As the month of October fades away and is replaced by the month of
November, which represents the start of the "best six months of the
year" for stocks, traders are all sharpening pencils, firing up slide rules
and priming keyboards in anticipation of making some very bold calls on the
pending "bottom" for the current market bloodbath. This weekend
alone, the blogs and email inboxes are stuffed with glowing predictions of an
imminent upturn and the number one reason for this is apparently the
"incredible strength of the U.S. economy."
There used to be a famous newsletter writer/speaker/technician called Joe
Granville who was universally hated by fund managers and analysts because he
constantly referred to them as "chimps" and regularly had a trained
monkey dressed up in a three-piece pinstripe suit on stage with him
pretending to be reading the Wall Street Journal during speaking engagements.
Granville often quoted Charles H. Dow as originator of the most-important
term in stock analysis and the source of most serious portfolio errors over
time: "The stock market is a barometer, not a thermometer" was his
memorable phrase and especially today with so many CNBC analysts crediting
the U.S. economy for stock market resiliency. From the book:
"Remember the difference between the thermometer and the barometer:
the thermometer records the actual temperature at the moment just as the
stock ticker records actual prices. But it is the business of a barometer to
predict.
In that lies its great value, and in that lies the value in Dow Theory.
The stock market is the barometer of the country's, and even the world's,
business, and the theory shows how to read it."
As you all know, I credit the incredible stock market bubble as having two
major causes: the first is the injection of trillions upon trillions in
fantasyland liquidity into the financial system after 2008, and the second is
the actions of the world's central bank trading desks which most times, if
not all times, are simply the money-center banks around the world taking
instructions from the policymakers. However, the MSM messaging services has
every analyst in every medium pointing to the current temperature outside as
proof positive that winter simply won't arrive and that a crashing barometer
does not forbode a storm on the horizon. As a boater who navigates the Great
Lakes, ignoring the barometer usually results in "bad things
happening" and I would urge all of you to use the current market blowoff
as a portent of those same "bad things happening." It is not
"different" this time.
The worst fourth-quarter performance in recent memory was 2008 (sub-prime
crisis), where the S&P dropped 38.5%, with other notables being 2002
(post 9/11 blues) and 2001 (dot-com crash). Those markets were basically
without the invisible hand of intervention; stock prices were controlled by
human emotion rather than elected officials and computer algorithms. The
scary part about 2018 is that today there IS intervention and there IS the invisible
hand and yet 75% of the S&P 500 is now officially in "correction
territory" verging on full-fledged bear markets. The FANGS have one
general left (Apple) to report earnings next week, and if it cannot avoid the
"Sell the news" virus that crushed Netflix, Google, and Facebook
(and Amazon), then 2018 will be up there in the chart when I post it in
February with updated numbers. The daily RSI for the S&P is a hair above
30 but the weekly RSI is still over 36 so considering that in 2008, it took a
minus 20 reading to even resemble a bottom, it took until 2009 March for the
bear cycle to run its course.
Also, as bad as 2008–2009 was in terms of percentage decline and technical
damage, it only lasted from the summer of 2008 until March 2009, so its
nine-month duration was a picnic compared to the slow water tortures of
1973–1974 or 1981–1982 and even 2001–2002. The problem remains that most
market participants have no recollection of bear markets because they are
simply too young and are victims to a form of cognitive bias called
"recency bias," where they are making investment decisions based
upon relatively short-term historical time frames. This is what I glean from
the number of interviews out there and the younger the speaker, the greater the
bias.
For short-term traders, I don't doubt that a very short-term reflex rally
could occur in November and possibly very early November as fund flows come
into the markets spooking the shorts. I, for one, will not try to trade that
rally because my greatest fear is that we are going to see the youngsters
scramble to save their 2-and-20 bonuses by locking down profits (or whatever
is left) and that means that there could be a serious liquidity problem for
everyone.
Turning to gold and silver, I have spoken of this more than a few times
since 2008, but for the precious metals all you need to watch is whether
those that get margin calls are forced to cover. Large Speculators and
Managed Money get margin calls; Commercials and Producers do NOT get margin
calls. In 2008, Commercials were net short and Large Specs were net long and
the Producers were net short while Managed Money was net long. As for the
shares, they were massively over-owned by Managed Money and Large Specs. From
the chart shown below, you can see that while the Large Specs are no longer
net short, they are still carrying a very substantial short position so to
add liquidity (cover margin) they will be buyers into any sort of stock
market-related liquidity squeeze. Similar situation for the Managed Money gang
including the CTAs, all of whom are now de-leveraging as fast as they
possibly can.
In other words, the gap between the two lines shown below depicting COT
positioning is illustrating an "Extreme Bottom" for gold. Those of
you dumping physical gold and silver would be better off hedging the physical
with the gold and silver miners if you see overall stock market weakness
dragging the miners down with it. Remember, in 1987, the crash took physical
gold up $80 but the gold miners got cut in half. Similarly, the long bond had
the biggest rally in history at the time. Just sayin'.
There are a great many reasons to be cautious in stocks and bonds and
leveraged real estate but I am simply unable to conjure up sufficient
arguments against gold and especially silver as we close out the month of
October 2018. As I finish this missive, the big new today is the announcement
that Germany's Angela Merkel is standing down as chair of the ruling CDU
party. This will be viewed as the ultimate dissolution of the glue that binds
Europe together. I will have more on that later in the week but for now, the
next two days are going to be VERY interesting as the month winds down and
book-squaring accelerates. Today we have had a 600-point reversal to the
downside and it is going to get even uglier by Wednesday.
Remember the last ten minutes of "Trading Places"? "I
demand an investigation. Get those brokers back in here. Turn those machines
back on! TURN THOSE MACHINES BACK ON!!!"
Retribution is the operative word for the day.
[NLINSERT]
Images and charts provided by the author.
Michael Ballanger Disclaimer:
This letter makes no guarantee or warranty on the accuracy or completeness of
the data provided. Nothing contained herein is intended or shall be deemed to
be investment advice, implied or otherwise. This letter represents my views
and replicates trades that I am making but nothing more than that. Always
consult your registered advisor to assist you with your investments. I accept
no liability for any loss arising from the use of the data contained on this
letter. Options and junior mining stocks contain a high level of risk that
may result in the loss of part or all invested capital and therefore are
suitable for experienced and professional investors and traders only. One should
be familiar with the risks involved in junior mining and options trading and
we recommend consulting a financial adviser if you feel you do not understand
the risks involved.
