T bonds broke down hard as ‘taper’ hysteria hits home. We might again question whether this is due to the Fed’s supposed decision to one day taper or a compulsion from the market; like maybe China and/or Japan are systematically selling (or plan to sell) T bonds to deal with their own internal issues and US policy makers are fully aware of this.
Regardless, this would-be deflationary issue is unlike those that came before it because T bonds are being puked along with most other debt securities the world over. Debt is being repudiated and this is deflationary.
Let’s lead with the BKX-SPX ratio, which is one of our indicators for the ‘Taper to Carry’ thesis.
The ratio of banks to the S&P 500 held up quite well yesterday and remains on signal for our ‘Taper to Carry’ thesis. This is where the banks would one day theoretically begin to lend out the nearly free funds they received from the Fed via ZIRP at a guaranteed profit margin due to rising long-term interest rates.
If the market attempts a bounce the above noted resistance looks like an area to either expect a failure or load/re-load short positions if that is one’s orientation. Today the media is attempting to find reasons why the post-FOMC reaction was over done. In my opinion, this was the kickoff to a bearish summer. A break above resistance calls that stance into question.
Let’s keep gold simple with a weekly chart.
Gold has now Fib retraced 50% of the move out of 2008. It is very over sold, but there is a nice 62% Fib down there at 1150. People are talking about the amazing snap back that is going to happen in gold but again I will remind you that if gold snaps back it will just be peoples perceptions of monetary value snapping back (likely along with a heck of a lot of short covering and margin call easing). I view gold in a similar way to the long-dated puts I have on the stock market. Just let ’em sit there through the massive volatility.
Silver is hideously over sold after failing to find any Fib support from the 2008 low on the weekly. It is just now touching the big support area at 17-20.
In fact, the monthly chart shows that silver has dropped below the 62% Fib of the entire bull market.
HUI is homing in on the bull market trend line. I have been calling this 220 +/- but it is refined here to 215 (ish).
Over the last few weeks the market has become a little easier for me to make sense of. This week I feel as though someone lifted a piano off my shoulders. That is because things are making quite a bit of sense when we realize that a deflationary brew is forming on the macro, instigated by a credit/debt rebellion in bonds. This includes US Treasury bonds. So the people who think ‘deflation event… buy bonds!’ are being punished. Tough market, but it makes sense, especially if the ‘Taper to Carry’ play is viable.
I continue to expect a generally bearish summer for broad equities and at some point, if inflation is to be a play on the intermediate term, I am expecting the precious metals to make a bottom and lead the way out, just as they led the way IN to this mess.
People ask if I am buying gold stocks and my answer is no. I am 100% cash as I think the trend line (at least) on the HUI chart above beckons. I could buy today or I could wait. I just do not know until the market tells me what to do. But people who are fundamentally astute and/or engaged in the sector and can stand additional downside are and probably have been buying value. I sleep soundly with gold however, as I have for many years. The miners are another animal in my book.
Until gaining some sort of evidence about a coming bottom (and folks, it looks more and more likely that when the miners do bottom it will be a ‘V’ reversal and explosion as opposed to these wretched patterns that keep failing) or attaining the 215 target my interest is more in shorting the US stock market on bounces. We’ll see. As I said, things could change in an instant. Unfortunately that is the hyper kinetic market we have.
For most people who want to manage risk, cash remains the tool for now. Even if a 50 point HUI explosion ensues that brings it to 280, which is 180 points lower than when the risk management regime began. Have balance and patience.