NFTRH Interim Update 11.28.12

Morning Notes 11.28.12

It appears that the Thanksgiving week lift in the markets was indeed bogus, just as we thought.  So far of course, it is as usual the precious metals stocks that are taking the hit, but if this is due to the expected bounce in USD and long-term T bonds, pressure should come upon the broad market as well as we get another deflationary whiff amid all the Fiscal Cliff ™ uproar.  This is according to plan.

As noted recently, I have tightened up my game where trading is concerned.  It is not in my nature to be a victim of events that I saw in advance as being possible or even probable.  The DUST ETF once again helped greatly as I carried ‘too many’ gold stocks.  The DUST position was sold yesterday because it was a heavy one and because it provided a nice profit.  But commensurate with that, bear positions were increased against the broad market and more miners were sold, some for profits and some to limit losses.

Currently held are [omitted].  4 explorers and 3 producers.  I suppose these represent the hard core that they will have to pry out of my dying hands (as long as the intermediate picture remains on track), although stocks are just stocks and will never be over loved in this corner.  I will protect most or all of these positions as needed and as opportunity presents.  Cash is at a fairly heavy 64%, but there are positions in bear ETF’s in there as well.  So you can see that the speculation portfolio is intolerant of risk.

If we are in for a continued short-term decline – as the work below indicates as probable – then cash is the best risk management tool in my opinion. Play the market short if you are a trader and are comfortable doing so (which is what I am doing), but again this letter makes one hard recommendation for risk management and it is cash.

Now for the work… TLT is bouncing at the support we noted in #214.  This is in line with the analysis for a renewed deflationary backdrop and a correction of the stock market’s enthusiasm from last week.  The target remains 131.

tlt

USD is bouncing at support as projected.  The bounce should be limited to around 81 or else this would start getting uncomfortable with respect to the intermediate bullish view on the markets.

usd

So the short-term script is fine.  But now come the parameters after I show you happy picture of silver leading gold, which is bullish for the precious metals sector and a bullish sign for the markets.

sgr

Silver-Gold ratio has not only held the break above the moving averages, it has continued going up despite a thus far troublesome week.  If the short-term bearish stuff continues, this ratio can take a hit but should remain at or above the shaded area and the moving averages for us to remain on the intermediate bull case.  Okay, that is the happy chart.  Here are less happy ones…

hui

HUI obviously found resistance per the zone we noted in #214.  What I do not like about the chart is that the short-term rise is taking on the look of a Bear Flag.  If it is a BF, expect a lower low and a deeper probe into our fat support zone.  Think 420 or so.

gdx

Weekly view of GDX has TRIX saying “cyclical bull market” believe it or not.  MACD is going to squiggle around, but TRIX is smoother and it’s above zero.  We used TRIX to confirm the ‘W’ bottom (green arrow) and now we can use it to remain in opportunity mode during the ongoing correction.  The signal changes if TRIX triggers down and then goes below zero.  But for now, we should consider the bullish signs as long as we are going to highlight the bearish ones.

hgr

And here is one of those potentially bearish signs.  The HUI-Gold ratio also appears to be in a Bear Flag, which would imply a lower low to the one from a couple weeks ago.  If that comes about we really need to see the ratio hold the July and May lows.  Here again is the monthly big view.  A lower low to 2008 is simply not acceptable to the bull case.

hgr mo

Both the nominal HUI and the HUI-Gold ratio are in weekly uptrends (AROON).  The daily charts are obviously in downtrends as are the monthlies.  Gold stocks can afford perhaps a quick swoosh down and reversal to keep the intermediate trend positive, but we should be aware that if they lose the weekly trend and the HUI-Gold ratio makes a lower low then we must put aside all that we think we know and try to figure out why the market is saying what it is saying.

Real deflation?  I don’t think so.  I think USD and the long bond are bouncing from over sold status after a happy holiday week.  But I am just a hard working letter writer.  I don’t tell the market what to do and neither should you.

Now, to finish up the precious metals section, let’s remember that the CoT structures are bearish.  This post from yesterday shows gold’s big picture looking just fine.  But this post also from yesterday shows a once again degraded CoT situation with speculative net longs, commercial shorts and open interest all ramping.  What do the smart players expect in December?

Wrap Up

Has Bernanke fixed the system?  Has the ECB?  Markets cheered a Greek deal until they realized it did not mean squat.  US consumer confidence is at its highest level in what, 4 years?  Was it a stellar Black Friday?  Is it crisis over, move along, nothing to see here?

cci

Commodities are still recovering after all.  In particular, base metals (GYX) and agriculture (GKX) look good.

vix

The VIX remains asleep.

hyg

Risk takers are happily taking risks in junk bonds.

hyg lqd ratio

Junk vs. investment grade bonds are back to the moving averages, which have limited the ratio since September.

Short-term stresses are showing up first in the precious metals stocks – which for the life of them can’t seem to get out of their own way –  as often is the case.  This will either spread out to the happier broad markets for the expected short-term correction and deflationary blip or else we are forced into revision mode.

What would that revision look like?  It might look something like this…

  • The global economy resumes organic growth as base metals (copper, etc.) and commodities signal no further stimulus is needed.
  • Ref. the commercial hedgers position on the NYSE per yesterday’s email update.  They are nearly as bullish as they ever are.
  • Gold goes back to the hell it came from and gold ‘community’ is banished for being an old fashioned anachronism.
  • Apple makes new highs.
  • Google makes new highs.

Or it might look like this…

  • Real deflation grips the system as it really was about money supply growth (or lack thereof) after all, commodities decline hard.
  • Stocks decline hard.
  • Gold stocks get hammered.
  • Silver gets hammered.
  • Gold drops but out performs the assets positively correlated to the economy.

This was meant to be a fairly routine review of a plan that is unfolding more or less according to what was envisioned.  It blew up into something more, probably because the format here makes in depth discussion easier.  I would say that the real Wrap Up is that nothing has changed.  If and when it does change you will be the first to know.

Stresses are appearing in some areas but not in others.  The US dollar is the linchpin.  If it is bouncing within a new bear trend, asset markets – incl. the precious metals – will resume rallying soon enough.  81 +/- is the key there.  USD should not make a higher high above 81.50.

Managing risk sets you up to feel strong and ready to evaluate events on a day to day basis and this is not your father’s or grandfather’s market.  Time frames are compacted during times of desperation by policy makers.  It is why I personally tightened up my game.  There was a time for long horizon thinking.  This is not it.

If and when we confirm a new inflationary phase, we may be able to set it and forget it for a several weeks to a few months.  That is the current plan, pending a disturbance that seems to be kicking in now.

Have cash, have patience and you will be strong.

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