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Margin Debt to Become Issue

The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, November 21, 2016.


 

For stocks, we saw something remarkable last week, a strong close into options expiry in spite of non-supportive open interest put / call ratios across the key measures we follow, with the exceptions of IYT, NDX, and MNX. And if you look at the sectors, it was in fact the transports and tech that lead the markets last week. Tech was oversold due to the reaction post election, so this was not surprising, and almost seemed contrived; but I would not want to be accused of being a conspiracy theorist. Too late - right?

But more, this is a sign of the powerful money flows into the States via foreigners excited about getting a piece of the Trump explosion (evidenced in the strong dollar[$]), along with front running an escape from their own more tumultuous situations set to heat up as we head into next year. (i.e. think European elections.) What's more, we saw the largest weekly fund flows out of bond funds and into equity funds on record, which didn't hurt prospects for equities needless to say. And this trend is set to continue into next year, with the big questions being 'for how long' and 'how high'?

This is of course why you don't want to short stocks, because these trends are set to continue into next year. And again, as pointed out last week as follows:

"So how will we know that stocks are set to take off into next year? Well, for one thing, and as pointed out on Monday (again), if the CBOE Volatility Index (VIX) finishes the month back in the wedge it's been working on since 2008, we will have a signal that seasonals should be respected this coming year, implying stocks could rise right into summer. That's what happens when years ending in '7' turn out to be crash years - stocks rise into summer. So needless to say we will be watching this month's VIX close with bated breath. If it can't, that would mean rising rates have taken a sufficient chunk out of buybacks (etc.) to endanger equity valuations at these levels. This would signal the possibility of a 10% correction in the Dow, at a minimum."

That's my story and I'm sticking to it for now. It's subject to change if (when?) the Fed raises rates in mid-December. It's all on the VIX at this point, so stay tuned into next week.

Speaking about the Fed raising rates in December, this is when the bounce in precious metals should end, likely in the week before the FMOC Meeting, the 5th to the 9th. This will end the bounce (currently underway) we discussed last week. It may go right until the meeting, however it should not go past, because the Fed is certain to raise rates at this point with the $ going through the roof and all the rhetoric coming out of the Trump pump. That's what I think. I think the paper gold and silver gamblers on Comex have not puked up enough of their positions yet (but are getting there), meaning this is just a bounce in precious metals, as evidenced in the attached charts directly above.

And make no mistake - nothing else matters.

Correspondingly then, expect to see the precious metal share gamblers do the same thing, where in terms of the head and shoulders pattern (H&S) on the Gold Bugs Index (HUI), the testing of the neckline of the pattern should be completed in coming weeks, likely keeping the trade in the 190 to 210 range as the large round number at 200 is tested at the same time. Then the wholesale deleveraging should commence as the margin debt players realize rising rates are not an illusion - suspension of disbelief finally hits the conscious mind - in concert with the December Fed Meeting. Again, if history is a good guide, weakness in precious metal shares will likely continue to be an issue until a great deal of the record margin debt levels are purged - when the next credit crisis arrives - likely next year at some point once Trump's honeymoon runs it course.

The Donald is a romantic you see - very dangerous people under the right (wrong) conditions.

I find it interested the more grounded analysts share similar views with me at this juncture, which is not always the case.

Good investing will be possible in precious metals as early as next year some time.

 


Give us a visit here to find out when.

Special note: In the PS department today, attached here is an interesting piece by Reg Howe, on how Donald Trump could harness gold's power at some point in his tenure, perhaps when all else fails to make America great again. It's been my contention for some time now, that any substantial increase in the price of gold (precious metals) would need to be administered by the powers that be 'when it suits them'. (i.e. like FDR did in 1934.) With The Donald now in the White House (if not all the time), he could turn out to be the most unconventional President ever. Now, let's all hope the gold is still in Fort Knox. Gold could be remonetized up to $20,000 (who knows?) plus if such a scheme was ever employed.

 

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