The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, November 16, 2015.
They call it 'behavioral finance'. It's the study and application of how psychology affects decision-making in financial markets. This field is widely studied now in both academia and the business world alike, with many works such as this, and is a primary reason (the other being greed) the application of algorithms in computerized trading (news dissemination, etc.) has taken over the trade on modern day stock exchanges. It's estimated that machines now perform more than 80% of all trading on major stock exchanges around the world, and it's the algorithms that tell them what to do. So, the question then becomes, what are they being told to do?
In a nutshell, they are being told to exploit human frailty and emotion by creating incalculable outcomes to the human mind, which in a basic sense means forcing outcomes that are opposite to what logic or reason would suggest should occur. How though - how could they possibly do this? Is it simply via High Frequency Trading (HFT), which is essentially legalized scalping on a basic level? At first blush, one might think the answer here is 'no', however it should be noted HFT's use algorithms to shape the direction of trends, which is why this theft is sanctioned by the bureaucracy's price managers, and allowed to continue operating. (i.e. legalized theft.)
Then you have the Quants, who don't attempt to hide what they are doing at all. Because again, it's sanctioned, with the algorithms programmed to exploit human frailty, where the price managers know all the bad news out there will cause thinking (but mentally exhausted) human beings to bias speculations / hedges (think in leveraged derivatives markets) to capitalize on 'the fundamentals', but end up thwarted by the power of the machines when increasing (bureaucratic) liquidity is applied to the formula. (i.e. from central banks, corporate buybacks, etc.) In the case of the stock market it's called a short squeeze, as most speculators / hedgers bet on losses, which seems logical today given the backdrop.
And it also works the other way, believe it or not, where if a consensus of traders are betting bullish in the derivatives market(s), the outcome will also be the opposite to what most expect here too - with precious metals the omnipresent exemplar in this case at present. It's Pavlov at work you see. Greedy speculators see the cookie just out of reach, salivate, and then react by predictably buying calls in sector specific derivatives markets, which in turn causes put / call ratios to remain low, which in turn allows the machines to keep prices suppressed - which is Western status quo script - which is why its sanctioned. The speculators in this space are greedy and desensitized beyond belief, so the negative feedback loop here has crashed this market and keeps it suppressed without price managers having to do much at all.
Getting back to how all this applies to the stock market for the purposes of this narrative however, the overall effect this is having on traders (and the public), is its increasingly screwing with people's minds. All the bad news is creating a state of high anxiety (not the Mel Brooks variety), which in turn is the dynamic (think negative feedback loop) that fuels the creation of asset bubbles as process intensifies. Bad news causes idiot speculators to participate in bearish bets; then official / establishment 'better than expected' news is released to surprise theses buffoons (think hedge funds primarily), sparking another episode of what I have dubbed, the perpetual short squeeze.
The fact this can go on for as long as it has is testament to the stupidity of both the public, who leave their money with hedge fund managers that are both unable to beat the index funds (by a long shot), and charge too much for their services; and, hedge fund managers themselves, who in calculated greed, keep speculating / hedging against losses in a 'rigged world' (think accounting, etc.), which in turn creates the self-fulfilling prophecy of the perpetual short squeeze in stocks that they lose money against. Historians and psychoanalysts alike will look back on this period and revel in amazement. According to Einstein the definition of an idiot is someone who repeats a negative behavior. By this definition, the majority of the investing public and hedge fund community qualify.
Of course it could be argued other motivations are at work here. Because essentially these people are just trying to protect themselves from the vulgarities associated with the larger machine, better known as mankind. What's more, it's morally wrong, and will be looked back on like the MKUltra experiments are today, where a group of rich assholes and bureaucrats exploited an unsuspecting public, only this time the control group is much larger - to say the least. But nothing ever happens to these guys, so they will keep pushing until something blows, because they know the public is stoned and it will take civil war to dislodge them. This time however, when everything blows up, they won't be able to put the pieces back together again.
So people should have high anxiety regarding what's coming, because it will likely be every bit as bad, or worse, than the realists have imagined - and people are growing more anxious because they can sense an unpleasant change is now upon us. Because at some point we will hit the wall with all this debt, don't kid yourself, and by the looks of things (see charts below), that point is now. (i.e. the world economy is definitely rolling over.) In fact, as you can see below, and although an extended transition process may be involved (think months), Mother Nature is telling us if we don't want deflationary implosion in our present system, the monetary inflation currently being hoarded by the 1% of the top 1% will have to either be increased substantially, spread around better than the now dysfunctional trickle down, or both. It's either that or the global economy will deflate dead ahead. (See Figure 1)
Technical Note: One should note the Dow / XAU Ratio pictured above in a long-term monthly plot showing the entire inflation cycle from 1980 is very close to the monthly closing target in the 400 area. One more sharp sell-off in precious metals shares and we will hit the target, possibly giving us the desired monthly close IN NOVEMBER. As discussed previously, it could take several months to complete a top, where it would not be surprising to see it vex above the Fibonacci target before reversing decisively, which would be signaled by a monthly close below the 50-point interval at 350. And again, as denoted above, once this occurs, it should take approximately five years, to the 2020 / 2021 area for the Dow / XAU to conceivably retrace the entire move from 1980.
