Monday, September 30, 2013

Going Digital

Since our last note, the Australian dollar has continued to follow and converge with silver's month old footsteps, while precious metals have treaded water over the past thirteen sessions. Should the Aussie remain in these freshly laid tracks without converging higher (our expectation), its next immediate sequence for the comparative would be a large drop to its 50 day sma ~ 91.70. 

In either case, we expect a binary move out of the recent range for both assets. 

Our educated guess is that these two programs are about to go digital (higher), as the analog signal gets converted, via a modem - the market.

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Qualifying the Quantitative

Here's a quick update from last Friday's note (see Here) on the Nikkei, EWJ and the yen. We added the quantitative currency driver at the time (US $) to silver's series.

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Sunday, September 29, 2013

Bear Hunting

In unseasoned hands, these wily trading vehicles won't discriminate their pernicious ways of attempting to pick your pocket faster than an easy going, but uninformed stroll down La Rambla.

For our purposes of expression here, this comparative serves as just another impression of the miner's familiar trajectory and personality, when contrasted with the banks - circa 2011.   

For further reading on this concept - see Here

Friday, September 27, 2013

Quantitative Cocktails

Around the edges - our research has taken on greater binary implications with respect to future risk appetites in the markets. What we mean by that statement, is there are several bearish scenarios that should they trigger, would change the tone of the market rather quickly. On the flip-side, if they come to pass - we would expect a rejuvenation and continuation of trend.

Considering it's been over three months since we revisited a concept introduced here in June, we thought we'd put together an update of our Quantitative Cocktails (see Here) charts that looked at Japan and the Nikkei. 

Below is an abstract from that note which explains our basic logic in the comparative:
"It's safe to say that both silver and the Nikkei were THE risk cocktails for each periods pronounced gains; whereas, the markets monetary handlers had brought participants noses back to the trough to feed (through a perceived weakened currency) - then gallop, in the asset meadows that would most benefit its yield. 
As was the case in 2011 with silver and the commodity led risk drive, the impetus for these pronounced periods of boom and bust were largely psychologically driven phenomenons, motivated by what initially was perceived as radical central bank interventions. Should the rally in the Nikkei meet the same fate as silver, the weakness in the targeted currency will prove to be ephemeral as well as its primary benefactors."  
Although the reflexive bounce in the Nikkei was marginally stronger than the comp alluded to this June, the negative strength and momentum divergences are apparent. Either way, the market should tip its hand over the short-term. 

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Should the comparative continue, the pronounced positive divergences in the yen will likely find a match - as well as a mean reversion. 

a Patriots Path

The good news this morning is the country doesn't appear to be suffering the effects of Stockholm syndrome. Whew. The bad news, however - is Washington still holds us hostage from time to time.

To cut to the chase, although both assets more or less trended together from 2008 into the third quarter of 2011, gold and equities have basically taken mirrored paths - ever since our beloved patriots down in Washington resolved their last congressional civil war. 

We were hoping this fall for a correlation transition to more unity between assets, but for the moment they appear to be marching with their respective biases - very much like our fearless representatives... 

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Here's a quick around the horn of a few trends we have been following. 
For recent context - see Here
 For recent context - see Here
For recent context - see Here

 For recent context - see Here
For recent context - see Here

Thursday, September 26, 2013

Fear - of a Higher Power

While we often rode on the short side of the precious metals train over the past few years, we always kept a close eye on their lagging miners. Historically speaking, their scorecard didn't add up: they (collectively) never had their day in the sun. 

While in the end they failed to shake our downtrodden perspective, their poor relative performance did stand out as an outlier and ultimately a surprising possibility that their best days may yet have come for the cycle. 

Certainly there were some bright spots along the way, but for most producers that should have benefited from gold and silver's appreciable year-over-year gains since September 2000 - the typical leveraged advantages of holding the miners never materialized. For example, whereas gold has returned around 400% since September 2000 - the HUI Gold Bugs Index returned ~ 377%, the AMEX Gold Miners Index ~ 213% and the XAU Gold and Silver Index a mere ~92%.  


Fundamentally speaking, there are several contributing factors - but for us it primarily boiled down to these three:
  • Poor capital expenditures/deals
  • High costs of mining, & 
  • Poor forecasting and hedging by producers
The good news for investors today is that most of these heavy chains are being unburdened, thanks in large part to the gun the bear market brought to the producers heads this summer - and a bifurcation in performance in the commodity market that should relieve some cost pressures and differentials going forward.

Just one month after gold and silver prices capitulated at the end of June, large producers caved en masse and forked up write-downs of approximately $25 billion. Producers were caught off guard with the sudden fear - either tighten their fiscal house or risk a coronary in the market. Consequently, no stone was left unturned as valuations on current and future projects were reduced, discretionary expenses trimmed and even dividends cut. For the big boys it was diet now - or die a day later.

