Precious Metals Next Rolling Bubble
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Thursday, January 14th, 2009.
A point I wanted to make clear with respect to our discussion the other day is hyperinflation must be justified in the minds of the doers, having the political will of the people behind them. This is why we will need another round of financial crisis for public consumption, and we know from comments made earlier in the week the set-up is for a possible black swan event in summer, with stocks topping out no later than spring. What's more, and as you will see below, it should be noted that a top in stocks could come sooner this time, possibly by options expiry this Friday if a blow-off continues, finally snapping the desire of speculators to continue accumulating bearish bets on stock averages in the form of puts. In this regard, it should be understood whenever US index open interest put / call ratios begin trending lower on a lasting basis, which would finally signal bearish speculator exhaustion, the party will be over for the counter trend rally out of the March lows, the most extreme example of such an occurrence in history. It should be noted this, along with all the other reasons, is why a vacuum exits beneath stocks, which of course is the precondition required for a black swan event to be triggered later this year.
As a sidebar it should noted updated US index open interest put / call ratios will be published on the site next Wednesday despite the fact I will be on holidays. You will remember I will not be posting commentary next week, but will be back in action on the 26th, where I will review the post January options cycle trends. In this regard, it should be remembered we are on 'exhaustion watch' for the bears, which would involve put / call ratios both falling and trending downward. There are a great many market participants these days, and reality stinks, which is why stocks remain buoyant as put buyers continue to be squeezed by the bureaucracy's price managers. This will all come to an end when speculator attitudes change however, so keep an eye out for this next Wednesday and in my next commentary that will give us an opportunity to see how the February cycle is trending.
And it appears the Chinese are working with the West more closely than some realize as well, with the announced lending restrictions yesterday obviously timed to cool down gold and increase the appeal of increasingly worthless US paper. And the Fed was also out jawboning equities lower. You will remember from last week we pointed to the probability of such an outcome when US bond auctions were being conducted, and here it is. The weakness in stocks didn't last long however, not with all the rubes long US index puts and CBOE Volatility Index (VIX) calls, a topic that was discussed thoroughly over the last few commentaries. Not surprisingly, stocks are getting squeezed right into options expiry on Friday, which as mentioned above could in fact be 'the top' of the post crash bounce if we get a blow-off that takes the S&P 500 (SPX) into the 1170 to 1200 range also discussed last week. We know this would be an important event because of the tight Fibonacci resonance signature seen below on a daily snapshot of the SPX / VIX Ratio measuring the nature of the move from the March lows. This measure makes such an extension a high probability turn point. (See Figure 1)
Supporting this view I would be amiss in not pointing out that it also appears corporate bonds have already topped out in hitting the Fibonacci resonance related target discussed on these pages for some time, being the 90 level on the ishares High Yield Corporate Bond Fund (HYG) shown below. Here, the fact stocks could continue rising divergent to a top in corporate bonds is a bearish signal contrarians should be able to get their teeth into if contemplating putting some short positions on sooner than the March / April timing window. You'll just have to grin a bare it (if stocks continue to rise) until the bears capitulate or go broke and stop buying those puts, which at the latest should be April based on our historical / cycle related studies. (See Figure 2)
Moving onto precious metals now, open interest is back at record highs, which is a plus for the banking cabal because a new population of buyers will need to be added to the existing ranks in order to take prices higher, and as alluded to the other day, this might be difficult right now with volumes in financial markets generally on the decline. And it just makes common sense that an increasingly unemployed and aging population, burned on multiple bubbles during the first decade of this new millennium, would not be hot to have a repeat of this kind of thing. Of course because of this, and fear, the resulting bond bubble will likely be yet another blow to the average investor's portfolio, so who knows, when this money begins fleeing bonds in earnest, which according to our calculations should be anytime now, perhaps enough of it will flow to precious metals to inflate the next 'rolling bubble', where without this source of new demand, as long as present paper market mechanisms are still setting prices, one does need to wonder where the buying will come from sufficient to overpower the moneychangers.
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Good investing all.