The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, October 12, 2015.
So you think the economy is going into recession, or is already there. For growing numbers this is true if you are not part of the subsidized and / or financialized economies. Certainly the useless parasites on the Beltway are not feeling it. But the hard working and honest people in the real economy are getting decimated by these assholes - not that it matters - or at least it hasn't mattered to the stock market up to this point. And based on last week's rally in stocks, the strongest in years, this will likely continue because not only is there record short interest on the New York Stock Exchange (NYSE), but also, selective put buying against key ETF's is coming back, with buying in IYT (Transports) and XLF (financials) recently sending open interest put / call ratios soaring. (see here)
And if history is a good guide, that's all that matters. It just doesn't matter the economy is getting worse by the day and likely about to slip into recession. The only thing that matters in modern day markets that are nothing more than sentiment based betting parlors, is how the gamblers are positioned - for collapse, to muddle through, or to skyrocket because everybody is short - like now. So, believe it or not, stocks could blast off to new highs going into year-end with bonus / buyback related buying fueling the squeeze. This is the message behind recent corrective price actionin the Dow / XAU Ratio and now we have the gamblers / hedgers enabling one last run-up, looking to vex the profound Fibonacci resonance target discussed on these pages for sometime now.
Such a conclusion regarding the most likely path for the Dow / XAU Ratio is bolstered in the observation unlike the broad market related ETF's cited above, open interest put / call ratios for precious metal ETF's have remained depressed, providing no short squeeze power in the sector to give it that push needed to achieve 'sustainability' in the present move higher. And while the precious metal sector could move higher yet, because it's still longer term oversold, at some point these ratios will matter again, especially if strong dollar($) talk returns. Because right now they are riding the larger liquidity wave higher, but as soon as the boys in New York think they have enough suckers back in the market, likely when a few stronger data points come out, don't be surprised when the machines turn on precious metals, yet again.
This coming week will be an important test in this regard with options expiry approaching. With the strong performance in the larger equity complex last week as NYSE participants were getting squeezed, this week should see some consolidation anyway, but the tell for precious metals, and the trajectory of the Dow / XAU Ratio, is how much precious metal shares will give back if we do indeed witness such an occurrence. Again however, this may not happen right away because short squeezes are violent and intense by nature and may keep rolling with no correction until the S&P 500 (SPX) reaches the 200-day moving average (MA) at 2060. This is of no matter in predicting lasting turns however, down for stocks and up for precious metals, it's the path of the Dow / XAU Ratio that's important. Again, what we are looking for here is a surge to the Fibonacci signature target delineated below. (See Figure 1)
With no stock market crash now likely in October, or the rest of the year for that matter, because it will take some time to burn off the record short interest on the NYSE, what should become apparent very soon is we will return to a strong stock market / weak precious metals configuration if the above has any predictive power, again, allowing the ratio to reach the target. Of course, if like in 2008 broad market shorts decline with stocks all the way down (see attached above), such an outcome would throw quite a monkey wrench into the mix, which is why such an outcome will not be taken seriously until signs this is happening appear. Therein, it's still possible everything starts falling post seasonal weakness ending in October, however unless short interest and put / call ratios change radically between now and then, one must assume the status quo will prevail once again - at least going into next year.
Other things to watch for this week include a weekly VIX close below the 200-day MA, which would be another piece of the puzzle made clear for the bullish case. It's already had a two-day close below 20, increasing the odds of such an outcome considerably. Certainly nobody should be betting on sustained move back above 20 in the VIX until it happens, where a two-day close like this would signal 'risk off' again, and the possibility of an unpleasant surprise for the bulls. Some would argue that the above assessment is 'hogwash'; and, that increasing weakness in the Europe, Emerging Markets and larger periphery will bring New York down. Or mounting tensions in the Middle East will do it - right? All I've got to say to these types is if you think the nut jobs in New York give two shits about whatever else happening outside their little 'fiat nirvana' when it doesn't benefit them - you haven't been paying attention.
Then go ahead - bet against them and see what happens.
You don't do that if one is attempting to maintain a relatively stable net worth until the cards are stacked against them, which is not now. This is why although the HUI could easily reach important resistance at 150 before reversing lower, cautious speculators don't participate in such counter trend moves because the volatility could be both untenable and unexpected. With the Fed now clearly cornered in a more dovish posture however, the funds could keep buying for some time because they are using other people's money and for that reason are reckless. This is why precious metals are rallying with the broad market, and why they will fall with it as well.
If history is prologue however, precious metals will top out first, so be careful if running the gauntlet. Remember, just one stronger than expected data point may be all it takes to reverse the short-term trend with the majority of speculators still out of position.
Good investing in precious metals is coming.
See you soon.