A ‘White Paper’ article on contrary indicators in the emotion packed gold sector. Make it them work for, not against you.
The gold sector is peopled by a high concentration of contrary indicators because it is a relatively (to the vast world of equities and bonds) small market that offers refuge from some of the damaging aspects of the spectrum of investment products that are supported by the manipulation of interest rates and printed (and digitally created) money supplies. Thus, gold has moral high ground if an asset can be thought to have morality.
“In risk management, the smallest details matter. This market is a war and you avoid the bullets first. Then you win later.”
HUI Destruction – Surprised?
The damage in the precious metals began back in November when the critical 460 support level was broken on HUI. Anyone who did not acknowledge that the violation of this level (the neckline to the 2011 topping pattern) was important – or as NFTRH called it “abnormal” to a bullish case – was looking through rose colored glasses.
After that came a bottoming attempt, a failure in January, numerous bottom calls from around the gold analyst spectrum and a series of bear flags that served to reset over sold status just enough to fuel each new plunge.
The first inkling of the most recent warning sign was noted immediately, in real time in this NFTRH update. There is also a target of HUI 250 in that update. This target has been on watch for months now, as has another at 100, which has seemed improbable but for its measurement off of a massive topping pattern. 260 is a 62% Fib retrace of the entire secular bull market. A trend line goes through the low 200’s. 100 is a cold, hard measurement.
To be ready for these targets, first you need to be intact. Here is the key excerpt from last week’s update linked above. This is all about discipline, not hope.
“I have used a combination of selling, cash raising and bear positions to squeeze out a small gain thus far this week. But it gets tiring compared to the comfort of simply sitting in cash, which has been the recommended risk management position for most people. If the HUI continues to look as bad as it does now my goal is to sit this one out as long as necessary. We will keep tabs on what I think is going to be a great contrary play, but we will not force it. We should let the technicals guide.
So wearing an unbiased technical analyst’s hat, we have a bear flag in the making. If it breaks down, HUI would lose the 50% secular bull retrace level, which is also the 62% cyclical retrace out of 2008. 250 could easily be next up, as there is notable support there, just below the 62% secular retrace level.”
Why Manage Risk?
It is upsetting to see how many people maintained trust in the gold stocks because it is a sector that I believe suffers from way too much stagnant ideology and dogma. Also, I think the sector is supported by people who are generally good and have a sense of right and wrong. They are in a monetary revolution against corrupted and powerful entities after all.
But that is no reason to be a victim. The gold sector has fiery leaders who command from a pulpit on high, as they chronicle the evil-doing of the banksters, cabals, central planners and other nefarious entities. You will notice that I don’t use those terms except when trying to make a point that it never pays to be emotional in market management.
Your only real potential enemy in the market is yourself. You are not on a team with a “community” of others. Or if you are, you should not be. You should be thinking for yourself. The ‘other’ knows no more than you do, but if he thinks he does, then he is downright dangerous if you submit to him.
When the action becomes impulsive as it is now, never mind the targets. Watch the action. Right now the action in gold is startling, but it should not be surprising. When you invest in gold you understand that you are buying value and that you are committing to revolution against an entrenched system. What is revolution? It is war. People get killed in wars. They are trying to figuratively kill you if you are a gold bug.
I sit in 100% cash (outside of one stock market short position) looking forward to a buying opportunity that could be a big one. Yet still I feel uneasy because I know lots of people just wanted to set it (the ideology) and forget it. NFTRH even lost subscribers over the years who were gold bulls that did not want to hear the frequent updating/revising and the mental whipsaw it can induce.
‘Buy and hold’ is tough enough in the regular markets, but in this ground zero market to a monetary revolution, the intensity of the swings can be white hot. I sometimes put a disclaimer into the interim updates that people who do not want the mental whipsaw of short-term management should disregard such updates. But today’s events serve to tell me that more of this is required, not less. So what now? Day-to-day and week-to-week management in service to opportunity; that is what now.
Unfortunately, this is not your grandfather’s market. This is a market being ‘hands-on’ managed, massaged and outright violated by policy makers and their associates in the financial services industry and financial media. Gold especially is a monetary instrument that would shine a negative light on current policies. It is a digital and connected age, where anything is possible in the short-term.
