The Boys From Brazil - Revisited
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Thursday, August 5th, 2010.
The economic news just keeps getting worse and worse (and worse), validating the view we spiraling down in another recession within a larger depression. Of course the effect this is having on an ever-decreasing population of traders (only the pros are left and their numbers are shrinking too as the trade patterns become increasingly bizarre) is to become even more bearish and keep on buying puts, because at some point stocks will turn lower to reflect the fundamentals, right? Unfortunately for surface dwellers that think like this they could keep the squeeze in stocks going far longer than most would remain solvent, being just fine with the bureaucracy because this will enable them to keep the illusion alive longer theoretically.
Mind you the stock market is developing increasingly dangerous divergences due to all this propping, opening the possibility of a very ugly September (seasonally the worst month of the year) if / when the put buyers become exhausted. That is to say, as divergences grow more stretched, the probability of a binary accident occurring increases exponentially. And they are growing, marked in particular by the fact this week should be down for both stocks and gold from seasonal / cyclical perspectives, with instead both putting on surprising (to short sellers) returns. Again, as per our comments the other day, a combination of dwindling volumes and participation in the market(s) combined with a systematic algo related jam job being perpetuated by The Boys From Brazil (they are a bunch of little Hitlers) in New York (justified in their minds due to the election), is setting the stage for a potentially nasty September indeed, assuming of course those returning from holidays are sellers and not hedgers, keeping US index open interest put / call ratios (updated here) buoyant and rising like they are now. This is a low probability however, simply because it's happening now with participation rates falling, meaning more and more traders are simply throwing in the towel. (i.e. as the trade becomes more concentrated.)
Now, with only the pros left in this market, it's possible they will have outsized insurance bets (puts) on that will not expire until September. And while this might be true to an extent, the big thing to watch for in the upcoming expiry in two weeks is the open interest put / call ratio on the bullish dollar ($) ETF (UUP). (See Figure 20 attached above.) If it reverses higher later this month (post options expiry), along with VXX (CBOE Volatility Index [VIX] ETF) (I'm using this as a proxy for the VIX since it's so heavily traded), then between cash market related selling by those wishing to escape higher taxes in the US next year (think Bush tax cuts expiring this year), and trouble in the Eurozone that would go along with a falling currency unit (which will be the case if put / call ratios on UUP head higher [and down on UDN]) in two weeks together with European traders returning from holidays), stocks should fall hard in September, extending into October in exercising the full extent of the seasonal pattern.
Naturally we would also like to see US index open interest put / call ratios reverse course(s) lower (like XLF and XLE) as well in order to facilitate such an outcome. And if they remain buoyant and rising over the next two weeks until expiry on the 20th coincident with key considerations discussed above, then the dye would likely be set, and volatility in stocks would pick up again post expiry, perhaps substantially. I say this because I have not witnessed the markets being manhandled the way they are right now since the days just prior to the tech wreck, with stocks, bonds, precious metals - you name it - run so far against the fundamentals since then. I mean the manner in which silver was matter of factly pushed lower off the highs yesterday as stocks continued to rally was stunning to say the least considering the rumors floating around a run on COMEX inventories could come at any time. (i.e. by the cabal's own definition silver is an industrial metal and should for that reason respond favorably when stocks are buoyant and the $ is weak.)
Why did this happen? In a word - history. The bureaucracy usually has their price mangers smash gold and silver around the time of the Employment Report (which is Friday), so with the $ so oversold (not that it would rally much until options expiry is past), still, don't be surprised if precious metals suffer into early next week, especially with the Fed meeting, which is another excuse these characters use to be particularly aggressive in their price capping. And they will continue to do this especially if speculators come in over the next two weeks and drive put / call ratios on precious metals ETF's lower; this, along side pushing stocks higher every opportunity. The Employment Report tomorrow will afford them one such opportunity with a strong number, which would be a surprise, lifting the $ temporarily. Here, the idea would be a strengthening economy translates into a stronger $, which in turn justifies bureaucracy related price management selling and public follow-through. So traders, try not to get caught by these creeps here.
In reverse, keep an eye on precious metals ETF put / call ratios (link attached here), where if they remain buoyant, prices should rebound in and around (if not before) the Fed meeting next week scheduled for Tuesday (it's a one day event), especially if stocks remain buoyant too. Here, even though precious metals prices would undoubtedly fall in September in sympathy with the larger equity complex if selling should arise, in the meantime gold, for example, could easily run up into the $1225 area before falling off in the next corrective sub-wave(s) lower. So, for short-term traders, this is an excellent opportunity to attempt gaming profits into options expiry. For everybody else however, we are still in a waiting game to accumulate more physical metals at lower prices, this, assuming gold and silver bullion remains readily available to the public.
Why do I say this? Because at some point in the not too distant future the Ponzi Schemes being perpetuated by the COMEX and LBMA will blow up in one way (formal default) or another (cash settlements only), and the jig will be up. What's more, while there's no telling what could happen to paper market pricing of precious metals under such circumstances (prices could decline if no value is perceived in paper precious metals), this does not mean prices will fall in the physical bullion market, again, assuming existing stock piles are not entirely consumed within a matter of days. Thus, waiting too long to accumulate your physical metals could prove a grave financial error all this known today. So, don't get caught with your pants down folks, as such a mistake could prove to be more than just embarrassing.
To finish up on the stock market, given the above factors, expect the S&P 500 (SPX) to continue grinding higher into options expiry on the 20th interspersed with episodes of volatility, perhaps surrounding this Friday's Employment Report, or next week's Fed meeting. In terms of targeting, it would not be surprising to see the SPX ratchet up into the 1140 to 1160 range at some point in coming weeks, where once this is a reality, short sellers can go to work in earnest, speculating September should yield the results / conditions discussed above. Naturally, probabilities associated with this vein of thinking will be confirmed as soon as possible post expiry this month in order to reduce risk via key sentiment related assessments. (i.e. UUP, VXX, etc.)
As for the crude oil ETF (USO), and that of natural gas (UNG), while buoyant equities could continue to play favorably here, with put / call ratios no longer supportive of gains, they are likely best avoided at this time.
Unfortunately we cannot carry on past this point, as the remainder of this analysis is reserved for our subscribers. Of course if the above is the kind of analysis you are looking for this is easily remedied by visiting our web site to discover more about how our service can help you in not only this regard, but also in achieving your financial goals. As you will find, our recently reconstructed site includes such improvements as automated subscriptions, improvements to trend identifying / professionally annotated charts, to the more detailed quote pages exclusively designed for independent investors who like to stay on top of things. Here, in addition to improving our advisory service, our aim is to also provide a resource center, one where you have access to well presented 'key' information concerning the markets we cover.
And if you are interested in finding out more about how our advisory service would have kept you on the right side of the equity and precious metals markets these past years, please take some time to review a publicly available and extensive archive located here, where you will find our track record speaks for itself.
Naturally if you have any questions, comments, or criticisms regarding the above, please feel free to drop us a line. We very much enjoy hearing from you on these matters.
Good investing all.