Tag Archives: risk management

Risk Still ‘ON’ by TLT-SPY Ratio, but…

TLT vs. SPY is but one indicator of the current ‘risk on’ condition for the stock market.  The broad market (unlike some individual stocks and sectors; seen retailers lately?) has not made any technical breakdowns and beneath the surface indicators like TLT-SPY have not made any definitive moves to rein in risk taking.

But it is indicators like TLT-SPY and several others that would ultimately tell the story of a ‘risk off’ situation.  For now, TLT-SPY has positive divergence and is grappling around with the 50 day moving averages.  It looks constructive at least with RSI above 50, although this has happened a few times previously before ultimate failure.

Conclusion:  We’ll just keep our mid-year plan (+/-) for a market top front and center until something triggers to change that.  This market could well have another mighty suck-in in store for the public.

tlt.spy

Precious Metals: Risk Management to Opportunity

What Has Been

A solid 2.5 years of risk management (to varying degrees) has been required of precious metals investors.  It was most intensely required after the announcement of QE3, when the net commercial short position in silver began a relentless march toward a very bearish alignment in late 2012 and then the HUI Gold Bugs index lost an important support level at around 460.  Here is the chart of silver with a heavy commercial net short position from NFTRH 215, dated 12.2.12:

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Let’s Own Our Bad Calls

Following charts keeps you on the right track in that it forces discipline.  But bad calls like “technically, a bounce toward the 50 day averages would be the ideal bear opportunity”, written right there on the chart, come with the territory; for we non-gurus anyway.  So let’s own this one…

spx

…and all the others that have not worked out over the years.  Like oh I don’t know… like an HUI target of 888 maybe?

As with risk control on the gold stocks over a bigger picture, risk (with regard to the very real possibility that the short term bearish call on the SPX was wrong) was controlled at the noted resistance intersection on the chart.  SPX had ideas other than what I had projected.

It’s simple.  Nobody is going to be right all the time, but risk management always plays a role in success over the long haul.  Think of any given trade at any given time; half the people are on the wrong side of it.  Manage risk.

[edit]  This mess in the VIX helped with the risk management along with SPX’ break of resistance.  VIX formed a lousy looking pattern and pooped the moving averages.  Now it looks to the ‘higher low’ parameter to see if it can’t whip up some summer discontent.

vix

Gold Wipe Out Highlights Unbiased Risk Management

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.

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HUI daily chart, from NFTRH

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.

What Now?

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.

Bottom Line

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.

Biiwii.com, Notes From the Rabbit Hole, Twitter, Free eLetter

Reset

I am now neither short nor long the gold miners.  3X bear DUST was sold today and so were the last few miners it was protecting.  ZSL was sold as well in the now 100% cash speculation account.  In the Model portfolio ZSL is still protecting a silver stock position and HDGE is there too, as a small introduction to the short side of this market against what are very few remaining long positions.

I’d rather be a relaxed market watcher and analyzer from this vantage point and I think right now everybody could use some perspective that such a state promotes.  NFTRH subscribers were apprised of the latest HUI technical problem last week, just as the first hint cropped up.

I go easy on the promo because it is pretty hard to promo risk management, which has been the backdrop for so long now.  But if I were to promo I’d tell you that for 29 bucks a month (or less than $26 a month on an annual subscription) NFTRH stands on guard at all times in support of its clients’ interests.  I don’t owe anything to the gold “community” and some ideology.  I owe everything to my subscribers.

Now, from a healthy mental state I look forward to opportunity and care not how long it takes to get here.  It could be this afternoon or it could be in June, but it’ll come.

Technical Analysis – Put Egos Aside & Respect the Charts

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.

au.mo

Au monthly chart, log scale

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?

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HUI weekly chart, linear scale

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.