US Index Open Interest Put / Call Ratio Analysis
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, January 22, 2013.
The markets have entered surreal and unsustainable states thanks to manipulation associated with official US repression policy (comply or you will be punished), with direct monetization increasingly being applied to an expanding array of key targets. It's well known both debt and precious metals markets are heavily manipulated, however now the stock market has fallen into this category with the help of the New York hedge fund community, at the behest of their masters, money center banks. Evidenced of this is found in the recent and uncharacteristic repression of the CBOE Volatility index (VIX), which was pushed below structural support last Friday. (More on this just below.)
Taxes are rising, the economy slowing, and earnings have likely topped out, but liquidity has been rising too (QE3 and 4 are working as money supply growth rates are rising again), which has made this all possible; again, creating the surreal dichotomies that exist in the markets today. What's happening here is the powers that be are clever; they know rising taxes could crash the economy; but at the same time, they need to pay for their increasing and uncontrollable largesse. So, something had to be done. And obviously it was decided the stock market had to be driven higher (banks ironically used the extra liquidity in banks because of the Fiscal Cliff ruse) in order to both distract and convince the masses all is well in hand. This is all an illusion however because ultimately higher tax policy will have a material effect on revenues, as amongst other things, high-income earners defect (led by high profile types), and business generally slows.
Back to the VIX now, which is pictured here in Figure 2. Again, last Friday it was pushed below support (think financial repression) dating back to 2008, losing more than 8% in order to generate a meager 5-point gain in the S&P 500 (SPX). (i.e. it's having to work harder in order to produce only marginal gains.) Unlike when it broke out a few weeks back just prior to the backroom Fiscal Cliff deal (which wasn't much of a deal at all) at year's end, this breakout may not prove false however (odds favor this because unlike that move this breakdown did not fail on the first day), with the VIX potentially remaining pressured for some time possibly. (i.e. on it's way down to produce a double top in the SPX / VIX Ratio off 2007 highs, now only 10% away.) Not reflected in VXX put / call ratio trends (which has acted as a simple proxy up until now) is the amount of open interest in the futures market (at a record), along with market structure (term structure), which has now pushed most of the hedging out several months to guard against debt ceiling worries.
So you see, the ploy(s) associated with creating all of these dramatic embroils (ruses) to suck unsuspecting rubes into unnecessary hedging (and speculating) practices has been working for price managers, where all they had to do was increase buying when the time is right, setting off a short squeeze. This strategy will become increasingly difficult moving forward however, because understandably, the ramming shorts took over the past month is having an effect on both their sensibilities and betting practices, as reflected in updated US index (and ETF) open interest put / call ratios, with the charts attached here. As you can see in the attached, with the exception of precious metals (more on this below), almost all (except for financials) broad stock measures literally crashed post expiry, which will mean price managers will need to apply more pressure in the future to achieve similar results.
This of course accounts for the steady drop in short interest on the New York Stock Exchange these past months as well; however again, it does not mean the larger degree move is completed. We would need to see the SPX take out 1450 (think Progressive Interval System) and the VIX re-enter the wedge by today in order to come to any conclusions like that. (i.e. the 3-day rule.) This kind of top will likely not be witnessed until the debt ceiling embroil is resolved, and all associated interplay has an opportunity to run its course. (i.e. the equity short squeezes exhaust themselves.) What's more, even if we see this it still does not mean the larger degree move is over, as the powers that be will defend a wedge breakout of the VIX with everything they've got considering what the stock market means to their fiat currency economy(s), which is everything.
A more likely outcome is still a tape paint (think January Barometer) strong close for the month of January (as posited previously), as the pressure will build in the hedge fund community to be fully invested correctly (long) going into month's end both the higher and closer we get from here. So you would think a correction would make sense at some point (think this week), however that word (sense) does not comprise a large part of the hedge fund community's vocabulary, so anything is possible. Along this line of thinking, if we see a straight shot up into the mid-1500's on the SPX by month's end this would undoubtedly be an important top. It may need to be tested, or marginally exceeded later on, however this would use up a great deal of ammo both in terms of liquidity and psychology; so again, this would in fact likely turn out to be a 'sell signal', not the all clear sign some would like to have you believe.
