Ill winds mark its fearsome flight,
And autumn branches creak with fright.
The landscape turns to ashen crumbs,
When something wicked this way comes... (Ray Bradbury)
There is a certain maneuver in military strategy that involves the act of
conveying a warning to an opposing captain by way of firing a missile or (in
ancient times) a cannon ball across the bow of his ship. It was akin to the
throwing down of the gauntlet or slapping a man across his cheek with one's
glove and represents a signal that one is prepared to do battle. Your
response will be "coming to" and hoisting a white flag if you are
not willing to engage.
Last week, the Good Ship "MMT" (Modern Monetary Theory) had two
such events with the first being the revelation that the U.S. Justice
Department was invoking the RICO statute to indict our old nemesis, JP
Morgan, alleging that it conspired to manipulate the gold market and in doing
so, named senior managers as masterminds of the scheme. What was the shocker
was NOT the indictment itself but rather the fact that they brought in RICO.
RICO (RICO Act) stands for "Racketeer Influenced and
Corrupt Organization Act" and "focuses specifically on racketeering and allows the leaders of a
syndicate to be tried for the crimes they ordered others to do or assisted them in doing, closing a perceived
loophole that allowed a person who instructed someone else to, for example,
murder, to be exempt from the trial because they did not actually commit the
crime personally." It allows prosecution of large criminal organizations
such as the Cosa Nostra or Mafia and for it to be brought to bear upon a
major legendary American bank is nothing short of astounding and a seriously
large and menacing projectile whizzing across the bow of financial market
complacency.
The second cannon ball to soar across the bow of investor confidence was
of even greater significance. Tuesday morning, the first day of the FOMC
meetings, the Federal Reserve undertook a $53 billion "repo"
operation, which was effectively a Herculean hypodermic injection of
liquidity into the banking system, and before all those "WTF?" bubbles
go sailing around the blogosphere, operations of this magnitude are only done
as "emergency measures" such as market crashes or the seizing up of
the interbank lending facility such as was happening in 2008. I was on a
train when my news feed lit up and my first and near-automatic response was
"Someone is in trouble."
Now, there have been no official reports of anyone "in trouble"
but the response of traders to this news was predictably and frustratingly
robotic but why shouldn't it be? There are no humans left to trade anymore.
The algobots that implement pattern recognition software were searching out
"Fed rate cute" and "Trade war moderates" as their cue to
buy stocks and having found nothing ominous in neither a major banking
leviathan charged under the RICO Act nor a $53 billion repo (the first since
the 2008 subprime meltdown), went on their merry way of buying any and all
dips because "the Fed has their back." The days of my unbridled
self-flagellation and distemperate outbursts, the nature of which subsided
dramatically after gold broke out above $1,375, have crept back into the room
and are threatening to dishevel me, a condition not appreciated nor tolerated
by those around me. Emotional chaos is nigh, and it is not good.
At the risk of sounding like an alarmist, I am so concerned with the
liquidity scramble that is being undertaken by the banks that I fear that
there lurks a large ticking time bomb ready at any minute to derail the
current stock market rally, which is within a chip shot of all-time highs for
the S&P. It really isn't all that surprising that stocks are being bid
higher; there isn't really an alternative for the young money manager trying
to preserve wealth. The usually wrong majority have been avoiding bonds like
the plague despite the 30-year Treasury up nearly 10% year-to-date, while the
traders continue to trade the big names despite softening macro conditions.
Collapsing German PMIs, weakening forward guidance, Fedex warnings—these are
all symptomatic of "The Wall of Worry," a phrase that was relevant
back in the pre-PPI (or at least limited PPI) days, when humans made
investment decisions.
Today, there is no "Wall of Worry" that bull markets climb but
there IS a "Cliff of Confidence" that is the Fed. Markets are
scaling the "Cliff" because no matter how bad the outlook, there is
ALWAYS a bid. Even last December when things looked irreversibly bad, the
"Invisible Hand" of Smilin' Stevie Mnuchin came to the rescue and
investing since then, as they say, has gone "swimmingly." Despite
all just opined, I remain alarmed and on the "dedicated defensive."
There are a few of us around that recall the words of Ben Bernanke in the
early stages of the banking crisis of 2008 when he described the subprime
contagion as "contained." For this reason, when I see Jay Powell
saying that the REPO liquidity injections are not to be misconstrued as a
"policy tool," I am reminded of that famous joke, "How can you
tell if a central banker is lying?" Answer: "His lips are
moving." The Fed does NOT inject vast sums of cash into the banking
system if everything is going "swimmingly well"; it does so usually
during times of stress when one or more member banks are in trouble due to a
default or a trading mishap. We have heard absolutely nothing this week as to
exactly WHY the overnight lending rate spiked to 10% but you can be that someone
did not want to give up any "liquidity" unless they got a big fee
for doing so—meaning—someone or someTHING needed liquidity real bad.
Silver continues to recover, albeit with fits and starts, off the lows I
identified via my Twitter posts on September 13th. I quite like
Twitter not so much for being able to see what the Kardashians had for lunch
but more so for being a tracking tool for market calls, both good and bad.
Stockcharts.com is a terrific tracking tool as well as the "Saved
Charts" feature time stamps all saved charts so my "buy" and
"sell" signals are locked into posterity for all to either admire
or ridicule.
