Germany, and everything in between (Paris Massacre, etc.), clearly racial tensions are on the rise. And things are just getting rolling in this regard, as the violence is spreading. Not a problem for 'all-knowing' bureaucrats who live insulated (in ivory towers) from such concerns themselves however. They have the solutions to such problems, which in the case of local women interacting with 'North African Men' at public parties (like New Years celebrations), is to 'travel in groups', and to keep them at 'arm's length'. You cannot make this stuff up.
Of course the real tragedy here is the citizenry is supposed to trust these people, both elected and appointed bureaucrats, to serve the interests of the public, but unfortunately this is not reality. The fact of the matter is all to often, and ubiquitously within all societies, power corrupts. So unfortunately what happens all to often is corruptible bureaucrats end up serving their own best interests, not the public's, with the 'migration crisis' in Europe a profound example of this, being another manufactured 'make work program'. Because more immigration requires more administrators, police, and money printing necessary to pay for all this, which as you may know, does nothing but make people more dependent on a corrupt and fundamentally flawed system to meet their needs as society continues to be hollowed out.
So not only are European citizens more dependent on embedded bureaucrats for their jobs and money, but also now there's a need for 'heightened security'. It's the manufacture of an increasingly corrupt and desperate 'security state' that knows no limits in exercising its power to maintain the status quo for the privileged. The bureaucrats in charge of the European experiment in Brussels aren't worried about partying with the 'North African Men' they allowed to immigrate to Germany, France, etc. because again, they live in 'ivory towers' (they are rich), insulated from the turmoil they themselves create. What's more, as a result of the intensifying race / class chasm they have created, it should be recognized that like the countries they have destabilized (think Middle East), Western sovereigns have now essentially gone lawless themselves, where who you know and what one can buy is all that matters.
People are waking up to what is really happening to them (as opposed to what the media tells them) now however, and they are getting mad about it, both in Europe and the US. This in turn is forcing the bureaucrats to make it appear they are slowing the destruction, however until these children have their toys taken away, don't expect any miracles. The damage is already done - and it will get worse apparently. (i.e. Germany would be 'unlivable' if the a**holes in charge get their way.) On this side of the pond, Trump says he's going to send all the migrants (illegals?) packing if he gets in. Although he may mean it right now, I will believe that when I see it, because they will shot him - and they will tell him so. But maybe The Donald isn't afraid of being JFK'ed - who knows? I can tell you one thing for sure - 'we the people' want somebody back in the White House they think they can TRUST, so if he does make it that far - he's 'a shoe in' assuming the voting machines aren't rigged.
So again, people are beginning to figure out what these characters are up to, and who knows, maybe they will actually be held accountable one day. Certainly the party is over in the cognitive dissonance game bureaucrats have depended on to keep the public buffaloed if the growing outcry associated with the manufactured migration assault (on the public) in Europe is any indication, where it will be increasingly difficult to regain any trust for the 'reprobates in charge'after this stunt. It could be argued Americans are ahead of the game in this regard, manifest in Trump's popularity. And this is probably correct considering the basis America was founded on, and the sentiments this creates in 'the people'. Certainly the reprobates in charge have done their damdest to squash this brand of thinking, and for the most part have been successful, however Trump is claiming the moral high ground in this regard, so things should get truly interesting if he continues to surge.