For some perspective, this was in stark contrast to a year before where many otherwise savvy value investors were falsely enticed by the sharp correction in mining shares and perceived cheap valuations relative to spot prices. The general sentiment at the time was that valuations had overshot on the downside, but were likely just testing the crisis lows from 2008. With Big Ben and company still ramping QE, downside seemed limited - what could go wrong? Unfortunately, most didn't realize how much further spot prices could fall despite the abundant monetary elixirs and what would happen if the relative valuation lows from 2008 were broken. 

The calculus for us back then was pretty simple. Spot prices likely had much further to fall and if valuations broke the 2008 lows, cheap would get a whole lot cheaper - and fast. 
"If you have followed me on Twitter over the past six months you know that one of
my standing refrains throughout the weeks has been that the precious metals miners are still one of the larger value traps of this market cycle. And similar to the financials in the tail end of the previous cycle - it has ensnared some rather large whales in its net. From the sophisticated palettes of Einhorn to Gundlach, the extraordinary valuations of the miners - relative to gold, have been too attractive to simply pass up for these marque money managers.  
Generally speaking, I have maintained a bearish perspective on the miners - despite valuations, for the simple reason I believe(d) weakness in the precious metals complex was and is ongoing."  - The Value Trap 1/27/2013
To help guide our downside expectations, we began contrasting the breakdown the financials made at the tail end of 2008 and early 2009, where on a relative value basis they broke the previous crisis lows set in 1990 and 2000. Simply based on the divergent momentum structure in the comparison and the downside catalyst a breakdown could add, we felt confident early in the year that the miners still had a very long way to fall.

As so often the case in the market, the thesis of the earlier vintage of value investors was sound - but their timing was off. From our perspective, they had the right idea that in the summer of 2012 the sector was in the process of retesting the crisis lows - but failed to estimate downside momentum of spot prices and the significant risks those conditions would impart on the miners valuations going forward. 

From a comparative perspective it has been the inverse of the value trap the financials became throughout 2008, whereas, the crisis lows caused a near death experience to valuations in the banking sector - the secondary lows in this operating environment brought the precious metals sector to their knees. This is illustrated in the ratio charts and performance series below.

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From a purely psychological perspective we have found the 2011-2012 BKX comparative closest to the mark for the miners - in a market environment heightened with uncertainty as the sector adds to and tests the traumas from the 2008 crisis. 
While the comparative crisis low in the financials was a great benchmark on the way down, the miners have diverged over the past month from the V shaped bottom - so often found with a panic low.  
Even on a relative performance basis, the retest by the financials in 2011 fits the character of the precious metals sector today - fear - of a higher power. 
For further explanation of the rationale behind these charts - see:
*  All stock chart data originally sourced and courtesy of 
*  Subsequent overlays and renderings completed by Market Anthropology

Tuesday, September 24, 2013

1800 or Bust

The equity markets continue to work off the bender they imbibed themselves with after last weeks Fed meeting. 
We still prefer running with the bulls towards the 95' comparatives year end target of ~1800, but will be keeping a very close eye on the financials. Last week we mentioned we were looking for the banks to climb in the sector performance standings and they have fallen even further behind. 
Considering autumn is upon us, we had to fulfill our contractual agreement of including at least one crash scenario. In all likelihood, the BKX will find support where it currently traded down to this morning ~ 62 and continue on its merry way. Should it loose that support over the short-term, a more material correction is a higher probability for the equity markets. 
As always - Stay Frosty

Monday, September 23, 2013

A Comparative Case Study

Over the past three years since we started sharing some of our variant research methodologies, we have arguably been positioned on the profitable side of the tracks far more often than not. 


Incorporating comparative analysis into our weekly research has helped us proactively guide and temper our respective market expectations. 

We have found that a combinatorial research approach that takes into account a market's sentiment, positioning and technical framework - can be strengthened by applying comparative studies with similar properties; such as cycle positioning, momentum and price structure. 

While our opinions to the causality of a certain assets trajectory and potential may be just that - an opinion, the comparative study has often been a first indication that an assets underlying backdrop may be shifting. 

In essence, it keeps us honest before we really know why. 

We tend to look at markets as basically open systems with interaction dynamics and kinetics that can and often do change (i.e. interventions and communications by our monetary handlers, reflexive feedback loops, political climates) - but change driven by our inherent social condition that replicates with certain reliable behavioral expressions and geometries. 

A recent example of a comparative study that kept us on the right side of the market for a very long time, but led us to shift our future expectations basically at the pivot - was the US dollar index this spring. 

Since April 2011, we were of the opinion that the USDX was carving out an important low and would be trending higher - despite the Fed's active and visible hand with quantitative easing. Although several conditions and developments across asset classes helped form this opinion, comparative studies with previous USDX lows greatly buttressed our confidence with our market posture(s).

Fast-forward to this May when the USDX was at the top of its range, the 1997 USDX comparative flashed concern that momentum was coming up short and that the dollar was vulnerable to taking another trip lower through the range.


