The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, November 23rd, 2010.
'Those were the days' is a well known but now little used catchphrase that is employed in describing 'better times', usually heartfelt and sentimental for the individual(s), and usually occurring in better economic times. And at one point or another in a person's life the concept of better days - perhaps even glory days - as in one's youth, can be particularly poignant, especially if the economy, even if it's only yours, hits the skids. Of course in terms of the larger economy these days, better times and glory days are becoming a thing of the past for growing numbers unlike anything we have seen for quite some time unless you are a banker, manufacturing your wealth at an increasing expense to all others, in an unsustainable economic system designed to do one thing and one thing only - maintain the power of the privileged.
Unbeknownst to many of these types however, the world is about to get smaller courtesy of peak oil, and the deleveraging of our aging population that has not even begun yet, so surprises lie in store for increasing numbers, with any hope of more glory days in the future a vestige of a bygone era. When will this become more self evident to all? How about when the cockamamie empire of Brussels' bureaucrats (Europe), and the experiment better known as the euro, disintegrate due to insolvency, a condition that has already arrived, but is as of yet not being admitted. The meltdown in Ireland may be too much to ignore for much longer however, especially if bond spreads keep widening in spite of the bailout announced over the weekend.
In moving onto technicals in the markets that provide clues in this regard, it should be noted the dollar ($) has now undergone a 38.2% retrace of recent gains and is in a position to rally, making it possible for the euro to turn lower once again. This would of course be in sync with an accelerating currency debasement agenda in the euro-zone, however more than this it would be an indication of sentiment change towards the $, which has become increasingly bullish for some time now. So all we need is for the open interest put / call ratio on UUP to start trending higher and increasingly any hopes of a $ collapse would be quickly dashed, and the second arrival of the credit crunch will have reappeared for the less endowed to see once again. (i.e. not that it ever left.) In this respect, if I understand the situation correctly, once participating speculators in UUP calls think a large enough counter-trend rally has occurred to necessitate covering their bullish bets (which is why the open interest put / call ratio is still down), the sentiment snafu that is keeping pressure on the $ will be removed, and a rally, if this is the 'true trend', would then be possible.
So on a more profound level perhaps the best question a speculator looking to catch a meaningful turn is, 'is this the primary reason the euro is not imploding right now given escalating problems in the region presently?' And in going further perhaps a better question is, 'why would the $ rally on top of technical reasons associated with UUP and / or euro-zone problems? I've got a good answer for that question in how about an escalating game of chicken between the US and China that collapses the treasury market, which is something you can count on at some point even if it's not now. Myself, I think it will be a euro collapse that sparks the credit collapse 2 (CC2), the sequel to the first episode witnessed back in 2008, and QE2's nemesis. These will definitely not be glory days.
Moving onto precious metals now, where we will be going back and forth all the way through today's commentary due to our goal of attempting to show you why risk in the inflation trade has unfortunately turned untenable, there are those who think it won't matter what macro-conditions are, and to those people we say - good luck. While it's true gold is still so under-owned / undervalued it will still go up if not in absolute terms, surely on a relative basis against just about everything that moves. Yes, this may be true, however these gains had better come soon before the head and shoulders pattern in gold to go along with a collapsed open interest put / call ratio on GLD take hold, or the bulls are in for a big surprise. If I had to guess it would be equity bulls (which will include precious metals with sentiment readings like that) are likely going to be surprised next week when the holiday weekend is over - good Christmas sales or not.
Believe it or not, in terms of employing technical analysis in aiding our forecast the Gold / Silver Ratio tells one everything you need to know in one chart, from short-term probabilities, to where we are in the long-term trend. In this regard, and in focusing on the plot we have been using for some time now below, right now, the ratio is telling us that based on the count, important (but shorter-term) support, and a projection off the indicated structure, while the Gold / Silver ratio will probably extend down to 47ish before an intermediate-degree correction ensues; first, there is no guarantee of this because the present intermediate-degree sequence now has a fully counted out five-wave sequence as of last Friday; and second, because down is the impulsive trend, the move to the measure (47) will likely take place. (See Figure 1)
Of course after the Gold / Silver Ratio does bottom, which will likely be this week based on the totality of supporting technical / sentiment based information we have, an intermediate-term correction higher will ensue, likely lasting several weeks, if not months. You should note this changes our intermediate-term outlook then, as we were looking for extensions of present trends into the first quarter of next year, however you can't fight the tape. What is happening here, and an understanding that will be discussed further on Thursday, is bearish speculators have run out of gas, which has key US index open index out / call ratios heading lower in earnest now, an unwelcome development for the bulls as the squeeze in the equity complex depends on continued skepticism regarding the health of the bull, cyclical as it may be. (i.e. we noted last week larger degree cyclical influences in the equity complex were topping right now.)
And as suggested above we have more technical evidence to support this hypothesis, where again, while this sentiment measuring ratio (the NDX / Dow Ratio pictured below) still has some work to do on the upside in completing the count, this move will likely take place by week's end, possibly characterized by a 'failure' in equity prices. (i.e. fifth wave failure.) Here, the S&P 500 (SPX) would not make an extension past the October highs (but possibly make a double top in the 1220 - 1230 range), as suggested below in Figure 2, triggering an exact repeat of the sequence witnessed at the top in 2007 - 2008. So now you see why we have grown increasingly concerned regarding the equity complex / inflation trade moving forward, now entertaining the notion the $ may indeed rally from here despite still low open interest put / call ratio readings. (See Figure 2)
Past this, and as suggested above, if bullish $ speculators in UUP were to start pulling their bets on such a rally, which would lift open interest put / call ratios (meaning sentiment would be getting increasingly bearish as prices were rising), then the possibility of the present lows in the $ being significant would increase considerably, along with the probability CC2 has arrived in full force, meaning a high degree cyclical top in the secular bear market in stocks is being witnessed right here - right now. Again, this hypothesis is supported in that the VIX is close to touching indicated support shown above, which would be the signal one should expect profound cyclical changes in all related markets.
Fast-forward to today and one should note the VIX is now at support.
Safe investing all.