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Where's the Wall of Worry?


 -- Published: Monday, 30 June 2014 | Print  | Disqus 

Here we are with yet another options expiry approaching this Friday and sentiment wise, nothing has changed for years. As far as speculators / hedgers are concerned, stocks are toppy, and precious metals are going to the moon – sort of. That is to say, according to the most recent readings of key US index open interest put / call ratios and short interest, with updated charts here and here respectively, with some minor exceptions, not much has changed in this regard, where market participants are still generally bearish on US stocks, and bullish on precious metals, which is why prices travel in the opposite directions of these sentiments.

Why is this? Answer: Because of computerized trading, and the algos that control price movements, exploiting the biases of speculator betting practices such that at the margin, traders are pushed to cover positions, causing amongst other things, contango related reaction in the cash markets. And the fact it’s all being done at the speed of light, with HFT controlling such a large part of the trade now, leaves simple mortals helpless against this with the mindless repetitive betting practices of speculators / hedgers who continue to think they're reacting to events rationally, while the machines exploit this weakness with emotionless precision.


Yup – the Boys From Brazil have the markets rigged up ‘real good’, and nothing will apparently ever change that, because again, the speculator / hedging crowd will just keep repeating their negative behaviors over and over again, making them big time idiots in Einstein’s books. Sarcasm aside folks, although put / call ratios have been rising for both GDXJ and NUGT of late, allowing for this little rally into options expiry (along with a little help from Al Qaeda), one must remember that until these ratios tick up well over unity across the board, as long as market mechanisms remain the same, or some external / other (think they run out of physical) force kicks in, the bureaucracy’s price mangers will likely be able to smash precious metals prices back down at planned intervals, aided and abetted (for example) by the hedge fund monthly window-dressing cycle.


Of course such a moment may be closer than one may think, especially since other signs, with equity players apparently all-in on the stock market again, a good example, making a top in stocks / bottom in bullion prices possible in July, if not sooner. All we would need is for speculators / hedgers to come to their senses and stop these negative behaviors that has now morphed into one of the most profound manias (if not most profound considering its global reach) in the history of mankind. (i.e. the mania in risk management.) Or maybe the ISIS takes Iraq (and its northern oil fields), which sends crude oil prices to $200 – who knows. One thing is for sure however, if the bureaucracy’s price managers / mainstream media are able to spin this one like all the others, and speculators return to their old ways, expect precious metals to be attacked again into month’s end.


How can we know about probabilities in this regard? While other newsletter writers and such are running around pointing out the inverse head and shoulders patterns and other positive technicals; still, this does not make for a sustainable reversal if the money flow is not there. ‘Show me the money’ is one of the more famous movie related catch phrases of all time, and this sentiment definitely applies here. Therein, and in an effort to keep this as simple as possible, watch the SPX / SLV Ratio. If it closes below the large round number at 100 for two days in a row, we will have to assume it has topped, and aside from a test that could come at some point in coming days, is on its way to sub-10 trajectories. That is to say, I believe that ultimately, this ratio will be trading below 10, when the Dow / Gold Ratio (DGR) is trading below unity (1), some time in and around 2021, a Fibonacci time interval off the year 2000 start point of the bull market in precious metals.


Returning to the here and now however, smaller and more speculative stocks should not be leading the move again (like at Christmas), because this sequencing does not show the proper sentiment (psychological) backdrop, one of fear and ‘wall of worry’ climbing, necessary to sustain a lasting move. (i.e. with the larger and ‘safer’ stocks out-performing first.) Of course we know why this is happening, it’s because the open interest put / call ratio for GDXJ has taken off to the upside, threatening to take out unity. (i.e. because some speculator(s) think deflation is coming and this should hit the group hard.) So if the SPX / SLV Ratio takes out 100 on the downside with the juniors out-performing, what does this mean in this respect? Answer: I don’t know. I do know however, that if this ratio collapses over the next fortnight, say post options expiry this Friday, so will the juniors in all likelihood.


What’s more, what about the performance of the juniors (or any stocks for that matter), if the broads turn lower with a vengeance? Exactly. What happens then? Will the Boys From Brazil who live in New York allow the computers to keep precious metals stocks buoyant if everything else is crashing? Past spread trade related short positions put on by hedge funds to exploit the perma-bull betting practices of precious metal speculators, one does need wonder in this regard. So, in terms of the validity of a signal by the SPX / SLV Ratio dropping below 100, not to mention all the other breakouts that could affect another ‘fake-out breakout’ like at Christmas, all I can say is stay liquid in the larger plays (if you are buying) for now, and keep your thinking flexible.


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Good investing all.


Captain Hook


The above was commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, June 16, 2014.

Treasure Chests is a market timing service specializing in value based position trading in the precious metals and equity markets, with an orientation primarily geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven to be very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested discovering more about how the strategies described above can enhance your wealth should visit our web site at

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions.

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