That “anything” is now happening. This most recent and climactic destruction began with one simple little creep by the Gold Bugs Index out of a little bear flag. But the greater down trend began last November with a technical violation of an important support level.
In risk management, the smallest details matter. This market is a war and you avoid the bullets first. Then you win later. The only way to do that is through constant checking and rechecking of assumptions and data points. It is a lot of work, but if you don’t do the work you suffer the consequences.
Work is good. Lazy thinking is not. Do the work folks.
Case-based ‘White Paper’ on the importance of unbiased TA:
I would like to repeat the idea that it is best to subordinate yourself to markets at all times. To put your ego aside or at least check it daily to make sure it is not leading you astray. The gold bug ego for example, hardened by a solid decade-plus of relentless bull market is in my opinion too set in its ways on balance. That is because it is an ego that knows it is right.
Using a log scale chart, which is better for illustrating trend lines, we see that gold is at critical lateral support zone. But there are two more lateral support zones roughly in line with the two major bull market trend lines.
It is difficult to imagine gold declining very hard from current levels, given the superior sentiment backdrop (pervasively over bearish by the usual contrary indicators), but the chart is always the chart and it should be respected by right minded people. Gold holds critical support at 1524 until it doesn’t, see?
Speaking of respect for charts, the sad journey of the HUI Gold Bugs index drives home the point. There were no predictions made in Biiwii land. There have only been probabilities based on status above support, below resistance, etc. In fact, I must once again own the fact that in 2010 into 2011 I had a measured target of 888. Nice one chart boy!
But the important thing is to keep respecting the charts no matter what they do, regardless of whether what they are doing is constructive to your favored plan or bias at any given time. HUI, in making a series of warnings (1, 2 & 3 on the chart) by violating support levels, has come to a very bearish state.
With the constructive sentiment backdrop and extreme over sold status, the index has been a candidate to at least put in a tradeable counter-trend bounce. But yesterday something happened that even put that prospect in jeopardy.
Since this area of the market is one that I remain engaged with fundamentally – the Cyprus hype only adds fuel to the bullish case for gold – my newsletter Notes From the Rabbit Hole will remain open to the bullish case at the drop of a hat. But we will surely not become victims if worst case scenarios come about in the interim.
That weekly chart of HUI especially, has most recently been a negative view since the index lost former support at 460 after making a ‘W’ bottom last summer. That means that Huey must now prove that it is not bearish (by recovering at least the lower of the 2 red dotted necklines) and not the other way around.
Some people dislike technical analysis because it can say some disturbing things that go against everything we think we know. And that is exactly why we need it. The current plan is to be ready for opportunity whenever it arrives on its own schedule.
Current gold ratio setups, a real world view of ratio analysis ‘White Paper’
As the Cyprus drama and other macro events play out and distort normal macro economic signals to varying degrees in the short-term, let’s review the ‘real price’ of counter-cyclical gold vs. the cyclical industrial metals:
Au-GYX bottomed hard in February, MACD sported a positive divergence and now the ratio has turned up hard, despite the economic growth signs in the US. Global growth, especially in materials-intensive China has decelerated.
Regardless, the Cyprus hysteria has driven the ratio up to an over bought level at the SMA 200, which is a logical area for a pullback. Support is noted (green). The target off the bottoming pattern is 4.60 or so.
Au-Crude Oil is also in a bottoming pattern, but has not broken above the neckline. A break above that area would target the SMA 200 in the low-mid 18’s. The two charts above are constructive to the fundamental case of the beleaguered gold mining sector as gold simply must begin to out pace miner cost-input commodities for any kind of fundamental case to be engaged. That is why gold stocks are counter-cyclical.
Turning to the weekly chart of gold vs. the S&P 500, there is a bounce in progress at a last-ditch support level. A failure for counter-cyclical gold to gain traction vs. the great market of happy hopes and dreams would bring on more sweet dreams for US stock market players and a nightmare scenario for hard core gold bugs. The red arrow measures the pleasure and pain, respectively. Support needs to hold here for a near term bull case in gold and especially the gold mining stocks because after all, if it is as easy as throwing a dart at the S&P 500, why on earth would one suffer the agony and ignominy of the gold mining sector?
