So we have been making a fairly big deal about the over bought state of silver vs. gold or put another way, gold’s extreme under performance to silver. Witness the Gold Silver Ratio (GSR)…
The stock market put on a hard bounce yesterday, but little has changed throughout the spectrum of indexes and indicators. The Dow and Tranny are trying to get the traditionalists in the Dow Theory community excited, but NDX, BKX, RUT and several others are simply bouncing as things stand now at 6:07 US Eastern. NDX for example, at 3613 is still within the 3600 +/- bounce objective we laid out weeks ago.
After Retail Sales at 8:30 we may have a different story, but as of now nothing has changed in the bull/bear mix as a result of yesterday’s action.
As we reviewed in an NFTRH update, the VIX has gone back to sleep and is in a support area. As for its partner in market anxiety, the Gold Silver ratio (GSR) got bonked but is unbroken.
Along with the long bond’s bottoming potential, the sneaky gold silver ratio has been in a classic set of higher highs and higher lows (i.e. a bull rally). The last year has been chock full of screwed up market signals (even to the degree that a flurry of well known market luminaries famously got out of the game) I assume compliments of the Fed and friends working the markets 24/7. But normally (ha, what a word, normally) a rising gold silver ratio indicates liquidity stress developing and possibly an oncoming economic issue.
Also normally (again, what is normal now?) a rising GSR does gold miners no good, other than to indicate a time of positive underlying macro fundamentals that would ultimately help the sector.
AKA Things 1-4. Thing 1 in the top panel is gathering a bullish looking little pattern, which is theoretically a bearish hint for asset markets. Yet things 2, 3 & 4 are okay as 2 & 3 continue to correct and 4 remains buoyant. Market liquidity is what would be at issue if these things break bearish.
Yesterday the market’s signal was “Gary, you lost on this go round with the puts on SPY; admit it and take the loss!”
Today it is “Gary, your Asia, Emerging Market and US tech theme is over heating a little; think about taking the profits soon.”
I like neither of these charts if I am a bull. The gold-silver ratio is making a weirdly bullish pattern at the top end of a support zone and the VIX is still in a series of higher highs and higher lows.
These appear to be bearish indicators beneath the joyous “China’s growing and we may not drone Syria!” endorphin release. Just sayin…
The gold silver ratio (GSR) hit what could be described as a heavy resistance area a few weeks ago as the markets roiled and obsessed about ‘taper or no taper?’ and liquidity pretended to come out of the markets. I say ‘pretended’ because rising junk to investment grade and Treasury bond ratios turned out to be a secret ‘tell’ beneath the surface that risk was still indeed ‘ON’.
If the precious metals are going to find relief silver probably needs to out perform gold. GSR works as a sort of metallic credit spread after all with the less risky and stodgy old relic doing better (or less worse) than his wild little brother when things get tough on the market liquidity front at least as relates to the ‘inflatables’ like the precious metals, commodities and some global markets. The disinflationary pull and firm USD has helped Goldilocks see to it that there has been plenty of liquidity for US stocks thus far.
Just as silver blew off and topped out to signal the end of the last inflation hysteria in spring, 2011 (tanking the GSR) it should bottom out and lead vs. gold in any new inflationary cycle. So far? What inflation?
But the GSR did hit that big resistance zone, which was actually formed back when the Fed announced QE 2 and broke the GSR down hard from what I thought at the time was a nice bottoming pattern.
It has been a long, hard road for gold (and silver) bugs since QE 2. Silver is in a big support zone, but it is also a thick support zone. Just as the chart above can allow for more spikes up into resistance, silver can do some white knuckle testing of its big support zone. Here’s the chart from NFTRH and eLetter updates this morning.
We are looking at an equal and opposite RSI over sold to the former RSI over bought during the manic 2011 climax. Silver has already done the negative equivalent of the first over bought RSI cluster, but what concerns me is that there was a second hump to an EXTREME and terminal over bought condition. Could the opposite come into play?
Just a geek asking questions my friends, not trying to make predictions. Better to ask such questions on a happy precious metals up day than when… well, you know.
I think in the context of 2 years of post blow off bearishness we are getting close to a bullish phase. This argues for contrarians to be on alert, given the supremely bearish sentiment in this utterly destroyed sector. But still I cannot help but wonder if those RSI’s are going to come to an equal and opposite state before the real bull relief comes.
A strong and definitive move, led by silver, in the precious metals would be helpful in negating the prospects noted above.
This liquidity sucker has been on a grinding drive higher since mid-April. In a world suddenly replete with scary charts (hello bonds), the MACD on the daily gold silver ratio shows room for another burst upward.
Worse still, check out the weekly…
I have been writing for months now about the risk building in this market. But you don’t tend to get taken seriously when the thing just bloats and floats carrying all the dumb money. Just ask Prechter.
The weekly view of the GSR should scare the bejeezus out of anyone who cares enough to look beyond the easy to digest and linear financial analysis readily available out there. Global bond markets are imploding and funding is being terminated. Period.
The market will bounce around and indeed I am still hoping for a pop to consider buying back bear positions. But the situation is not good said not the wishful blogger, but the GSR, bond market, recent sentiment profile, etc. The Fed is doing what the market tells it to do with this taper hysteria we have going on now.
A couple weeks ago in NFTRH 241 we reviewed the bullish looking gold silver ratio (GSR) and noted a baby inverted H&S from which it is approaching a measured target.
A relief phase, where silver out performs gold could kick in at any time. But then we also note that the big downtrend out of 2008′s blow off top was broken as the little H&S formed and resolved upward.
The bad news is that this indicates liquidity contraction and the worse news is that had better not be a big inverted H&S that has formed because if it is, it’s implication is not at all good for much of anything, including possibly even the prices of silver especially, and gold. Gold’s value is different from its price.
Price could drop considerably and incredible value could still be retained depending on what is happening around the barbarous anchor. Please get that concept about gold.
Let’s see if silver gets a turn to lead in the short term, but stay on alert for the big daddy inverted H&S. It is truly a concerning picture for most investments positively correlated to the economy. Sort of a gold-CCI ratio on steroids.
Well me, for one. Indicators are simply a must for me to be used in conjunction with regular TA. But the indicators have blown a gasket lately as economic contraction is lurching into the picture, the Gold Silver ratio is doing its job of indicating that, and yet the stock market levitates while precious metals are destroyed and commodities are not far behind.
Here is the GSR through yesterday. It’s up again today.