We have been working a theme lately about the mania going on in US stocks (some valuations are not overly manic but policy sure is) and also the one going on in the mirror (a fun house mirror at that) in the ugly precious metals sector.
We are in a time of utter reverence for great and powerful Oz-like people doing not so great things to the rates of interest that would be paid to savers and prudent people (Zero Interest Rate Policy or ZIRP), and doing wonderful things for leverage (substance) users, speculators and asset owners (MBS and long-term T bond buying).
It’s a bail out of the type of people who put the financialized economy at risk in the first place and a bail in of those that cannot afford to take risks and gamble as the Fed seems to so desperately want the masses to do. How are they bailed in you ask? By continuing to follow the prudent conventions of the last century into a new era of ‘Inflation onDemand’ ©, which was instigated by the Greenspan Fed and has been carried to new extremes under the Bernanke Fed after Greenspan’s mess unwound in 2007-2008.
Slowly but surly things are coming around to policy makers’ wishes. Grandma may still be holding out with her shrinking passbook at the local bank, but more and more regular people are joining the bull party going on in stocks. It is a ‘new secular bull market’ after all! Best of all, ‘it just started this year and there’s plenty of time for it to run’ thinks a newly bullish public. As of the Fiscal Cliff drama 1 year ago, the public was firmly bearish and convinced that ‘the bear market’ and ‘the great recession’ from 2008 had not yet ended. 3.5+ years into the bull cycle, no less.
Look at the beautiful chart below with its monthly MACD ripening and its RSI doing something that has only resulted in market crashes on the last 4 occurrences, including the crash of ’87. Hopeful bulls will proclaim how long the RSI remained over bought while the stock market rose unabated from 1995 to 1998. Yes, you are right sir. But that was the mania stage of a secular bull market born by the way, of relatively sound monetary policy. This one is a cycle, just as the one that blew out in 2007 was a cycle.
T-minus 4 months?… The cyclical bull market in US stocks (a series of higher highs and higher lows, uninterrupted since March, 2009) will be 5 years old in 4 months. The manic phase of the secular bull that ended in 2000 lasted roughly 5 years. The inflation-fueled and cyclical bull market instigated by the commercial credit bubble that ended in 2007 lasted roughly 5 years.
Now the current specimen rises ever higher carrying new sponsorship that basically sat out what it thought was a bear market from 2009 through 2012. They have bought the ‘new secular bull’ promotion hook, line and sinker. How do you think this is going to end, eh Bueller? Well, probably with a blow off as manias tend to do.
Blow offs never end well. Ship of Fools, thy name is the US stock market. Yet for now, the ship sails happily through calm waters.
In the mirror we have the mess that is the HUI Gold Bugs index. The inflation mania that ended in spring of 2011 loaded the precious metals boat. The boat got heavier with refugees from the acute phase of the Euro crisis and then HUI got technical warnings 1, 2 & 3 with the critical warning being a loss of 460 (2) as silver built up a huge commercial short position in its Commitments of Traders data, and a final warning being a loss of the neckline (3) to a massive topping pattern.
Technical damage has been done on all but the biggest pictures as we watch for secular bull market down leg 4 to be put in. The trend line break (shaded yellow) is probably freaking people out right now. NFTRH has been allowing for that ugly event for many weeks now as we cover multiple bottoming scenarios that are in play. Trend lines are less important than bull market ‘higher lows’, which in this case can come anywhere above 150.
A complicating matter is the measurement of the big topping pattern, which is roughly to 100. Could that level be reached in a final puke fest and clean out of gold bugs? Yes, and it could be epic. But the index is a candidate to bottom any time now and shorter term management will help tell that story. The monthly chart above is just a big picture for perspective.
So it is getting near time to think about selling the cyclical US stock bull and buying quality situations in the counter cyclical gold stock sector because there is this quaint old notion in the financial markets; buy low and sell high and because we have a clock ticking on the S&P 500, the economy and most importantly, the policy making that has propped them.
Everyone now loves the US stock market bull and utterly detests the ugly image of the gold stocks in the fun house mirror as the public has finally decided to run with the aging US stock bull and the final holdouts are throwing in the towel in the precious metals. Wall Street is running another errr, operation, with the Fed behind it with supporting policy. Within the next half a year I’d expect a long anticipated macro pivot to be engaged and a counter cyclical phase to begin taking shape.
For now I am personally both long and short certain US stocks but managing the arduous process of a coming pivot, where the idea will be to lock and load positions and then sit into the next cycle. NFTRH will be managing this process every step of the way as it has done since inception in September of 2008. If you are so inclined, check out this service that never predicts, but always keeps the analysis in alignment with macro themes.