Of course it's going to deflate eventually anyway, however if Western central planners attempt to accelerate / diffuse monetary inflation in order to counter an increasingly sluggish economy, which is expected given their proclivities, what the chart of the Dow against gold stocks (XAU) is telling you is some degree of hyperinflation will be experienced in coming years. This is the takeaway when gold stocks begin outperforming the blue chips. So when this relationship reaches significant Fibonacci resonance related turn point like the one denoted above, which is the most reliable method of plotting such turn points within technical analysis, one is advised to take notice. This is a big deal because a 35-year Fibonacci signature has now traced out. I will say it again, this is a big deal and you should not only take notice, but act as well. (i.e. sell stocks in favor of precious metal shares.) And the same is true for bullion as well, as can be seen below as the Dow / Gold Ratio (DGR) is set to vex the 38.2% retrace. (See Figure 2)
Because we are actually in a recession (see here, here, here, here, and here), and the US will get drawn into this narrative sooner than most think, including the Fed. Retail sales are falling off a cliff in the US, and no amount of BS about online sales will hide this fact in the end. By this I mean while Wall Street and Corporate America (think buybacks) may able to inflate stocks one more time going into December on pure rhetoric and liquidity, don't kid yourself, once Christmas is over, the party in stocks will be too. In fact, it could be argued the S&P 500 (SPX) is making a rounded top, a hypothesis which is in fact supported by the observation the ratios both above and below can hit the Fibonacci related objectives even if stocks keep falling from here. What's more, in a 'deflation scare', precious metals will fall faster than the blue chips initially before they bottom (in anticipation of accelerated money printing and solvency concerns) - so again - please realize that stocks might have topped on a more permanent basis than we have been thinking. (See Figure 3)
So don't be surprised when the Fed doesn't raise rates in December. Who's kidding whom here? The US is already in recession. (See here, here, and here.) Look below - according to this important chart you will see the US consumer has hit the wall and is tapped out, and no amount of trickery will be able to prevent stocks from rolling over this time. This is why the Fed cannot raise rates. The chart above confirms this thinking as well, because the 21 - exponential moving average (EMA) (in purple) on the monthly SPX / VIX Ratio has now rolled over and does not look like it wants to reverse higher, meaning all rallies in stocks are selling opportunities. This means if the bureaucracy's price managers are able to engineer a rally after seasonal weakness ends this week, it should stop short of recent highs at 2100 on the SPX. Not likely? (See Figure 4)
If you think such an outcome cannot occur you have not been paying attention these past years. All they need is a good showing on Black Friday and the implosion in retail stocks (and the broads), will be put on hold for one last rally. If you think a 'slowing economy' already in recession (depending on definition) will stop the nut jobs in New York from continuing on with their agenda and bullshit story (strong economy) you are wrong. That's why they keep people doped up - so they forget things quickly, do what they are told, and act illogically - all the things you need to have the degree of complicity in our increasingly dysfunctional society we see today. Keep the dollar($) strong, interest rates down, commodities down, stocks up, and especially precious metals down at all costs (the 800-pound gorilla in the room) - that's life in the 'big apple' these days.
So again, don't be surprised if the status quo boys attempt to maintain the illusion of 'normalcy' in the face of an increasingly volatile picture, because this is what they do - push their own agendas in spite of the greater good, or reality. The idea is to maintain control and power so they can keep milking the cow - the status quo. The only problem is things are now spiraling out of control, and the cow might end up on the BBQ next year - or earlier depending on where you live. Because people do crazy things when they are hungry. This is what you saw last week in Paris. And you can expect more of this to come as crashing economies extend from the Middle East (ME), to Europe, and back to the States - it's inevitable.
This is why our present oligarchic system of enriching the 1% of the top 1% via idiotic agendas like global warming and NIRP at the expense of the public should have an epic failure coming up here if history is a good guide. That's the big message the charts above are signaling - that the Western status quo party is over - even with the 'pretend marriage' with China. When this falls apart, as many marriages do these days, that's when the gloves will come off in the gold market. That's when China will bid gold much higher in Asia and start an even more intense arbitrage stampede from west to east that will cause a real problem for Western bankers (and the rest of the bureaucrats). Supply conditions in the West are tight, which should supercede paper market games at some point.
That's all for today folks. Again, just to be clear, look for a rally in stocks (and corresponding smashing of precious metals) to begin sometime closer to Black Friday next week, once all the excitement surrounding Paris blows over, and the status quo reassert their grip on the narrative / markets one more time heading into Christmas - seemingly defusing our permanent state of high anxiety these days.
After that however - look out - because big changes are coming your way - for reals.
Good investing will soon be possible in precious metals.