The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, June 23, 2014.
As usual, Danzel Washington (and Tony Scott) did a great job on the movie Unstoppable, an action-thriller that depicts just how fast things can get out of control when big and powerful things gain momentum. In this case we are talking about a train, however the same dynamic of course applies to the entirety of the physical world - including those created by the human experience. Extreme mass is difficult to stop in any dimension governed by the laws of physics (especially gravity), including the financial markets believe it or not. The stock market, debt markets, commodities, etc. - they have all grown into large masses because of all the money printing and monetization - and the momentum in this regard appears unstoppable.
Because to stop it (the money printing) would cause a calamitous crash in these markets, not to mention the larger financialized economy, one that would really hurt, so humans being what they are, attempt to avoid this inevitable pain. Or is it better these days to say the public allows the powers that be to continue in their lust for power and wealth because most are still eating, but this is set to change. The recent loss of house majority leader Eric Cantor is a shot across the status quo's collect bow in this regard, because establishment schemes are no longer providing sufficient game in periphery economies to keep people fed, both at home and abroad - signaling - as in all such previous instances throughout history - the party is indeed stoppable.
People need to eat. Starving people don't just get jealous of those who are eating, they beginning to fight back (even in surprising places), which is what we are increasingly witnessing now that American - Anglo Globalization is being recognized for what it really is - a subversive colonization agenda. China, Russia, the exploited (for their resources by Western capital) - the periphery - is increasingly acting to protect itself from the ravenous monster to the west - its oligarchs, politicos, and bureaucrats (dogs) alike. This counteraction has turned desperate Western fascists on their own with increasing determination of late, looking to destabilize and tax middle class targets with furious intensity. Again, as with Cantor, the evildoers will find increasing opposition at home too until they are stopped as well.
In the meantime however, expect both the contempt and efforts from these types to go parabolic with growing desperation to keep up appearances, which today means tacking gains on the stock market day after day. Just like the days of 'bread and circuses' in Rome, as the powers that be were steeling the citizenry's wealth and liberties, they needed increasingly profound distraction, which is where the US (Western) war machine comes into play today. Hence, we have the latest CIA engineered make work program kicking off in Iraq again, not that this will really help in the end. Yes, it may delay the inevitable for Western power mongers a little longer; rally oil stocks a little more; justify printing more money; distract the masses; but, the clock is still ticking - the debt clock that is - tick, tick, tick.
Of course you would never know it unless one looks under the shiny veneer that still covers America. But the cracks are appearing, where people are feeling the stress, and soon visible signs will appear. The benefits of all the money printing (debt creation) are now producing a negative marginal utility that can no longer be hidden, as reflected in now contracting GDP. How can I say this with any degree of certainty? Answer: Because the S&P 500 (SPX) / iShares Silver Trust (SLV) Ratio broke down big time last week, plunging through the psychologically important large round number at 100, leaving little doubt the party is over for the status quo. This means much of the inflation that has been channeled into the stock and bond markets will soon begin to send key commodity prices zooming higher - with precious metals at center.
And again, we know this because of the signal thrown off by the SPX / SLV Ratio reversing a three-year long massive bull run that trebled values over that time. The question then arises, why did this occur last week? Was it Iraq, the Ukraine, what? Answer: No, it was the Fed coming out with what was perceived as a dovish undertone in their official statement even though the taper was continued. That's why both gold and silver broke violently upwards, which was enough to break all the indictors diamonds on the three-year plot below, along with what can now be labeled the bearish rising triangle. Now that it's short-term oversold one should not be surprised if 100 is back-tested before the journey that will eventually take out 2011 lows gets underway. (See Figure 1)
Figure 1
Again, the reason the SPX / SLV Ratio is so important is 1) the SPX is the most widely followed broad measure of US stocks; and, 2) SLV, as proxy for silver, is the establishment's wiping boy, the only commodity across the full spectrum not trading above 1980 nominal price highs. How is this accomplished? Unlike gold, silver is a small market / more localized commodity that was demonetized many moons ago, making it easier to manipulate / control / suppress. It's the beacon that everybody watches to see if Da Boys are still in control. The signal we got last week when the SPX / SLV Ratio went crashing through 100 is the bureaucracy's price managers no longer have control over the macro, which has historically signaled sub-standard growth, and the need for increased speed in currency debasement.
So you see, the Fed was working on backward looking data in maintaining a tightening stance in their policy decision last week that will likely need to be reversed before the year is out. This is why precious metals popped last week. And this why they should remain buoyant from here on, setting sail on a new leg of the bull market that began in 2000. Moving averages, some volumes, and most ratios would have you believe this is the real McCoy. However, some caution should still be used with respect to the shares in my opinion, even though they have just put in a strong moving average / ratio related buy signal. Aside from this, the volume spike(s) on Thursday looks like a short covering related capitulation, which is likely options related. (i.e. we know this from previous sentiment studies.) (See Figure 2)
Figure 2
This concern is heightened by the lack of net money flow indicated above, showing that all the gains in June have been manufactured by the machines trading shares back and forth with no net accumulation. Please notice that back in December that cash flow turned positive prior to prices moving higher, a noticeable divergence to the present sequence. That being said, the above may be a false measurement, because other accumulation / distribution measures are showing the former is occurring. What to do? Be careful. Again, stick with the more liquid shares in spite of the juniors leading in this apparent turn, because volatility can turn up at the most unexpected times with few shorts to squeeze. All we need is for aggressive speculators to become bullish again in the option pits, and the 'true sentiment' related support enjoyed over the past month would be removed.
And, what about the stock market? If it fails soon, won't this hurt gold and silver stocks too initially? As you may remember from recent previous discussion, history would suggest this is indeed to be expected. What to do then? Keep position limits in mind - that's for sure. Or in other words, leave yourself cash to exploit such an opportunity if it arises. While nobody can predict with any degree of certainty weather such an occurrence will befall precious metal stock investors this time around as well (six-months of deferential liquidity / margin based selling), one thing is for sure, history is the best teacher, and paying attention to this pays off.
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