Portugal - Gorgeous Bear Pennant

For those who care, sorry for being away so long. I have been pre-occupied with other interests recently. Posting is likely to be sporadic for a while.

Silver has gone parabolic on a short-term basis and Gold is breaking to new highs on a daily basis. Things are obviously frothy and overbought here and now is not a time to establish new longs in the precious metals sector. I am rather enjoying the ride, however, as I don't trade my physical Gold. We will remain in a bull market in precious metals until the Dow to Gold ratio hits 2 (and we may go below 1 this cycle). Gold is good, stocks are bad.

My "long physical Gold, short stocks" trade is only half working (oops). We are back into nosebleed sentiment territory (again) in paperbug land, and I remain stubbornly uber-bearish here on equities. My favorite technical chart right now is of Portugal's stock market (using $PTDOW as a proxy). Here's a 20 month daily candlestick chart of the action thru yesterday's close:



Robert Prechter mentioned on an interview the other day that a recent daily sentiment reading on the U.S. Dollar was 98% bears. Since all fiat is trash, I am still looking for a powerful rally in the Dollar relative to other paper promises, which will throw stocks and commodities into a steep correction. A stock market crash is absolutely still on the table and risk is very high in common equities right now

Mr. Market keeps telling me the same thing: stop playing in the casino, put your casino money into physical Gold (and a little into silver), and sleep well. Some day soon, I may just listen...

Revisiting My Gold Stock Buying Plan

I was wildly bullish on Gold stocks during this winter and spring. I am now in watchful waiting mode, waiting to accumulate Gold stocks at a cheaper price. I have been more focused on shorting the S&P 500 over the last few months, but I watch the Gold sector every day.

I don't trade physical Gold, but I am always looking to accumulate more on weakness if I have cash on hand. I don't own Gold miners, I trade them. I don't think buying and holding Gold miners is a bad idea at all this secular cycle, but I have chosen to buy and hold the Gold sector via physical metal and to trade the Gold sector using the miners. It is a personal choice, as we all must make when investing and managing our own money.

I "gave up" on the long Gold stock trade in May, when Gold stocks failed to show the strength relative to the metal price that I thought they would be showing if we were on the verge of a major cyclical bull thrust higher. I am bearish on equities in general, but Gold stocks can move higher despite a falling general stock market and have many times in the past. I am more concerned about the Gold miners' lack of relative strength compared to the Gold price than I am about a stock bear market.

I created my own thesis and "road map" for the anticipated Gold stock (as a sector) correction back in May. Since that time, the major Gold stock indices (i.e. $HUI, $XAU, GDX) have made a kind of triple top formation, while the junior sector, using GDXJ as a rough proxy, has broken about 5% higher than its May highs. In other words, pretty much sideways action, but the sector has not yet corrected as anticipated.

The point of corrections is either to "scare you out" (i.e. price plunge) and/or "wear you out" (i.e. take a long time moving little in either price direction). Of course with Gold stocks, even a "wear you out" correction can have 10-30% swings in either direction. C'est la vie in the Gold patch.

Only time will tell if my anticipated correction in the GDX ETF down to the 40 level will prove correct. For now, I am watching and waiting for a better opportunity in the Gold stock sector. Why? Because Gold stocks are still underperforming the Gold price, and this is corrective-type action in my opinion. Couple this with my uber-bearish outlook on the stock market right now and I continue to believe that Gold stocks are headed for a significant correction. This is not a bearish outlook, this is cash on the sidelines looking for a better entry point. I may get it, I may not (such are the risks of speculating). If I get it, I will be betting the family farm from the long side using long term LEAP-type options on GDX and potentially on a few individual miners. I also plan to go long GDXJ as well if I get my anticipated correction, but to a lesser extent since this ETF doesn't offer long term options.

Here is the chart that keeps me from being bullish on Gold miners right now, a 2 year daily chart of the $HUI mining index divided by the price of Gold (i.e. $HUI:$GOLD ratio chart):



This analysis is irrespective of the general stock market and stands on its own. Couple this with a "toppy" looking Gold chart (1 year daily $GOLD candlestick plot):



For those who can't see how Gold could possibly correct here, have you seen the latest Commitment of Traders chart for Gold futures (if not, check here)? Lots of paper chasin' momo hedgie quants in on the "long paper Gold" trade right now, just waiting to hit the sell button at the first sign of trouble.

I remain wildly bullish on Gold and Gold stocks for the long term. I remain wildly bearish on equity markets for the intermediate term. I remain in bored and watchful waiting mode when it comes to the Gold patch for the short term until I see a meaningful correction, which I am thinking (hoping?) will complete before the year does.

Deja Vu All Over Again

This chart should cause a sense of dread for all the retail investors left that are still still holding and hoping when it comes to general equities (chart stolen from a recent piece by Carl Swenlin):



Mutual fund managers, in aggregate, are like retail investors. There is no added value provided by these managers when reviewing this chart. Highest levels of cash occurred at the bottom, lowest levels of cash at the top. The August 2010 level is actually a record low percentage of cash over the past 5 years.

We are also set up to have a Volatility Index ($VIX) sell signal on stocks:



Equity put to call ratios remain at low levels for an equity bear market (i.e. levels that mark a stock market top, not a bottom). I think the current short squeeze will run out of steam this week, creating a significant top before a devastating plunge.

When it comes to Gold, I remain firmly committed to the long side via physical Gold that remains my largest holding. I am not interested in Gold stocks right now as I am skittish on all equities here. However, I am VERY bullish on Gold equities for the long term and hope to accumulate on weakness this fall. Gold stocks continue to underperform the metal, which keeps me in conservative mode and continues to make me think we are still in a consolidation phase for the short to intermediate term. I continue to think the U.S. Dollar is going to have another major rally to the upside this fall despite its horrible fundamentals.

I am still heavily short the S&P 500 via puts on the triple bullish UPRO ETF. The only changes I have made to this position are that I sold some puts as a hedge against my position and cashed this hedge out, using the proceeds to add to my short position on Friday. So, I am more net short now than I was a week ago.

When the mutual fund redemption requests start pouring in again on the next drop, mutual fund managers will have to sell significant amounts of stock due to their low cash positions. This, along with the lack of the uptick rule and the heavily computerized trading currently going on, will create an avalanche of selling this fall in my opinion. I think the herd will be forgetting about the confirmed Hindenberg Omen on the books at just the wrong time. Though I think we could have another up day or two this week, I am keeping my crash helmet on for the fall.