The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, August 31, 2015.
According to Wikipedia, Six degrees of separation is the theory that everyone and everything is six or fewer steps away, by way of introduction, from any other person in the world, so that a chain of "a friend of a friend" statements can be made to connect any two people in a maximum of six steps. It was originally set out by Frigyes Karinthy in 1929 and popularized by a 1990 play written by John Guare. Taking it a step further, the theory can be extrapolated to superficially explain what appears to be a 'shrinking world' that is really due to technology, but what's the fun in talking about reality right? Man has never been about that. Man is the hedonist and dreamer and prefers convenient fiction. And it's this sentiment that is infused into all aspects of human interaction in one way or another, including politics, economics, and our various organizational frameworks.
It's easy to understand this sentiment in making the observation that because of technology, the world has in fact been shrinking to man in profound dimension, in terms of mobility, interaction, and perception. Today, rapid world scale travel is available to increasing numbers. And if one cannot afford that, just open up a Facebook account and all of a sudden you are socially connected on a global scale. Rich or poor, the world is shrinking, so its understandable people are fascinated by this phenomenon. But what if I were to tell you this is all about to change. At first most reject such thinking, which is the reaction I get when suggesting profound change in this regard is upon us. However one should have an open mind because this will help you survive what is coming.
If you look closely one can see it. The world is breaking up and relocaliziing because increasing numbers are realizing the unipolar American Empire has reached the limits of its power due to earthly constraints - they are decentralizing for survival. The political economy of competitive currency devaluations is the most prominent example of this condition at present, however this is just the beginning of a larger process of protectionism, where one should be preparing for increasing economic upheaval right to the core of the Empire as periphery decay finally takes its toll. This will become self-evident to all as living standard continue to erode, even the 1%. The Western political class and bourgeoisie should take notice of this because the backlash of present predatory policy could be severe. Attempting to hide the decay in order to continue exploiting public trust and resources is treasonous.
Be that as it may, one thing is for sure, process will accelerate in this regard (decentralization away from empire) the faster things come unglued, meaning one should keep an eye on Western (including China) asset bubbles (stocks and bonds), because the markets have been trading six degrees of separation from reality for some time now, and an accident is now probable at some point. That's what recent volatility in the markets has been signaling. It's saying something is very wrong because volatility just registered an earthquake the likes of which not witnessed since Black Monday in 1987. It's signaling real trouble is just around the corner - a 'correction' that will finally separate reckless speculators from their money. And again, it's important to realize process is accelerating now, where we are poised for more trouble in this regard, and that we are moving into the September / October stock market volatility window.
So if you are not careful, you may get separated not only from your money, but who knows, maybe even your sensibilities (if one is not already there), because crashes tend to cause panics once the 'deer in the headlights' reactions wear off. Clearly we are not there yet evidenced in the big bounces in bourses since last Monday, however one would be well advised not to become complacent, or worse, reckless and greedy; running into September considering earthquakes are most often followed by aftershocks, and last Monday was the equivalent of a 9 plus reading on the Richter Scale. And this genesis could get worse as we vex further into volatility season. Right now we have official intervention, intensified corporate buybacks, the long weekend coming, and month-end window dressing to boost stocks, but once all this ammo is spent it will be up to an increasingly fragile bull population to carry the ball into September, and they are likely to drop it. (i.e. because of falling open interest put / call ratio which neuters the machines [short squeeze]).
The question then arises, 'does any concrete technical evidence exist to support this theory?' Looking at the weekly S&P 500 (SPX) chart below from the Chart Room, we can answer tentative 'yes' to this question, and go on to point out that once the Bollinger Band® Width Indicator (BBW) breaks out to the upside, so will volatility, meaning the market could see an unprecedented move given record margin debt levels, record low institutional cash reserves, and now we have record equity outflows as well. In terms of pointing out the important features on this chart we have the indicated channel test failure, Fibonacci signature failure, and the diamond breach in RSI. So, all we need is the BBW indicator to breakout accompanied by important Fibonacci support breaches in the MACD and ROC, and a bearish technical picture would be fait accompli. This should happen in September, likely sometime after Labor Day when price managers won't have light volumes on their side, along with options expiration around the corner. You will remember now that key index and ETF open interest put / call ratios (SPX, SPY, OEX, etc.) are falling and contained (despite the Fed's best efforts to get put buyers back in the game), options expiry can and will work against the bulls. (i.e. price stability.) (See Figure 1)
And this is now true of NDX, MNX, and QQQ speculators / hedgers as well, where ratios are declining and are either below unity or approaching it. (See here) What could happen to really get some selling going is the NASDAQ / Dow Ratio, pictured below, should reverse lower and break down out of bubble territory, taking all the premium out of stocks in the process. Apparently this is not supposed to happen as long as the Fed's balance sheet remains inflated, so the pace at which the air comes out of the bubbles is not known, especially if a new round of QE is unleashed. Of course this is their biggest problem over time, because eventually they will need to hyper-inflate, and we will have the same result (deflation) after the crack-up boom. An unintended consequence of all this is business comes to sketching halt, which would eventually see the premiums in stocks disappear rapidly, but again, this cannot be speculated on until we experience the boom in asset prices more QE would foster. So, one thing is for sure, if stocks do tumble in September short sellers should watch the charts closely - and don't push your luck. (See Figure 2)