As you can see a few months on, gold continued its breakdown in Euros but has held our “Gold would be broken below here” parameter. This is an important parameter and it is holding.
The precious metals are making strides here. As tedious as it sounds, any investment case – such as it is – on the gold stock sector depends on the counter cycle, not on the ‘everything’s going up because inflation fears are breaking out!!!’ cycle.
The gold stocks have been miserable, and this is more a reflection of the challenges facing the sector aside from recently depressed gold-to-commodity ratios. These challenges include the S&P 500 out performing gold, geopolitical issues, management execution issues, etc. Through repeated execution failures and questionable decision making we realize that as a group, the sector holds many poorly managed companies, which is why only the quality ones should ever be considered. Mining by its very nature is a difficult and problematic industry.
So disclaimers aside, the real price of gold is a slow and steady indicator of the counter-cycle, which is the time for the gold sector to be thought of as unique. Another chart exhibits proof of the counter-cycle, the Au-CCI ratio AKA the ‘real’ (commodity adjusted) price of gold:
Au-CCI is on a long-term up trend but periodically spikes down when people (and mainstream economists) get giddy about economic growth. Today they are giddy. But a chart is in an uptrend until it no longer is. This one would have to impulsively violate the top shaded support level to reverse the trend.
In a way similar to how the AMAT-SOX ratio (or semi equipment stocks to broad semiconductor sector ratio) that we noted yesterday can be a Canary to a Canary in a coal mine, so too can the gold-silver ratio (GSR) be a more sensitive indicator to coming liquidity problems that would eventually be more broadly seen across the spectrum of gold’s ratios to things positively correlated to the economy. Here’s the GSR, shown by monthly chart approaching an important decision point.
A break upward and liquidity is going to come screaming out of the markets, with a deflationary backdrop the likely play. A break downward and rising inflation fears would be likely.
I realize that posts like this can be confusing and certainly are no fun, but there is a reason that so many market participants are confused right now. Looking under the hood at some of the mechanics going on in the macro markets (i.e. reviewing gold’s ratios) can bring clarity.
Opening disclaimer: I am not trotting out the past to show what a great contrarian I am. Truth is, I have not come close to fully taking advantage of the bull calls last spring and summer. Given what has gone on in the precious metals, it has been all I could do to manage risk to a break even.
That out of the way, this article was posted last May when it was very hard to be a bull:
“Led by near suicidal sentiment among the gold ‘community’, the broad markets recently embarked on a southerly course as well, culminating with ‘dumb money’ sentiment at very bearish levels in technology, energy, financials, industrials and on out to commodities. The last time sentiment was in such a compelling (contrarian) bullish structure was after the damage inflicted upon markets by last summer’s acute phase of the euro crisis.”
Flipping the above on its head today…
Led by near pervasive and still-growing bullish sentiment, the broad market is continuing upward on its course and is culminating with ‘dumb money’ sentiment and momentum being set to over bullish levels. The last time there was such consensus on the economy and the stock market may well have been in 2000.
“Think about the election year pattern, think about how wildly bearish sentiment has become, think about the market’s need to shake out the dumb money prior to rising and most of all think about how policy makers need to be perceived as doers of good; as part of a solution, as opposed to chronic purveyors of an inflationary regime that has been in force most intensely since 2000.”
Policy makers are not only thought of as part of the solution, they are revered far and wide in a reverential and growing rabid manner. This is the ultimate bull rationalization and it is the underpinning of confidence (great word) in today’s market.
“There are still articles showing up in the MSM talking about what a good idea it was to ‘sell in May and go away’. But the truth of the S&P 500 chart begs to differ. Yes, it has been a nerve wracking couple of months, but as of Friday the SPX is above where all but the most astute of the ‘sell in May’ contingent got out.”
There are now articles showing up in the MSM talking about the Great Rotation, the Dow’s all-time highs and a new era for the US economy, which has weathered the Euro crisis and myriad domestic issues as it continues to strengthen. All the talk of inflationary policy makers has gone the way of Goldilocks.