Putting politics aside for now and moving onto the markets, here we are in a post options expiry (opex) week within an extended five-week cycle running into February, where the effect of the new cycle is at its least. Normally what this means, is if the previous week witnessed an extreme, like last week's sell-off(s), making the first two-weeks of January the worst in history, then this week should produce a correction, which in this case means a rally in stocks. Just what precious metals do this week given their negative correlation to stocks (when it's convenient for US price managers) is anybody's guess, but for what it's worth, the charts are in fact suggestive of further losses. The Dow / XAU Ratio still has another 20-ponts to gain in order to reach the 420 target discussed on these pages last week, which should mean more losses for precocious metal shares. (See Figure 1)
After that happens - once the Dow / XAU Ratio hits 420 and finishes the month around 400 (the profound monthly Fibonacci target - see here) - that's when it will get interesting. Does the stock market start crashing next month characterized by the broads falling faster than precious metal shares? You should know that's exactly what happened at comparable cycle points in both 2000 and 2008, with three to four more months of losses in precious metal shares likely remaining to endure. And while this episode could turn out completely different (L - shaped?), at least we have a track to run on, which is more than one can say for most of the buffoons running around out there today, which is of course why we are all in so much trouble. Of course one could also say the bright side of all this opportunity exits for the well informed, which we hope is we. (See Figure 2)
Back to reality now (because few will benefit from this lunacy in the end), the only thing 'trickle down' about the Fed goosing of the markets all these years is the moral hazard, and the distortions in the markets we now must suffer. A large part of this, is the extremes that will have and will be witnessed, where long time subscribers would know we are still waiting for the Gold / Silver Ratio (see above) to vex the 90 area (matching the 2008 top) before a lasting reversal in precious metals should be expected. So again, even though we are still expecting precious metals to decline in the first half (quarter?) of 2016 due to deteriorating liquidity conditions, deflation scare, and speculator betting practices, the good news is we are finally in sight of an end to the mid-term correction in the group that started back in 2011, a 'correction' that saw a complete collapse in the shares. (i.e. so what do you call that?) (See Figure 3)
It's called lunacy in my books, which is why I always advocated building a strong portfolio base with the physical metals first (which has been a portfolio saver because the correction(s) in gold and silver were relatively mild - especially in Canadian Dollars), because the possibility of the shares crashing was always present, especially in this rigged / deflationary world. Along this vein of thinking, it's important to realize that investing in precious metal shares is speculation, not 'saving', like owning bullion. You would be surprised how many investors don't realize this however, which is why when they got complacent back in 2011, the ground was laid for a collapse in precious metal shares. It could be argued the same thing is happening right now in the broad markets based on the way the VIX (see above) is relatively well contained while 30 to 40 point swings in the S&P 500 (SPX) have become commonplace. (i.e. with interest rates so low, people have their money in stocks, dividends, etc., thinking they have 'savings'.)
Think not? Consider the monthly plot in Figure 3 carefully then. Notice how RSI broke out, tested the breakout, and is now accelerating higher. Notice the MACD is poised to break above important Fibonacci (Fib) resistance. Notice the intermediate duration full stochastic is poised to breakout. Notice Bollinger Band ® widths are poised to breakout. And then notice the VIX is trading above 20 and is poised to close the month with a breakout above 20. This is the most bullish set-up for a sustained / substantial breakout to the upside you will like ever see - so don't be complacent like the others concerning stocks, whatever you do. Again, for whatever reason (election year, exhaustion, insanity, etc.), broad market speculators have broken the pattern of increasing open interest put / call ratios along side rising prices here in 2016, which is the 'kiss of death' for the perpetual short squeeze, and the reason for the worst January start in history.
That being said, and as discussed at the beginning of last week, if put / call ratios continued to be weak going into opex last Friday, pushing stocks lower, then the next week should produce a correction higher, and we see no reason to alter this thinking. So while anything can happen obviously given the technicals / sentiment conditions discussed above, still, we should have a bounce this week, possibly taking the SPX back up as higher as the 1990's. With the next opex a full five weeks away, its influence on prices will be weakest this week, allowing for such a bounce. The three-day weekend also likely exasperated the selling on Friday as people were panicking out of stocks not knowing what news might come out. Those not involved in the speculation game closely would simply be losing trust in stocks now because of the price action. Therein, its import to realize the degree price actions is controlled by speculators, their attitudes, and the machines.
Further to this, and as stated last week, it's important to realize the bearish broad market speculators are broken (evidenced in put / call ratios declining with prices - see here), and that as long as this condition exists, stocks are doomed. For this reason then, anything above 1950 on the SPX should be viewed as gift to either sell long positions or get short if one is so inclined, and / or rising put / call ratios don't ring any alarm bells. Frankly nothing surprises me anymore, however I think that the trade (speculators, investors, price managers, etc.) have become complacent for one reason or another, with the fact it's an election year very high on the list. What's more, and along this line of thinking, I think people are becoming so enamored with The Donald - that he can do anything and is going to save America (like they did with Obama), that they are viewing the future in a positive light, given they are looking through rose colored glasses.
So again, it's this blurred vision that can keep speculators on the wrong side of the trade in 2016 too, but instead of being bearish the consensus is bullish now for the wrong reason (again). This is irony at its best folks. American's are attempting to bury their heads in the sand again this election (they think The Donald will fix all), and they are betting that way in the options markets to reflect this optimism.
Look out below.