The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, January 25, 2016.
In the end, and without a doubt, precious metals will be last man standing in terms of ultimate currency and means of saving. This understanding becomes self-evident upon the individual performing a comprehensive study of history, politics, and economics, amongst other things, not the least of which being free thinking sources of the above. This is of course why you are here, because we are all of those things.
Some would argue Bitcoin and blockchain technology will take over for corrupt bankers and bureaucrats eventually, however even if this is true, money will still need a basis from which to measure no matter, bringing us back to precious metals as global decentralization continues to accelerate. (i.e. which is why Bitcoin will not replace sovereign currencies.) The failed European experiment is testament to this, where corrupt bankers and bureaucrats are being found out now that increasing numbers are assaulted; and again, this trend will accelerate as economies and cultures continue to implode.
Corptocracy, and the neo-fascist brand of politics materialism engenders, has hit a wall within the finite constraints of the planet, however most don't realize this yet, including the 1% who are empowered by our corrupt civil servants and strata of 'players'. This is the self-evident truth that has not been priced into the formula yet, but the rich are beginning to smell smoke. If you look at US indices, despite this month's volatility, things still look 'glued together'. However if one looks at the global picture, things look quite different.
Moving to the markets now, as warned last week, with the extended options cycle (5-weeks) for February, the risk of a bounce in stocks was high, and sure enough we are now on our way to the S&P 500 (SPX) retracement targets at 1915 (38.2%) and 1945 plus (on just the last impulse) running into month's end. The combination of this and month-end window dressing should keep the tape firm into early next week, where the reality of broken bearish broad market derivatives speculators should rear its ugly head again (volatility could return quickly), working to bring stocks back down.
Within this context, and upon review of the key index (ETF) open interest put / call ratios we follow (see here), one should note that with the exception of XLF, all the other pertinent broad market related ratios continue to decline and / or remain low, which should begin to increasingly play on trade again as the month clicks over into February, and the next expiry approaches. So although the Fed Meeting this week should ensure a positive result going into month end, as further tightening is unlikely again so soon, especially after the messages in the markets during the first two-weeks of the year, more weakness looms next month. (i.e. assuming put / call ratios don't go zooming higher again.)
But speculators are expecting central authorities to come back in with more stimulus at any time, and with comments like those from Draghi this week, who can blame them. The thing is though, in order for stocks to be squeezed higher - guess what - more and ever increasing shorts / puts must play into the formula - or guess what - the rallies will be ever so fleeting - and declines will be bone jarring. (i.e. evidenced in the first two-weeks of this month.) So again, although we may in fact see a more dovish tone in the Fed this week (more QE is not likely yet, especially in an election year not to show favoritism), don't expect a 'game changer' from Yellen and company, which could reinvigorate the decline in stocks sooner than most could contemplate.
Because like the Fed is constrained in any QE this year not to show favoritism due to the Presidential Election, bearish broad market speculators also feel constrained for the same reason (the election), which will also prevent them from acting (buying puts because they think the price managers won't let stocks go down in an election year), which will in turn keep put / call ratios depressed. We were on to this possibility last year, with the observation stocks were also soft in 2000 and 2008 for the same reason, and here we are again. Thusly, and for the same reason then, stocks should also be soft this year as long as broad market speculators stop buying puts, which continues to be the case.
Of course if the first two-weeks of January are any indication, 'soft' might not be the proper adjective. What's more, this makes the final monthly showing that much more important to some people (price managers) in terms of the January Barometer, so you can expect them to throw everything including the kitchen sink at the stock market this week in terms of keeping it supported. A bad showing on the monthly signal would have US price managers thinking traders will want to sell the rest of the year. This thinking is of course wrong, because a bad showing in January here would have the effect of having the speculators shorting and buying puts the rest of the year, which would bring back the perpetual short squeeze.
So if the opposite happens, and stocks finish stronger this week, but not strong enough to negate the bearish monthly signal, the bears may finally have their nirvana. (i.e. a close below 1950 on the S&P 500 [SPX] would do this.) Because such a showing might be enough to embolden the bulls, which in turn would keep put / call ratios down. I will remind you that this is the 'big message' in the Dow / XAU Ratio (see here in Figure 1) reaching profound Fibonacci resonance related resistance at this juncture - that buy 'hook or by crook' (inflation or deflation) - another crack up is due. That's the one thing you should both understand and believe - that this year is going to see some wild market(s) action. And if it's going to be a crash, it's easy to figure out the signal to watch for - it's tech stocks.