"The most notable divergence today when contrasted with the dollar's last breakout leg during the first half of 1997 - was the considerable strength of the move as shown in its RSI. While the dollar's current momentum profile mimicked the previous cycle's range through April - it has recently diverged over the past month.

With only a few sessions remaining in May - the US dollar index is marginally holding above it monthly breakout ~ 83.50. As we see it, the risk here for dollar bulls and precious metals bears (both of which we have helped chair the Departments since April of 2011) - is the dollar becomes exhausted and similar to 1994 takes another trip lower through the range. All things considered - we still like the dollar, but remain vigilant and open to an audible lower for a spell." - Between Mosquitos & Cicadas 5/23/13 

By the time we closed out May a few days later, the USDX appeared to be taking the exit ramp we had cautioned as we continued to shift our longer-term posture progressively bearish as the negative momentum divergences accumulated. 
With four months of daylight between our bearish shift in expectations for the USDX, our early concerns with the contrast in momentum of the 97' comparative appears to be justified as price has fittingly taken the mirrored route lower - very much along the lines of the downdraft that began in 1994. 
As we have mentioned in previous notes, this year has exhibited the largest and longest correlation drop from the typically strong inverse relationship held between the USDX and the euro. Although the current relationship has trended together far longer than any time in recent history, similar to 1994 - we expect the index to roll-over one final time into 2014 coming out of the correlation extreme. 
Back in August, we built our confidences out even further that the Euro was winning the tug-of-war of perception with the dollar when it appeared that risk appetites in Europe were setting themselves up to break-out. To this point, Spain's IBEX index was highlighted.


"Reinforcing the USDX's vulnerability is the surprising strength displayed overseas in Europe, as shown below in Spain's IBEX index which continues to trend away from what appears to be a major low last summer. While we had our doubts last fall that Spain's troubles were behind them - the market has climbed through those concerns, very much along the lines of its previous long-term low in 2002/2003.

The takeaway for us is that perception trumps the considerable shortfalls in the euro's structural underpinnings here, and that as long as the eurozone continues to move away from disintegration on the visible horizon - the euro will find support with Europe's recovery." - Roll Over $ & Make Room for the € 8/8/13


Walking a familiar path, the IBEX made a new high in early August before it once again tested and bounced strongly from its 50 day sma. 

Friday, September 20, 2013

Meridian Market Update

Between the on-going debt ceiling shenanigans and more road to travel listening to the acerbic boys from Taper-Talk, the bears should have enough rope to once again do themselves in. 

Like the 95' Meridian break suggests - consolidation of the recent move higher seems more realistic - than a material decline. With that said, we see the Nasdaq as most vulnerable over the short-term and will be looking for the banks to start moving up in the performance standings.  

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Thursday, September 19, 2013

Irrational Survival

With one tiny omission to their script - the Fed shot the gorilla in the room, broke the dollar's back and gave credence to our summation that participants this year had reflected a composite character with all the brains and emotions of 2004 - and the heart of 1995. Seems fitting, considering this beast rests at the foot of the Fed, which for all intents and purposes has nurtured the creature with a creator's irrational love and proctor's occasional stern hand. In either case, we've enjoyed the show and look forward to the next scene - which as we alluded to has a decisively more inflationary tone. Irrational Exuberance Part II? Could be... but perhaps the truth lies much closer to actually - Irrational Survival. 

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Although the performance this year has kept up with the last Meridian upside break, unlike 1995's Madoff-esque smoothness, this year's volatility profile has been remarkably close to 2004 - thanks in large part to the Fed's taper-tantrums.  
Like 2004, emerging markets were hit swift and deep when the Fed first motioned it was considering pivoting away from peak accommodative monetary policies. Now that the goalposts have been moved even further apart, inflation expectations - as well as those markets disproportionally hit during the first half of the year - have reflexively surged. 
A similar dynamic also developed in the precious metals market, which from our perspective also remains one of the brighter spots for outperformance going into 2014.  
As we occasionally do from time to time, we fitted the current tape to the comparatives next pivot based on shifts in its momentum profile. 
Outstanding of (although buttressed by) our 2004 comparatives in the precious metals sector, we have viewed the most recent bear market as a successful retest of the 2008 crisis lows in gold, silver and their respective miners. This concept and relevance with the banks was explained in more detail (Here & Here & Here) in our previous notes. 

Needless to say, the anxieties and reluctance expressed in the sector - reflects a brittle participant whose respective confidences have been eroded and reduced by a large and volatile range. We expect Donald Rumsfeld might have summed it up, "A retest of a retest - is certainly uncertainty to a higher power." 
 Convergence with silver and the Aussie paid in spades yesterday. 
Exuberancia irracional? No - la supervivencia irrational.  
*  All stock chart data originally sourced and courtesy of 
*  Subsequent overlays and renderings completed by Market Anthropology