The recent activity – mind numbing as it seems to be – is actually constructive for the HUI with respect to a potential counter trend rally at least, and bear market end at best. This grind is fraying everyone’s nerves while morphing into a potential bottoming pattern.
The grind has also served to bring the 50 day moving averages down to the neckline of this potential bottoming pattern. So a break of the neckline would be even more important than normal in breaking the 50’s as well. The usual suspects (bullish RSI & MACD divergence and a gap fill) are present as well.
The upshot is that as long as this thing looks like it can hammer out an Inverted Head & Shoulders pattern I’ll probably give it some leeway below the 260 (gap fill) level we have been following to this point. The target of the would-be (it is important to remember that it’s not activated until the neckline is broken) pattern is 325, which conveniently corresponds with an area of resistance as noted.
Based on the formation of this pattern, I am lowering the point below which things can be considered ‘abnormal’ to a bullish case to 255 (+/-), which would put in a right side shoulder. The left shoulder is 256.20 and the head is 244.62. The point of an utter bottom failure is below the ‘head’ at 244.
The broad US market is simple; it must not break the trend line or else I am going to have to abandon the current bear positions (except for the Dec. 2014 puts I have tucked away) because I am not going to play the game of watching a market that I want to go down fail to do so. I’d probably wait and watch for bear opportunities later.
SPX is no longer over bought and certain global (emerging, Japan) and indicator (junk bonds, emerging bonds) markets could get some relief. I’ll not stand in the way if hope – amid an ongoing obsession with the US Fed – gets a second wind.
Current cash percentage in the Speculation portfolio is 58%. Backing out the market bear positions it is a conservative 70%, with all equities being quality (as I perceive it) precious metals (mostly gold) stocks.
If the US stock market forces my hand, cash will increase to 70% or so on release of bear positions. If the gold stocks force my hand by breaking down from the pattern noted above cash will increase toward 100%. I feel I have enough quality precious metals positions to wait and see if HUI can’t break the neckline. A daily close or two above that line would probably see positions added for a run toward 325.
Cash remains a very valid position until the markets grind out the expected changes (to precious metals bullish and broad markets bearish) or negate them. With the dynamics going on in sovereign (now including US) bonds and the Fed on tap shortly, it remains an emotional and dangerous market.
Beyond the near term, we remain on watch for a ‘carry trade’ play and possible inflation cycle, which would see commodities and certain stock sectors become favored, with home builders and interest rate sensitive items excepted. Again, this is just a developing thesis, not a reality at this point.