NFTRH; Then (Q4 2008) vs. Now

Housekeeping note:

If you are at all interested in what one casino patron is seeing as events unfold – assuming I am watching the market, which is not always – keep an eye on my Twitter handle @NFTRHgt for heads up on new notes in the Trade Log & In-Day Notes page. Yesterday I got pretty ‘talky’ there and even included a few charts. It feels more dynamic than the more standard updating process by post and email. This can also be a fail safe option for updating in the event that email deliverability glitches crop up.

Then (Q4 2008) vs. Now

Well, I think I am not alone among those who were actively managing markets in Q4 2008 and who may have some similar gut feelings to that epic disaster that turned out to be an epic opportunity for those positioning for it. But the dynamics are different today.

  • Q4 2008, markets liquidate the previous credit-fueled inflation, with the gold mining sector one of the early crash victims. This was well earned because the cyclical inflation that preceded the crash had put the sector in an over valued, bloated state regardless of what the average gold bug was thinking. The fundamentals were not good heading into 2008. The miners crashed from a topping pattern in HUI. The crash in broad stocks that followed also came from larger topping structures.
  • Today markets are I suppose you could say liquidating but the longer-term trends are intact in most stock markets and the gold miners are intact even on their shorter-term daily trends (being tested now) but are sure getting the bugs hot under the collar. Gold and silver are negative this morning along with stocks, so who knows, a crash could ensue. But the fundamental differences are that the instigation is courtesy of a spreading pandemic and while the effects of that pandemic (travel, worksite stoppages and negative business projections) are degrading the fundamentals of stock markets and risk ‘on’ assets, it sees counter-cyclical gold relatively steady and the miners that will leverage that relative steadiness fundamentally, are presenting an opportunity.

Now, nobody wants to hear someone going on about opportunity at a time like this. After all, inflationist bugs are puking, other bugs are telling each other campfire ghost stories about mass mine shutdowns due to COVID-19 while still others are getting margin called.

In yesterday’s trade log notes linked above we see that GDX ended the day sitting heavily right upon the 28 level (28.15 close) we noted earlier in the day could come about to fill those gaps on a 30 min. chart. We also saw the HUI/Gold ratio weakening to an undesirable level. Undesirable but understandable, given the pressures in play in the broad markets.

In Q4 2008 when I barely knew what I was doing with respect to writing a newsletter, let alone providing a more rounded financial market management service, I did know the market. I knew that the fundamentals were screaming into full bull mode even as gold stocks crashed. I knew the opportunity. But that opportunity ended up taking more patience than I originally though I’d need. I bought, bag held another 100 points lower on HUI and bought again, mercifully at the bottom.

That was a crash. This is a pullback within an uptrend. Uptrend pullbacks are usually (and in this market driven by exogenous risk “usually” is a word to be respected as it does not mean ‘always’ and with a situation like this “usually” can go out the window in a heartbeat) buying opportunities. So, if the miners hold here, great, this will have been a buying opportunity. But I am going to remember that in Q4 2008 I had my hands severed buying the falling knives before ultimate well earned and big time profits came in.

As for the broad market, it’s a sentiment event driven by a real event. I have tried doing what I am trained to do and that is to reject the fear-driven hysteria. It does not mean I am bullish, as in the Christmas Eve crash of 2018. But at some point a relief bounce is going to come and then would come the breakdown re-test. Then it will be time to plot a bear market strategy if this crisis is to continue eating into economic activity.

Functionally Speaking

Functionally right now, I’ve pretty much offloaded everything in the precious metals I’ve wanted to offload. It hurts seeing the items still held give back paper profits and it never feels like you’ve taken enough  profits even though I took a ton of them in both the miners and in broad stocks. But that’s show biz and I am personally positioned as I’d wanted to be in such a situation. Willing to accept minor draw down (I have not measured cash, but it is somewhere between 85% and 90% and the portfolios are an acceptable -1.5% for 2020) while the market gives me the clues I need to interpret what to do next.

As for broad stocks, I’ve hung in there with some items, but will probably manage more with the index ETFs both long and short going forward. I still have adjustments to make in those portfolio items pending the market.

Right now gold is acting as it should act (and it’s doing way better than the early stages of the 2008 crash) and also unlike Q4 2008, the US dollar is pulling back, not impulsively rallying with the risk off bids. Like I said, it’s different today than it was then.

The fundamentals and macro indicators for gold and especially gold stocks are slamming into full bull mode. Again, apologies for sounding bullish when gold bulls are supposed to be scattering right now (that is sarcasm) but I call it as I see it. Gold vs. stocks, gold vs. commodities, gold vs. currencies… all bullish.

One holdout has been the yield curve. You can read this mainstream media blurb (Government bonds see huge rally as investors look to safety) if you’d like to see the herds rushing into short-term bonds, which of course is a deflationary pressure on the yield curve, which is at least threatening to steepen again. A deflationary steepening of the yield curve is a similarity to Q4 2008. If that is the case, it is in line with the view that the miners will be pressured by the fear that ‘there is no inflation!!!’.

As a side note, with the herds piling into Treasury bonds now (long-term and short-term bonds) they are doing the Fed’s job for it, buying bonds and loading the next inflation gun, or fire hose. Remember the hawkish Fed of Q4 2018 when yields were breaking out? Today we are completely opposite. Hence, a dovish Fed can be expected.

Of course there is inflation. Just as there was in Q4 2008. It was sprayed in with fire hoses at that time and through 2009 and off and on to this very day. Another one of our theses has been a steepening yield curve for 2020. So why fear our own thesis? It’s time for wearing our big boy pants and big girl… well ladies, I will not profess to be a source of good fashion sense. But you wear your big girl garments of choice.

So anyway, a steepener can be driven by deflation, inflation or one and then the other. It’s a fluid situation. But a steepener is not in the bag yet and so this gold fundamental is technically not yet in the bag and by the same token the stock market (and the policy-created boom that has sustained it) is not dead yet either.

Bottom Line

It is not time to be hysterical. It is time to realize things are in motion and speaking personally, aside from minor interruptions like Christmas Eve 2018 and other negative and positive sentiment events post-2008, this is the first time I’ve been able to stand at attention to this market with the feeling that, assuming I am able to interpret events near correctly, a big opportunity could be in the works.

All these years of intermittently holding high cash levels and more specifically all these months of noting market risk while holding high cash levels were for a reason. That reason was to play the stock market while it’s playable, sure. But also to be protected from it.

As for the gold stock sector, it is counter-cyclical and its fundamentals will benefit from weakening economies (just look at their product, gold vs. virtually every other asset not called Treasury bonds right now). I have tried to manage the technicals as best I can but at some point things either go swimmingly to Plan A or they get off the hook to a more anxiety provoking Plan B. We’ll continue on a flexible path while understanding that the macro backdrop is positive for the sector.

The majority of risk should have been managed already, which is why I parroted that so often up until this week. But folks, it’s the major events that provide the real opportunities and while I got the willies about COVID-19 like so many others, I am tuning that down and preparing for something akin to Q4 2008, although different fundamentally and probably functionally as well.

It’s a work in progress, and one that I should not try to over analyze in one update. Questions are always welcome, which I would try to answer to the best of my ability.

I’ll not generally do updates in-day. I will make notes as applicable per the first paragraph above, however.