The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, October 26, 2015.

Anybody who did not heed our warning last week that stocks could rip higher into November is hurting big time if short. It was the combination of promised QE by the ECB, a rate cut in China, and better than expected earnings by key bubble stocks in the US - boom boom boom (not the John Lee Hooker variety) - Bob's your uncle - that did the job. Now, what we have is a technical picture that suggests new highs in the US broads are not just possible, but quite likely, given there's no way record short positions have covered all their positions in such a short period of time. (i.e. we will see in the reports soon.) With corporate buybacks at a record, and central bankers more debased than ever - none of this should be surprise to anybody if they are paying attention.

Apparently this concern applies to the so-called 'pros' in the money management business, because as can be seen in their speculative practices, they are the ones betting against stocks. To wit, it's important to note it's the active hedge fund community that's losing the majority of the money in this squeeze, with record shorts and elevated put / call ratios of institutional vehicles (OEX, NDX, and XLF) the primary gainers in the present options cycle. (see here) It's not the retail crowd that's crazy this time around; it's the 'smart money'. And you can expect this 'rinse - repeat cycle' of moron like hedge fund managers continuing to manage their clients money away shorting stocks until it's taken from them, because while they would like to make their investors money in order to increase their own fees, at the same time, they will not stop hedging / speculating on lower prices (based on 'fundamentals') because they are already making a ton of money, and want to protect themselves.

What could be better than being an idiot and still making a ton of money. You just can't beat the money management business. Anybody who didn't know the alphabet soup crowd was engaged in heavy buybacks can only be considered an idiot - and a big time idiot if short. Of course very soon, money managers both big and small will be having problems with falling stocks too - not that this isn't a problem already. The market is still at the highs and guys like Bill Ackman are getting killed. What's going to happen when stocks turn lower for real? Some would argue justice. Anyway you slice it however; there will be blood - a great deal of blood - especially in the hedge fund space. Some investors may get little to none of their capital back from some of these jokers in the next meltdown. It will be funny watching the clowns on CNBC attempting to rationalize such things for the dead heads that watch that crap and take it seriously.

Moving on to what to expect in the markets from here, seasonally the next two-weeks are strong, and month-end is approaching, so don't expect much giveback of the melt-up witnessed these past few weeks. This is the nature of a short squeeze, and considering we are working off record short positions, the pressure should remain. The present squeeze is already the strongest in years, but it could become a record breaker if speculators keep gaming the markets like nut bars, which appears to be the case. The shorts should be concerned the Dow / XAU Ratio has not even started to move higher in earnest yet, where again, it could continue to do so for some time before reaching the Fibonacci resonance target (see below), perhaps into early next year. Of course the bozos that are short don't watch such indicators, which is what creates opportunity for those that do. Once the shorts are burned off however, one would think they would be slow to return, which again, is why next year should be tough for the bulls, to put it mildly. (See Figure 1)

Figure 1

And again, as discussed previously, next year is a Presidential election year, which have had a tendency to be bad for stocks in more recent times as the speculative community gained control of the market(s). More than 80% of the volumes on the exchanges is now controlled by the machines (HFT, algos, quants, etc.) that depend on speculators to bet with flawed logic and emotions, which they will continue to do next year too, with the assumption the Fed will have their collective backs going into November (election time), meaning the collective will exhibit a propensity to bet bullish, as reflected in falling short interest and put / call ratios. The assumption is the Fed and friends will support the markets even more than it already does going into election time, emboldening the bulls. What will this do to the machines? It removes their ability to squeeze stocks higher, and could quite possibly exacerbate potential downside. Do you see, although the ratios both above and below may have one more push higher going into year-end / early next year, after that, we should see the toboggans come out in winter. (See Figure 2)

Figure 2

That's why the S&P 500 (SPX) should not be able to make it past 2200 in this squeeze as well, testing the bottom of the long-term channel again - best case scenario. And if the deterioration in the secondaries and volumes is any indication, if the SPX is able to get that high, such vexing should not be sustainable for long. This of course depends on the short sellers and put buyers, which we will continue watching in order to attempt gauging probabilities in real time. Confirming the belief we have one more grind higher in the broads dead ahead we have daily Bollinger Band® Widths on the SPX looking like a contraction should start soon, setting the stage for volatility to return once a top is put in place. This jives nicely with the observation volatility is contracting on a weekly basis (see below), perhaps set to test the breakout last month, before accelerating higher once stocks are in position to decline on a lasting basis - meaning the shorts / put buyers are finally exhausted. Because that's what it's going to take for stocks to trade in sync with their deteriorating fundamentals. It's going to take a profound shift in speculator betting practices. (See Figure 3)

Figure 3

And that's what one should expect to see next year if history is a good guide, because this is exactly what happened in 2000 and 2008, both election years steeped in speculative froth. (i.e. like now.) Add to the mix hedge funds are under-performing in meaningful fashion despite the markets being at the highs in what could only be described as a low volatility smooth ride since 2012, and you have a recipe for big surprises in 2016. So get ready, because next year could be just like 2008 in the stock market. The parallels are profound in this regard, right down to the fact CDO's are making a come back. One more run for the roses to allow things to get really stupid again, matching the year 2000 episode, and we should be in position for some serious tobogganing in 2016.

Leading up this, and a result of all this strength in equities, Fed script will be back to the same bullsh*t story they've been on since 2013, something that should become very apparent at this week's meeting. That's right, we'll be back in 'immanent tightening mode' any day now because the future is so bright (because stocks are rising), which should prove good cause for a real 'sh*t kicking' in precious metals again soon (this week?). Add to this we have further spec long additions to both the gold and silver long positions on COMEX, seen here and here respectively, with the latter at multi-year highs, and you now have a recipe for a rout in precious metals. So be careful here. One more rout was always our view, and now we have an overwhelmingly bearish set-up.

Further to this, it should be this metric, the stronger dollar($) metric, which eventually causes a correction in the larger equity complex some time around Fed meeting time as well, because of implications on foreign earnings. But such a correction should not fall back much more than a Fibonacci 38.2% retracement from the double bottom established last month, meaning the SPX should not take out the large round number at 2000. If it does, then a 50% retracement would take it into the 1975 area, which I will classify as 'worst case'. If this occurs, then the whole topping process could take well into next year, perhaps past the first quarter, but we will let the ratios tell us what to think instead of guessing.

To finish up today, I would like to bring to your attention that as predicted here just last week, it wouldn't take long for Russia's ISIS eradication services to be in big demand in more countries of the Middle East (ME), and sure enough, it's already happening. This is going to be a big problem for the States and dollar($) soon too, which is why we see it topping out sometime early next year in response to initial stock market volatility. The plot thickens as expected. The death of the petro-dollar is accelerating. This will be very good for precious metals starting sometime early next year.

We just have this last sell-off to deal with.

So again - caution is the word right now.