NFTRH Update, Q&A on US Stocks & Precious Metals, pre-Jobs

Yesterday’s bull fest seems to have quickly brought on thoughts of ‘here we go again’ if anecdotal evidence is any guide (referencing people’s comments at bearish sites like Slope of Hope among others).  There were also a couple of emails from NFTRH subscribers putting forth thoughts on a near term bullish case for US stocks.  One of those emails is copied here at the author’s suggestion.  I will answer as best I can, point by point…

I have a question for you which I hope is of sufficient general interest that you can reply (perhaps also for your wider subscriber base).

I know you follow Prechter and the EWI guys, as a complement to your own technical chart and macro analyses.

I used to follow Prechter but as a perma bear, his perpetual deflation calls could get you burned as a trader/investor.

Agree, deflation has thus far only come during discrete and violent episodes only to be reversed by policy making.  Prechter has under estimated the power that inflationary policy has in delaying the system’s need to correct.  I use his thoughts more as an acid test to my own stance than a short term guide.

In addition to your work, I follow Dave Bannister’s EW analysis which seems more accurate; plus the highly impressive analyses over at Gordon T Long (Macro Analytics).

Now, we have had a possible pivot buy signal in the PM equities (GDX, HUI). But that seems to be running out of steam (overbought, falling volumes)

GDX/HUI are still in uptrends by daily charts, although it would appear that today’s employment data would be an important fundamental consideration as to whether or not this will hold.

The weakness in the Dow and other indexes looks like it may be over. This aligns with Bannister’s view which is that that was a Major wave 4 down and that the final Major wave 5 up is now before us (albeit, possibly to be a truncated wave).

As you know, I lean toward a run to new highs on the stock market into mid-year.  As for the January correction, I lean toward it not being over yet.  Yesterday was a bearish setup until the indexes start taking back their 50 day moving averages.  Note:  SOX already has.  That is one to keep an eye on.

If so, then the PM equities are likely to drift down.

 Agree.

The BIG question is what happens after that ?

The question will be answered by what happens in the economic data.  If it continues to decelerate and gold continues/resumes its fledgling rise against the stock market, any declines or consolidations are a buying opportunity.  If the US stock market throws off the data and climbs, and then the data itself somehow begin to strengthen again, then the precious metals may resume their ‘hands off’ status.

The end of December and January was a mini trend.  This needs to continue to avoid an interruption in the counter cyclical plan.

Now,in 2008/09, with the huge sell off in the broad indexes, the PM equities were not spared. They tanked together with everything else.

So with the topping of Major wave 5, it looks as if there is another significant downwave upon us. The question is: if that happens, how are the PM equities likely to behave ?

As noted many times, in 2008 the miners were coming from an over valuation against degraded fundamentals.  After spending years mostly in POSITIVE correlation to the broad stock market HUI had made new all time highs and a very ugly H&S topping pattern that I called its “crown of thorns”.  Now it has been kicked aside and left for dead.  I do not buy the idea that PM equities must go down significantly in a major market liquidation.  Indeed, there is one line of thinking that could imply they have already forecast it.

Have the miners not already had a major down wave of their own?

Either follow the market down (as per 2008/09) or act as “counter-cyclicals” (rotation of funds out of the broad market into perceived cheaper safe havens) ?

You know my view is of the counter cycle.  I am going to stick with that.  That is why it is so important for the stock market to top out before we can go whole hog bullish on gold and the miners.  Also, I would tune down the talk that when the top is in the market must crash.  2014 could be nothing worse than a large, grinding topping pattern (ref: HUI in 2010-2012).  Why do so many people think the market must crash imminently?

Now, at Gordon T Long, they are forecasting one more final leg up as part of a “crack up boom”, [fueled] by desperate central banks forced to return to money printing once the deflationary downturn in the broader indexes takes hold and accelerates after the Major wave 5 top.

That, they claim, would be potentially a “hyperinflationary” phase. And by the way, the timescale for all of this – the Major wave 5 top, the deflationary wave down, etc – is all over the immediately prospective months of 2014, with the hyperinflation running into start 2015.

I am going to keep the Austrians, crack up booms and hyper inflation out of the discussion for now.  We are watching for a counter cycle first.

This scenario may of course prove utterly wrong. I for one think that it may on the contrary be very near to the truth.

How do you see it ? Because, using risk management techniques, it appears to me that being long the PM equities now is highly risky. The moment to go long is the unfolding of the coming big wave down likely in a couple months time ?

In a simpleton manner (so as not to out think myself) I see a bullish signal by weekly charts on HUI.  This is in the triggered up MACD and TRIX.  That implies a potential bottom. 

I also see a still-intact uptrend by daily charts, with silver having thus far held critical support and relieved its negative divergence.

I also see data coming in that is in alignment with NFTRH ‘s ultimate view of 2014, which is not a crack up boom or hyper inflation.

Speaking as one individual human market participant, I suspect that this morning’s Jobs report is going to surprise to the upside.  I am not sure why, but ‘I feels git ins me bones‘.  Feelings have no place in the this market.

So I stick with the charts and with risk management (high cash levels) in the event that a) the stock market has already made its correction prior to a final ‘drive to 5’ and/or b) that the precious metals are going to get wood shedded again.

Bottom Line

We must establish a trend of economic deceleration in order to be on plan.  Any thoughts of Janet Yellen and hyper inflationary responses (and eventual crack up booms) will come later.  First I want to see a CRACK, then later manage what comes next by way of responses.

The economy has shown signs of a crack in the most recent employment report and ISM.  If these are reversed, we go right back to where we were which for me meant nimbly trading stocks and managing risk to an extreme in the precious metals.

But the macro has dipped a toe into NFTRH’s counter cyclical plan of late and that is why I am in the game as of now and giving it the benefit of the doubt in the absence of technical breakdowns.  Okay now, bring on the Employment Report!