“I do not love this market by any means. But I am still long (and profitable) several positions that were bought down near the lows (Lithium, Rare Earths, a tactical global fund, a global bond fund) and others in technology and energy added since.”
Well do you remember how hard it was to be bullish last summer? Now it is easy to be bullish. Too damned easy.
“Last week as SPX tested but did not fail support at the EMA 200, I held, white knuckles and all. This market may yet prove that the dumb money sold in May; especially if the rally ends up going on long enough to drag them back in again before any coming change to bearish again.”
The dumb money is holding without a care in the world.
“But even if the market tanks tomorrow and stays tanked, the dumb money sold in May. Sentiment structures said so then and ‘price’ says so now. The big question is whether or not the dumb money will buy back in setting up the opposite scenario to May.”
One opposite scenario, comin’ up?  No comment on timing, see new post.
If you want a newsletter that works very hard to be right about these big macro turns, then give a Notes From the Rabbit Hole subscription a try. My personal trading can range from very good to poor. I am human. But the themes carried forward in the newsletter are usually nicely in alignment with the macro picture, from a contrarian’s point of view that is.
If you are a speculator, the extreme situations currently in play in the broad stock market (95% of the way to a potential ‘triple top’ scenario price-wise, and 80+% of the way time-wise) and the gold market (impulsive price drops amid growing concerns that the bull is dead despite rising money supply data) as of March 1, 2013 are the situations that you wait for.
In short, pivot points are the place to deploy capital (either to the short or long side) for big gains. The stock market has been on a cyclical trend for 4 years and a secular, mostly sideways trend for 12 years. Gold has been in cyclical downtrend for 1.5 years and a secular uptrend for 12 years. That is all well and good but trends can be a grind, filled with ups and downs, stops and starts.
A big macro pivot point on the other hand can be a career maker – if you can catch it at the right time after correctly gauging its potential. This is no easy task. If it were we would all be mega rich due to our amazing ability to call the markets. Unfortunately, the markets have a great way of throwing curve balls that not only have a wicked spin on them, but also burrow down hard and in. Maybe it is heavy sliders that the market continually throws, maybe it is sinkers. Whatever it is, our bats are often sawed off just when we think we are dialed in to a grand slam.
So moderation and risk management are what we should practice most of the time. It sounds boring, but when a big pivot comes, you will be glad to be in position to capitalize on these rare events. As an example, people who had cash in 2008 and 2009 were afforded the opportunity to buy all sorts of assets on the cheap, beginning with the precious metals, then key commodities and finally extending out to the stock market.
2008’s deflationary destruction was a contrarian macro pivot point as this Time Magazine cover with its depression-era bread line photo said all anyone needed to know about what the play would be.
And then came Tony Robbins sometime in 2009 warning the public about the dire consequences of the new depression and the rest is history. A cyclical bull market was born of too much doom, gloom and certainty by the public that the world as we knew it was over.
Dial ahead to today and we find the estimable Time Magazine asking…
What does this tell you? Does Time know what it is talking about this time or is it just reflecting the public’s view of the world back from mirror into which it dimly gazes?
Time Magazine published photos of breadlines and headlines reading “Depression 2.0″ at the very beginning of the current cycle, at exactly the time people should have been buying. Today, just below a potentially profound macro pivot point Time seriously ponders a “great rotation” into stocks. Sure, they could get it right this time. But what do you think are the odds of that?
You see, you have got to think for yourself if you are going to effectively practice what is necessary to succeed over the long-term in the markets. No analyst, guru or newsletter writer should be followed in a passive manner. How do you know they are not just trend followers, doing what is comfortable; doing what seems to feel the best and make the most sense at any given time?
It seemed to make the most sense to be bearish in early 2009. It was time to be very bullish. It seems to make sense now to be bullish now because it feels good and the apparent dangers are dissipating as policy makers assure us that they remain benevolent and in control. They are not in control, but it has been a long, hard battle for the formerly embattled Ben Bernanke to be given the respect of his predecessors. He now has it.
Just look at his smug self-satisfaction. The benevolent hero in full control. We will continue to work on a macro pivot for sometime in 2013 until given reason not to. In 2008 I became bullish on the gold sector first, then in early 2009 there was crude oil, copper and soon a Pandora’s box of asset markets giving contrarian bull signals. That was a macro pivot.