Turning to the Dow / Gold Ratio (DGR) now, seen below, if the above is true, that stocks have topped, then it should also be true precious metals have bottomed for the most part, however there is still the risk of deflation worry and margin calls causing one more spike lower (orthodox low), before the momentum turns higher for real. This is of course especially true of precious metals shares that will trade more like stocks in a broad market panic than gold and silver proxies at first. Of course we may be getting ahead of ourselves because as with the two charts above, we cannot say conclusively price managers will not be able to lift stocks / sell precious metals one more time. In the case of the DGR monthly chart pictured below, it will take a break of the Fibonacci 233 - exponential moving average (EMA) and the same of the RSI flag to confirm a trend change. We are very close in this regard, with just one more surge in stocks lower / gold higher, for this to become a reality. For this reason, and the fact open interest (OI) on COMEX silver has now declined some 40,000 contracts off the highs, we are compelled to turn a more favorable eye towards the precious metals sector at this time. (See Figure 3)
That is to say, that while OI on COMEX silver could still contract further because of deflation worries amongst an eternally confused bunch of idiot speculators, with the DGR now likely topped in terms of its reaction higher off 2011 lows, precious metals should have a noticeable wind at their back very soon now, making vexing some of the targets previously discussed on these pages more difficult, if not impossible. This week will be very telling in this regard, where if we see OI in COMEX silver continue to contract as speculators (especially the small ones) throw in the towel, even though more volatility rooted in continued index and ETF wrong-headedness might continue, one would be well advised to be well invested in bullion, at a minimum. Certainly it would have been better to see COMEX gold OI contract more as well before having to pivot ones thinking, however it should be noted that in relation to the growth of other derivatives markets across the full spectrum of currency, stock, and bond markets, the gains in both gold and silver are minuscule. What's more, as can be seen in this historical chart, OI for COMEX silver was over 300,000 contracts back in the 70's when trading had just started, some 40-years ago now.
Since then it has never repeated this feat, however if a mania is to become a reality in precious metals, which is probable given the corner the Fed (all central planners) has boxed themselves into, these levels of OI should be exceeded in coming years assuming COMEX is still in business. So again, once it gets below 150,000, which is halfway back down its more recent range, one is compelled to start thinking bullish again, if not before. As alluded to above, with the economy quickly fading now, the Fed and friends will be compelled to drop their bullshit story (the US economy is strong) soon in favor of more currency debasement in the form of QE, at which point the dollar($) should fall off a cliff given the magnitude of the larger picture. In the meantime they are hoping their bullshit story keeps the hoards out of precious metals, and its been working. But as the saying goes, 'every beginning has an end'. And that includes Fed fiction. It should be noted that as per usual, junk debt is leading the way in revealing the true state of the union.
Again, if this is to become a reality (sooner rather than later), the scale should be tipped by the end of September. In this regard, we want to watch the DGR. If stocks have topped and precious metals bottomed, it should form a larger degree head and shoulders pattern in September concurrent to continued contraction in OI of both COMEX gold and silver, along with rising precious metals open interest put / call ratios, if we are lucky. As mentioned last week, it might take falling stocks to finally get precious metals speculators to start thinking 'deflation', which in turn would curb call buying in the derivatives markets. And although we are now seeing this on COMEX, what we need next is for this to happen in the indexes, ETF's, and shares. If not, then more pain, and our more bearish targets for the sector might still be in play. Now that commodities are back down to long-term supports, speculators are beginning to think 'deflation', which is why OI in COMEX silver is contracting. Again, all we need now is for precious metal ETF speculators to catch this disease and bulls would be in business.
As it stands right now, I still would not be surprised to see the Amex Gold Bugs Index (HUI) vex the 90 area in coming days. Vexing 50 is likely out of the question, but not 90 as things stand today. Only a close above 130, which is the recent high, would put this possibility on the backburner. And of course a close below 100 would basically assure a move to 90, or lower.
There's not much else to say. We are hoping speculator behaviors keep changing and extend into retail (ETF) trade, but there are no guarantees. Again, if they don't, as pointed out above, although close, fully confirmed cyclical trend changes in stocks and gold are not in place yet, meaning price managers could extend the status quo (unbridled leveraged speculation) past this fall, into 2016, or longer. And while it's true the periphery is beginning to show serious cracks (see here, here, and here), if these speculative practices in key stock and precious metal betting parlors don't change to a substantial degree, the risk of liquidity induced snap back moves will persist, making the risk of volatility in your portfolio substantial in turn.
Until you see the BBW index breakout in Figure 1 (SPX) occur, the status quo is still in charge, and one should act defensively with respect to the efforts of bureaucratic price management.
Just look what all this has done to precious metals shares already.
But there are signs appearing of lasting trend changes in these markets now. Lets hope process continues to unfold favorably.
Good investing in precious metals will be possible very soon.