Side Note: It should be noted the Fibonacci time related half-life of QE3 hit yesterday, but with QE4 in December, and everything else going on, this will likely not matter much this time around. That being said, at some point the gap in the VIX between 16 and 18 will need to be filled (some historical counts would suggest over the next two weeks), so it's just a matter of time before a correction of some degree must occur. The bottom line is anything can happen and at this point its not what you make in your account(s) this year, it's what you avoid losing because volatility will undoubtedly pick up once again soon enough given the dangerous historical comparisons that will matter at some point.
Which brings us to comment on the precious metals sector at present, which has been beyond stupidity in terms of comment. With the incessant bullishness of the speculators playing the aggressive paper derivative products in the precious metals sector like risk does not exist (again) last options cycle (which ended Friday), price managers (the options writers, bankers, etc.) were able to push prices down to relatively depressed levels (considering the money printing that is going on), bringing us to an untenable situation once again. (i.e. how can one be bullish with the broads extended to the upside already?) And while we may see a very short-term rally into the first part of February until the next options cycle grabs prices once again (as discussed previously in terms of similarities to the year 2000 pattern and circumstances), it's difficult envisioning precious metals beginning an intermediate degree rally with significant upside at this point if the broads are only 5% from important tops. (i.e. the SPX should not exceed 1560ish this time around.)
Compounding this larger cycle negative possibility is that like last year, junior precious metals shares may see a strong January (and they have been outperforming all month so far with the strong stock and credit markets), and that could mark the highs for the year. One must remember that strength in the juniors is function of credit, not the commodities (gold, silver, platinum). And credit is a function of general liquidity, which in turn is a function of the broad stock market. (i.e. which in turn is a function of money printing.) So again, unfortunately a strong performance here in January with all this fraudulent (and transitory) wealth manufacturing going on could be bad news for precious metals again, just like it was last year, and in 2000 as well. The only hope is if money supply growth rates continue to accelerate, which is happening.
But how will we know when to get bullish? Answer: When silver crosses long-term and key Fibonacci resonance related resistance at $33, which is close now and counting (think Elliott) as if it's going to happen soon. For all the reasons you can find to be bearish on precious metals - throw them out the window if silver crosses $33 (some would argue $34) with any conviction because it's likely on its way to $60 minimally, and closer to $100 with any luck this run. What's more, the Gold / Silver Ratio (GLD/SLV) put in a 5-wave pattern to the downside today, which is a positive sign that after a little correction, silver should be leading the sector higher soon. One would think the Beltway Boys are going to pass some kind of debt ceiling deal soon considering their masters on Wall Street want a strong monthly close. And this should help the metals considerably.
On the brighter side of possibilities for the Amex Gold Bugs Index (HUI), if it takes out the 530 mark, and then 550 just to be safe, minimally, we will have a signal for a move back to all time highs, if not beyond. This of course would not be a stretch if gold and silver were to initiate new highs as well, which in turn should not be a problem if the historical relationship they have to an increasing US debt ceiling is maintained. Again however, the problem is the broads are within 5% of possible lasting highs and then they begin draining liquidity from the larger system if falling. This should not be a problem if the chain of events associated with a top in the SPX / VIX Ratio occurs soon however, where precious metals stocks continued to rise for more than a year afterwards into early 2008, with volatility bottoming at the beginning of 2007. (This will be covered in more depth next week.)
This is what should happen this time around as well then, as money printing accelerates around the world (think currency wars), and much hated precious metals shares catch a bid ounce again. Along this line of thinking, it should be noted that a temporary debt ceiling vote could be passed tonight by Congress, providing for an 'unlimited facility' for three months. This not only kicks the can three months down the road in a very underhanded and open-ended manor (think inflationary); but more, it provides for another embroil for idiot traders to hedge against at that time (with price managers hoping they forgot this time), meaning stocks (and liquidity) will be ramped up again in the Spring.
Clever buggers - no?