As you can see below, the NASDAQ / Dow Ratio has been going sideways through the worst start to a year for stocks in history, setting the stage for a nasty spill if credit conditions deteriorate sufficiently (think energy, China, Japan, etc.) to warrant a wholesale abandonment of these markets, bringing tech into the picture. Tech is the last man standing in the equity complex essentially because the NASDAQ / Dow Ratio has not broken down. It's been going sideways for a long time now, and for this reason the Bollinger Bands® (BB's) are very tight. Couple this with the ominous looking indicators and stochastics that have turned lower, and once breakdowns occur, the air pocket below tech stocks will become evident. (See Figure 1)
Thusly, in terms of sequencing, use the NDX / Dow Ratio daily chart (because it hasn't broken down yet) for the early signal bigger breaks should be expected, where once it breaks below the 200-day moving average, considering how tight they are, the BB's will flair up to signal a substantial move to the downside - a move that has zero chance of being false. This is when speculators will begin abandoning FANG and FANTacy stocks wholesale, which will expose the (larger) vacuum(s) under the broad averages globally - including core markets in the US - like the SPX. That's certainly the message in the monthly plot below, where both stochastics and indicators are pointing lower in ominous fashion, still having a great deal of room to fall. (See Figure 2)
Up until now, and despite the decline in stocks this January is the worst start to a year in history, it's still been quite orderly compared to what it would have looked like if tech stocks were not being supported by all strata of US price managers (prop desks, buybacks, etc.), and not many appear worried based on the observation the VIX has also been behaving well in remaining under 30. The thing is however, with the VIX remaining low, prices can actually fall further in terms of the 'risk adjusted indexes', as can be seen below in the SPX / VIX Ratio, which like the nominal index (see above), should fall much further before one need worry about a lasting bounce. (See Figure 3)
Again (see above), one should notice how both indicators and stochastics have broken down and are collapsing lower (with much more room to fall); and BB's have broken out to the upside, indicating this move is impulsive and just getting started. Once the 61.8% retracement support is broken to the downside, expect to see the SPX heading towards 1650. Tech stocks will have broken down when that happens, where unless US price managers come out with QE 4 fast, things could get disorderly on a lasting basis very quickly. Again however, the likelihood of more QE this year is remote with the election in the background, so don't count on the Fed to have your back this year.
And then there's the question 'what good would it do anyway?' All QE does is give the initial recipients a means of monetizing their own looting of the system, leaving little to no money for those not fortunate to reside at more lofty altitudes. What this means is the bureaucrats and their buddies (bankers, billionaires, etc.) are allowed to 'cash out' at the public's expense, and to hell with everybody else. But this will eventually be reflected in stocks because again, being an election year, one should not expect any new QE, where the rot associated with the last seven years of increasingly nefarious finance will finally catch up with the shysters in charge - exposing both the corruption, and those standing around with no clothes on, still cloaked by the haze of previous money printing.
What's more, even though this January's selling was far worse than that witnessed in the 2000 episode, still, it's for the same reason(s) (see above), and essentially has the same pattern. A weak start to the year because of tax planned selling set against a lack of intervention on the part of US price managers and speculators (for the same reason) because of the election, followed by a bounce into February / March, followed by more selling into summer / fall because the perpetual short squeeze is broken. The bearish speculators are finally broken, and the reason is so well hidden the consensus of speculators will never catch on - it's how the election makes them react / think in the derivatives markets. Now all we need is for paper market precious metal speculators to do the same and things would start looking better in the golds as well.
For this reason, one should expect to see the golds flounder around close to present proximities before resuming further downside when liquidity becomes a problem again in a few weeks. Again, if the broads (and liquidity patterns) follow the 2000 template, stocks, commodities, and precious metals should go sideways into March, at which time liquidity conditions should become challenging once again - taking all things equity down. Because precious metal stocks (and to a far lesser extent bullion as well) are viewed as quasi-equities, they remain vulnerable in the initial stages of panics. This is what we should see in spring - a genuine panic.
So if the corptocracy doesn't want a repeat of the year 2000m they better get busy with their buybacks. Buybacks are slated to start a new next month post the 'blackout period', which is why stocks could remain buoyant during February. Parabolic rounding top resistance on the SPX is at approximately 2020, so keep this in mind if the bounce gets that far.
Good investing is now possible in precious metals once again.