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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. Its 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. Whats 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. its 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 wasnt much of a deal at all) at years 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 its
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.) Whats
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
theyve 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 months
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 communitys vocabulary, so anything is possible.
Along this line of thinking, if we see a straight shot up into the mid-1500s on the SPX by months 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 its 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, its 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), its 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 its
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 its likely on its
way to $60 minimally, and closer to $100 with
any luck this run.
Whats 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?
Captain
Hook
The above was commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, January
22, 2012.
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