Today we should look out ahead to gauge the possibility of its opposite becoming engaged before too long. I believe the bloodbath in the precious metals may be a precursor to something profound. The PM’s did after all, lead the great cyclical bull market dubbed here as “Hope 09″.
For profound events to work for you in any sort of a good way you must be prepared for it. Being prepared means opposing psychologically powerful forces like the will of the herd, which probably comprises 90-something percent of the people. It is harder than it sounds.
The precious metals and especially precious metals stocks have been sold down to an extreme as a result of severely over bought status on both long-term (summer of 2011) and shorter-term (September, 2012) time frames.
Cries of ‘foul play!’ by the gold “community” have almost ceaselessly attended the drop, but the signs for anyone who would have wished to avoid the worst of the damage were right there in the freakishly bearish September/October CoT data (now quite bullish for gold), over bullish sentiment data and over bought charts.
Regarding the CoT data, NFTRH 227 observed…
Remember our “who are those guys?” Butch Cassidy references? Well we now know who those guys were. They were the bringers of a then unthinkable (by a brainwashed gold community) correction to an over bullish sector. They meant business.
The “community” has been obsessed with finding a bottom for the precious metals and especially the gold stocks. One well known chartist has flashed from bullish to bearish and back again enough times to make the community’s collective heads spin in unison. Ghost stories about manipulative and evil entities (yes, they are there, but a speculator’s job is remain intact first, speculate second) abound. Emotions are running high.
And there is in my opinion too much scouting for a bottom going on as entities giving away free analysis jockey into position to claim the prize of new would-be followers, customers or subscribers rushing into the sector looking for stock picks after the storm passes.
But the technicals on most gold stocks are not good, no matter how over sold they are. Sure they are bouncing and sure a bounce can become a full recovery. But in TA, there are very definite resistance zones to be dealt with before this can be called. People can speculate all they want, but I would advise not to take bottom calling to heart until it comes with some parameters other than ‘deeply over sold’ and until it comes from entities with no obvious bias.
It seems there is a long tradition in the market analysis community of being ‘the guy’. ‘The guy’ who made the Russell 1980-like call. This ritual of making calls can be worse than useless, it can be dangerous because many investors are just looking for validation of their views and an ‘okay’ from an authoritative figure.
With respect to my own analysis, I once received a criticism (within an overall favorable review :-)) from a subscriber and blogger that Gary “often says ‘I don’t know'”. But here is the thing about “I don’t know”… if you don’t know you don’t know, you know? If you don’t know then writing as if you do know is dangerous. Ya know?
Back to the current situation in the precious metals, gold is bouncing from very important support, has lurched back to a bullish CoT alignment, gold newsletters are very bearish and public opinion has submarined…
All good and it should ultimately be bullish.
Silver is in a somewhat less constructive state by these measures and the gold stocks, so obsessed over by a “community” still champing at the bit to speculate, are in a precarious technical situation until they invalidate some breakdowns. That is the truth.
Am I bearish? Are you kidding me? With this contrary setup? But we are in a process with not only the precious metals, but the broad markets the world over. And that process is a drawn out affair that should see major changes in 2013 and I just ask people to see the bigger pictures and keep the greed impulse (at least as prevalent in the gold “community” as in other sectors) under control, and have patience.
HUI may be on ‘the‘ recovery right now, but it has most definitely got lower targets in play as well; some much lower. These targets will only be invalidated when certain upside resistance levels are taken out. TA does not predict; it guides.
Today we use the recent events in the gold sector as an example of how effective use of Sentiment and Technical analysis can keep us on the right track despite what we may believe with all our rational being at any given time.
I am bullish on gold. That is simply because I believe you can’t sustainably grow an economy by layering more debt and leverage upon previously unresolved debt and leverage. Since 2002, I have been a gold bull and have no plans to change that orientation at this time. Quite the contrary.
