The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, September 21, 2015.
Just when you think you know something, you revisit another chart(s), which is always a good idea if you are a good (thorough) technician. That's what happened to me this passed week. You will remember we said last Monday we thought that stocks would rally off the Fed meeting because that's what they are all about creating tension to force stupid shorts to cover to be followed by another plunge, possibly leading to something very nasty as we work into October. Here is what we said, including the comments on precious metals, which we will also refine in order to galvanize our ongoing inter-market analysis of the two groups (stocks and precious metals), as follows:
"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 Amex Gold Bugs Index 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."
And sure enough, that's exactly what happened. The SPX vexed 2020 and closed back below 2000 Thursday, followed by more losses Friday possibly on its way back below 1900. This is where our view changes now because of what has become apparent on the charts below however, a scenario that was not first obvious until recent events unfolded. The charts we are referring to are the monthly Dow / Philadelphia Gold & Silver Index (XAU) Ratio and the Dow / Reuters/Jefferies CRB Index (CRB) from the Chart Room, presented below. In turn, they have now become the definers of the macro-trade, where they are unfortunately painting a picture of accelerating inflation moving forward.
What are these two charts telling us? They are both telling us the same message. They are telling us to expect a mountain of monetary inflation in the future. (i.e. which should be no surprise with a world quickly plunging into recession / depression.) Only now, unlike the past five-years, one should expect commodity prices (and general price levels) to rise, not just against stocks, but in absolute terms as well. This is what the Dow / CRB Ratio is telling us. And the Dow / XAU Ratio is telling us this is going to be a problem for macro company profitability and solvency. In other words, this next round of monetary inflation will be extreme because the previous ones did not work; necessitating both increased and expanded money printing. (See Figure 1)
Technical Note: One should notice that it would take one more thrust in the charts above and below to complete both the counts and Fibonacci resonance projections, which is likely considering they are so close to doing so. Failure is always possible, however in looking at a daily plot of the Dow / XAU Ratio attached here, we can see what is most likely occurring here is a fourth wave consolidation, with a test of the August lows a likely turn point back up, where they should then complete the Fibonacci signatures. Then it's a toboggan ride into the abyss.
Because you have to remember that the self-serving (interventionist) Keynsian idiots that run the system will never give up until their toys are taken away. So if the last round of money printing was not enough, hey, we'll just turn the screws on debasement rates and everything will be hunky dory right? There are no historical examples of such practices being policy suicide from the past none right? Just Weimar Germany, and Zimbabwe more recently, just to mention a few. But Zimbabwe is a small isolated case right? Right but Weimar wasn't. And even if this were true, it doesn't mean what the world's central bankers are doing now isn't suicidal just because its never been done on this scale before. (See Figure 2)
That's the 'big message' in the two charts above, both similar in dimension, count, and implications. The big message is our global fiat currency based system has its limits no matter how fat central banker heads become. They are telling us doom is just around the corner no matter how wide you start dropping helicopter money. They are telling us a check in every mailbox will not help the situation, even though the feds are likely to start sending everybody and their brother free money, because price rises will outstrip any benefits associated with out of control monetary inflation. This is why stocks have likely already topped even though the Dow could still make another marginal top against the larger commodity group. (See Figure 3)
This understanding is demonstrated in the monthly DAX chart above, where even though the ECB is presently engaged in an increasingly aggressive quantitative easing (QE) program, stocks are falling anyway. Yes, but what if the Fed brings back QE, and widens its scope so that the money actually makes it further down the food chain as opposed to just padding oligarch pockets? Obviously this would cause a reaction (think rising prices), however if the US has passed the same event horizon as Japan back in the 90's it won't matter. With the debt to everything ratios hitting records by the day now, already out of control, could it be the debt markets finally cease up when those currently in denial realize they are not getting any of this 'money' back?
This excellent article from David Stockman certainly paints this picture, and more. Stagnation is the word. Stagnation is all increasing money printing will bring because the system will not be cleared the serial debt bubble will be kept alive in a worsening zombie state instead of being allowed to die. Sure, people will love the free money at first. But don't forget they are simply attempting to buy your loyalties and sensibilities so you can only blame yourself in the end. One more surge higher in each of the above charts and then, that's when the trouble will start when precious metals and commodity prices begin rising again potentially uncontrollably this time as process unfolds.
So the question becomes, 'is some degree of global hyperinflation on the way?'
So again, in terms of sequencing, while seasonality and current events should see stocks down this week, they should not go much lower than the August lows (if that) before yet another sizable bounce unfolds, matched against another swoon in precious metals (see Technical Note above). If nothing else appears serious enough to get the knuckleheads in New York selling this week, there's always the government shut down ploy, scheduled for month's end next week. Remember however, this is just Kabuki Theatre designed to get dimwitted hedge fund managers and the few other speculators still alive to buy puts, so they can be squeezed out afterwards as things magically return to normal. (i.e. the can is kicked down the road yet again.)
This sequencing makes sense from a sentiment perspective because we will have an August bottom with a late September test in stocks, and if there is no crash in October, this will embolden the bulls, where we should see put / call ratios decline another notch(s) going into Christmas as Figures 1 and 2 put in their respective fifth-wave Fibonacci signature moves. And while I could be wrong about how to interpret Figures 1 and 2, where precious metal stocks falling faster than the Dow could accomplish the same technical result (completing the fifth-wave Fibonacci signature moves), still, it's better to be safe than sorry with US price managers involved that are 'fully committed', meaning nuts. Again, it makes sense to think idiot hedge funds that have never been this long the CBOE Volatility Index (VIX) might be wrong one more time no?
And wouldn't it be sweet if we get a bottom in precious metal shares in November like in 2000. November lows have a tendency to mark important turning points for the sector in case you did not know. And while it might take longer (outside November), still, the point is a great many speculators are now expecting stocks to be weak and precious metals strong going into October, as evidenced in post expiry open interest put / call ratios (see here), which is why this probably will not happen. Upon reviewing the key ratios we follow, it should be noted the ratios for the OEX, IYT, DIA, DJX, MNX, and QQQ all shot up post expiry, which will provide support for stocks moving forward if this persists.
If we get through October and stocks don't crash, which is what Figures 1 and 2 are telling you should happen, then speculators will sigh relief and stop buying puts against the broad measures of stocks because we would be moving into seasonal strength, which is the sentiment backdrop that is required for a bona fide reversal to take hold. Corporate players and prop desks will be buying furiously during this period for year-end window dressing, which is why the topping process could be choppy, however once Christmas is passed, it should be down hard for stocks, and visa versa for precious metals.
If this scenario does unfold, with put / call ratios for the key precious metal measures we follow still depressed, tax loss selling season should keep a lid on prices initially, which again, could bring a bottom in November. And again, such an outcome would be good for the present bulls. If the HUI can break below the large round number at 100, it might have the effect of triggering a final capitulation amongst the bullish derivatives players, possibly washing open interest put / call ratios out. We can only hope.
So be careful here. We are close to major reversal time but not quite yet if the above analysis has any merit.
See you Wednesday with pictures of the post expiry put / call ratios to review.