Just when I thought I had achieved "legend" status for buying
the JNUG (Direxion Daily Junior Gold Miners Index Bull 3X) at the May lows
around (split-adjusted) $30 and selling it in June at $45, I wanted to take a
ball-and-chain hammer to my forehead in July after pulling the trigger
roughly $60 too early, watching in abject horror as NUGT (Direxion Daily Gold
Miners Index Bull 3X) and the GLD (SPDR Gold Trust) August call options spit
in the eye of the Commercial traders and screamed northward. That is why
hubris is the most dangerous of all trader foibles and a great lesson for all
to heed.
Luckily (as opposed to brilliantly), I quickly drew the conclusion that
the landscape had, at least for the short term, changed and just as the gold
gurus were advising their sheeple to "AVOID SILVER – GSR going to
100!," I deduced that the long-dated (and very successful) practice of
fading all rallies in silver was going to get summarily rejected just as the
long-dated (and very successful) practice of selling gold at RSI 75-plus had
been rejected with the moon rocket move into the low $1,400s. In July with
SLV (iShares Silver Trust) at $14.30, I mentioned in my missive that at the
gold-silver ratio of 93, "Shorting the GSR here could be the Trade of
the Year" and I did the next morning at 92.40 while buying a record long
position in the SLV August $14 calls at $0.68 (June 25 Silver Tweet), which were rolled into the October
$15.50 calls at a double, so I took all of my risk off the table but kept the
same position with which I started. (Silver Switch) On September 4th, I sold that position
along with the remaining 50% positions in the senior and junior miner ETFs
(GDX[VanEck Vectors Gold Miners ETF]/GDXJ [VanEck Vectors Junior Gold Miners
ETF])(Sell GDX/GDXJ), and then proceeded to sweat it out in
abject terror while praying every half day that I would not lose the
positions to an all-out vertical spike in the miners. Luckily for me, heavily
medicated with Fido hiding once again under the tool shed, I pulled the
trigger and reversed with a half-position in the SLV December $18 calls on September
13th (@ $0.42) and followed up with two 50% purchases of both GDX
and GDXJ on September 17th and 18th but, alas, I went
into this past weekend long ½ positions in the silver calls and ½ position in
the GDX/GDXJ dynamic duo. (BUY GDX/GDXJ).
So now that I unabashedly patted myself on the back (choosing to carefully
ignore premature stab at the TVIX and SPY puts), you all want to know, I am
sure, where we are headed from here and no better way than to look at the
chart of December silver posted above. I see a test of the highs of September
4th in the cards for the following reasons:
- RSI is in neutral trending higher
- Volume into the correction from $19.75 to my re-entry
low at $17.50 was light as opposed to the massive volume on July–August
spike.
- Moving averages all executed positive crossovers during
the summer
- Monday's move through uptrend line (down through which
it corrected) is powerfully bullish, and,
- MSM pundits are all still in denial of silver's
dominance
As for the SLV, you can see that it has now, as of Monday's close,
scrambled back above the uptrend line drawn off the July–August lows and is
sporting a neutral 61.82 RSI while the MACD/Histograms are only now starting
to converge in advance of a positive crossover. The 52-week high for SLV is
$18.35 so with even the slightest of month-end hedging in advance of the
ignominious month of October, it should be able to mount a respectable
assault on $18–$18.35. Hence, if you are a speculator, you can continue to
add to the SLV Dec. $18 calls but only on down days. If you did not see my
tweet on Sept. 4th (@Miningjunkie) calling the bottom in silver
and initiating the buyback of the Dec. $18s, then scale in with a ¼ or ½
position and after you are onside with the initial purchase, average UP to
increase the size of the trade. NEVER average down on a futures or option
trade. You will wind up with shattered quote monitors and empty liquor
bottles adorning your desk and your pockets will be hanging ruefully from
your pants while your wife goes looking for a lawyer.
Lastly, there are many professional investors that profess to have
systems-based rules that govern their trading practices and while I have
great respect for many that follow a discipline, you cannot substitute
academic achievement for experience. I have a pretty decent-looking CV
(including the Wharton School) but you can take all the courses and all of
the degrees and stick them into the Vault of Failed Dreams for all they can
do in a meltdown. In the last few trading sessions, I have become
increasingly "edgy" and it has nothing to do with October on the
horizon or charts or trade wars or ZIRP. It is an "ad hoc"
interpretation of impending doom, a "feeling", a "sense,"
that the recent Fed REPO OPS that were vacuumed away from the headlines by
those that CAN were merely early warning signals of a yet-to-be-determined
"event risk" out there. I am still holding in excess of 35% cash in
the GGMA Portfolio and that is significant given how confident I was in early
September that the precious metals correction had run its course. Had I
committed all cash reserves to the miner ETFs as I am normally prone to do, I
would have added another 4–5% to the performance going into month-end.
I am exercising extreme prudence because if there is an event shock,
liquidity is going to be the main issue. Because these REPO OPS are being
conducted to shore up bank liquidity with the S&P within a few points of
the highs, imagine how sparse the bids will be in a market crash like last
October?
Something wicked this way comes—so stay safe.
Follow Michael Ballanger on Twitter @MiningJunkie.
[NLINSERT]
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.