I have probably written just about enough about the ‘gold generals’ and the strident psychology that tends to lead the gold “community” into a painful abyss every few years. The time to talk about risk in the precious metals is when they are blowing off to the upside amidst bullish animal spirits, as in 2011. Or on shorter time frames, as during the run up to the much hyped QE3 announcement in September:
“Sentiment is over bullish in the precious metals. Public opinion is over bullish, Hulbert’s HGNSI is over bullish and the CoT data show that the little and big speculators are over bullish. This should be cleared out before we renew our bullish enthusiasm on a risk vs. reward basis.” –NFTRH 208, 10.14.12
To complete the above story, this warning was simply a notice that the precious metals were due for what I thought at the time would be a normal correction. As we know, what followed has been anything but what most gold bugs would consider normal. Later this article will discuss TA and what its parameters (disciplines, kill switches, trip wires, etc.) can do for people to keep them on the right track.
The time to talk about opportunity is well, now, when gold is being sold hard and people are being compelled to swear off the precious metals story in favor of what is actually working. To add insult to injury, the gold mining sector is being absolutely decimated if not yet fully in price, then in perception (much of it earned by the way) as the most high profile geologist/sector analyst Brent Cook has just produced a widely disseminated and definitive piece, defining myriad reasons one should avoid the sector.
I am not a stock analyst or anything like an expert on any stock sector. That is not my gig. But I have learned a lot over the years and a big lesson was avoid the garbage, even in a bullish sector. With gold stocks now riding the bear hard, this is even more important because a lot of the garbage is not going to be there when the bear phase ends.
On the other hand, there are discreet quality situations out there. None in my opinion, as quality a situation as actual gold, or monetary insurance. But there are quality ‘plays’ and as they are puked up with the garbage, that would be an opportunity. But again, the metal is for insurance against the debt and leverage being employed to keep the system running. The stocks are a play (a sometimes dynamic one), and nothing more. This sector has proved that, even in bullish phases, it is not investment worthy as a whole.
Sentiment & Technical Analysis
Sentiment and TA can most certainly help people avoid the type of pain now being inflicted on the die hard gold “community”. We noted above how sentiment came into play as an over bought sector became too favored and over bullish. Once the correction started, it was time for TA to guide.
TA predicts nothing. But it does guide the way and often sets targets and parameters. HUI became over bought (see MACD and RSI extremes) in September and due for a correction as it blew through the 460 level, which had been a significant parameter to a topping pattern that formed in 2011. This was a bullish event. But the vertical drive had to be corrected and it would have been normal for the correction to find support at 460, an area that also included some important moving averages.
Personally, I became quite bullish as this area was tested and sentiment had come off its over bullish readings. But folks, things then quickly became very abnormal as an important support zone was crashed and turned to resistance. This is when the gold “community” began finding evil bankers and various boogeymen behind every move. And they were there alright, in the persistently bearish CoT data released every week for silver (see right side bar under ‘Technical & Data’).
HUI’s loss of 460; silver’s ominous CoT structure; this thing was now going abnormal to the preferred bull case. HUI went on to sport a potential bottom with support at 420; crashed. 395; crashed. And so on. But things became abnormal when 460 was lost; no ifs ands or buts.
The main point I want to make is that there should be no predictions nor defiance when managing markets. There should only be probability, risk vs. reward and discipline first and foremost to guard against our own preconceived notions or dogmatic beliefs. The point of being a market participant is to be intact first and capitalize second.
The market never cares what we may believe. People did not believe in the S&P 500 last summer. It did not care about this. People believed in the precious metals in September and the market as it turns out, did not. Evil bankers? Yes, probably in some quarters. Meddling policy makers? Most definitely. Right and wrong? There is no place for righteous ideology in the markets. There is only right and wrong regarding market direction.
I thought I was right in October as HUI began to correct September’s excess. I found out I was wrong when the 460 trip wire was hit. This is all about adjustments while maintaining big picture views, not about making predictions and holding to them through the damage. A bull who holds through thick and thin could have been a better and stronger bull with more discipline and less defiant dogma along the way.
It is okay to feel greedy now, in anticipation of coming opportunities in the precious metals. But that only applies to people who used discipline every step of the way to be in position to be greedy by being fearful when appropriate. That’s the market. Regular stock bulls are becoming ensconced in greed now. Many gold bugs are gripped in fear. The world turns and TA and sentiment help in the process of not getting thrown off.