Weekly Wrap

Gold and silver are flying! Unusually, they are flying along with stocks.  The ‘normal’ relationship has been counter-trend with risk on = stocks up, gold down. And risk off = stocks down, gold up.  But last week, saw a rare coincident rally.

And at the same time, the US dollar is getting squashed.  Am I starting to think the unthinkable?  And what is that, I hear you ask.

It is simply that because of the persistent weakness of the US economy and the growing dangers of China’s credit Zeppelin bursting into flames, the Fed will soon be forced to cease the tapering in its tracks and bring back full-bore QEInfinity and damn the torpedoes – full steam ahead.

What heresy!  Just when the markets have finally gotten round to believing the Fed has cemented tapering into place, we see these perverse market moves.

Hey – I’m nor complaining since I am long gold and have taken great profits out of my Dow campaign on the big 1000 pip decline and now on the rally.  But this theme has thrown a wrench into my Dow analysis.  To be honest, I was taken aback by the deep upward retracement in the Dow (and the Nasdaq has made a new high last week).  But the Dow has a history of deep upward retracements to the big declines, so nothing unusual here.

The US economy is sinking

Adding to the poor numbers out of the US this year, we had very weak December Industrial Production yesterday, and capacity utilisation also much lower (deflationary) with manufacturing down a whopping 0.8% for its biggest drop in many months.  Earlier, jobless claims have been rising and retail sales have been less than sparkling.  Auto sales are tapering (!) off.

So how did the market take these dire numbers?  Yes, that’s right – stocks rallied big-time.  Suddenly, bad news is good again – and that backs up my thesis that the market expects the Feb to fire up the presses again.  So it will be deja vu all over again.  But does this mean we will see another terrific bull market this year?

But how likely is the Fed will suddenly switch course?  After all the hoo-ha about tapering and prepping the markets for it?  Odds are not good on that front – and that is why the end is nigh for the stock rally.  Once the market sniffs that Yellen is in no mood to abandon the tapering, it will fall like a stone.  The Fed are very concerned about their ballooning balance sheet and have no appetite to crank it  up further.  They will only do that after the markets have fallen very hard.

And if they do send out stimulus signals soon, the market will almost certainly smell a rat and see that as a panic move.  What do they know about the economy that is so scary?  All of a sudden, QE becomes a big negative.  The effect of QE on the economy is diminishing by the month and the Fed knows that.  They are out of bullets.

And of course, there is the China syndrome.  The House of Cards could topple at any time.  The massive Chinese trust funds will try and roll over their debt this year and if things jam up just a little, it will spell curtains as the inevitable defaults will spread like wildfire.

The Mom n Pops are back!

This week’s AAII survey shows a huge jump in bullish sentiment on the rally.  Bulls now at 40% (+12% in week) with bears at 27% (-9%).  That’s a massive swing – and brings the reversal back down that much closer.  Cash will be king again very soon in the deflationary collapse.

And now Bitcoin crashes

The bitcoin phenomenon is part and parcel of the bullish mania surrounding anything other than cash.  In other words, investments.  From real estate to stocks to art to digital currency, investors have swapping cash for assets in their droves.  Today, cash is the most despised asset class in history.

But as a sign that the end is nigh, Bitcoin sunk to $300 last week on Mt Gox (was $1200 a few weeks ago) as the Silk Road II site was hacked and over $2 million in bitcoins were stolen.  I guess they are not as secure as people thought. That bubble is bursting – can equities be far behind?

And last week, I read an article on young artists whose work was fetching hundreds of dollars are now selling it in the hundreds of thousands just a few months later.  This mania is another symptom of the mountains of cash (and credit) out there.  We have seen the first whiff of contraction last month with the emerging markets drama.  When it spreads to the west, watch out below.

PLEASE NOTE: THE CHARTS ON THE NEW PLATFORM ARE DIFFERENT!  HOPE I CAN GET USED TO THEM SOON.

GOLD

My latest gold campaign started early January near the $1200 – 1220 level when bullish sentiment was on the floor and in single digits.  Did you see any mainstream (or otherwise) articles advocating investing in it?  Neither did I.  Of course,this was the ideal time to go long. There were plenty advising shorting or leaving alone. That was when Goldman Sachs came out with their infamous sub-$1,000 forecast (which they still maintain).

But now gold has rallied $140 to hit $1320 on Friday, I am starting to see articles asking how to make money in gold! Naturally, this has me worried.  One of my golden rules is when a trend has been noted by the MSM, it is nearly over. But the rally has been orderly and latest COT data shows a normal build-up of longs by the specs – no massive short squeeze – yet.

I sense the trade is not yet crowded but when it is, I expect to see many forecasts calling for $2,000 and even higher.  We are not there yet.

Many will be saying the rally is on because investors fear hyper-inflation (remember that?).  And these may be the same people who believe Fed tapering will cease and will crank up the money supply.  Others will say it is because of increased demand for the metal in China. Money is flowing back into gold EFTs, after all.

Remember, I had a $1400 target from December and have not altered my view.

There is an ominous gap just above current level which would be closed if market can reach the Fibonacci 62% level around $1330 – 1340. Maybe we will reach it next week.

DOW

Latest COT is most revealing.  Hedgies have massively swung to bearish side, as have the small specs on this rally.  This has set up a huge short squeeze, which is in progress.  And in the e-mini S&P, the situation is even more stark with hedge funds swinging wildly to the bear side.  The commercials have doubled their long positions in that week – a massive increase.  This spec bear swing is also matched in the e-mini Nasdaq.

So in all of the US stock indexes, last week saw a huge bearish swing by the specs.  The long side is setting up for a big disappointment..

On the daily chart, I have a new tramline trio working.  I like then, althoug they have many overshoots especially on the upper line.  The market has rallied to the centre tramline and will either jump above it or be turned back here is a kiss.  Next week will be critical.

NASDAQ

The rally here has been much stronger than in the Dow as the Nas has made a new high last week (but not an all-time high, as the Dow has):

Just admire the strength of the rally – up 9 days of the last 10, but is is sitting on my upper tramline.  Will it burst through or bounce down off it?  We shall know early next week.  I have no clues at present, but the January dip is in a clear A-B-C, as I suspected at the time.

 Have a great Sunday afternoon!