alice

NFTRH; Pivot Point or Flash Point?

What I mean by the title is that with respect to two sectors that I’ve considered generally “in the mirror” to each other, the broad stock market and the precious metals, is the North Korea disturbance merely an emotional flashpoint triggering short-term reactions (down in stocks, up in PMs) or an actual pivot to a trade-able decline in stocks and rally in the PMs?

On the one hand we’ve got the US stock market, generally at (above) big picture measured targets (SPX 2410) and on the other hand we have the gold sector, still grinding a downtrend. Were stocks already in a mature correction I’d most likely be getting very bullish on this Trump/North Korea flash point. As often noted, an inflammatory event in and of itself is never a reason to change a market view, beyond the immediate-term when the event is happening.

But stocks have been over pumped (by the tweeter-in-chief among many others), overbought and making ‘new highs!’ headlines. Thus, as we’ve been noting stocks have been vulnerable on a stand-alone basis, aside from geopolitical strife.

As for the gold sector, we’ve been noting that its risk – assuming the USD strengthens and many asset markets correct – would probably be at lesser risk due to the fact that the sector has gone absolutely nowhere (but gently down) over the duration of the USD’s harsh decline.

The bottom line of the above is that on this occasion I am prepared to NOT overlay the usual rules that see a negative geopolitical event as positive for stocks (as they have consistently been as soon as the event passes) and after the initial pump, negative for gold. Stocks are overbought and vulnerable. And the gold sector, while not oversold, is certainly not loved by much of anyone right now.

Let’s put up charts of SPY and GDX for reference. SPY, along with the Dow, popped to new highs yesterday and made a mean reversal. I saw this and shorted yesterday. But due to my summer, which has included a lot of in-day commitments I did not know the reason until after. Uh oh, thought I; it’s not gonna stick because it’s Trump’s big mouth that apparently did the reversing. But for the reasons noted above I am going to let it breathe and see how today goes.

SPY is completely intact right now but take out the orange dotted EMA 20 and it could start to get interesting. Also of note is that the largest volume days since May have been down volume days. That volume did not care about North Korea. That volume appears to have been distributing shares.

spy

As for GDX, I wonder if that is a bullish pattern forming? The black dotted line denotes its would-be neckline. GDX/HUI have been locked in a downtrend (red arrows) even as USD has been savaged over all these months. Now, the market godz could wave a magic wand and the bulls will go back to their happy place and gold bugs could be sent right back to Palookaville but again, stocks were vulnerable to begin with and so I am opening up the prospects for a more bullish near/intermediate-term for the gold sector (we have after all, been noting many positives on the fly beneath the surface).

By the way, while I see a normal corrective phase in the stock market as beneficial to the gold sector, an impulsive one – as in, ‘rut roh… this mess is crashing!’ – could pressure the sector.

Technically speaking, GDX could simply bounce to fill Friday’s gap down, get the bugs over bullish and fail. But an upside break of that pattern’s neckline would be a notable technical event.

gdx

Our view on the investment merits of the gold sector is that the same forces that could drive USD higher (risk ‘off’, market dislocation, liquidity contraction as reflected in gold out-performing most other assets) would also drive gold mining fundamentals higher. An extreme example of this was Q4, 2008.

Just some food for thought folks. Let’s see if a real market reversal would have been in the making even without the North Korea input. If that is the case, then the N.K. stuff would just be the ignition to something that was looking for a spark. If they quickly sweep it under the rug and the algos catch on and buy well, you know the drill.