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Prepare for Market Doom, the Moment of Truth Is Here –

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The moment of truth has arrived. The debt ceiling deal is done. After a final paroxysm of T-bill paydowns totaling $209 billion this week, all that market support from the US Treasury will go in reverse. The Treasury market will get slammed with a tidal wave of supply to start to repay all the internal accounts that the Federal Government raided to stay under the debt ceiling.

Under the circumstances, I thought this would be a good time to look at Primary Dealer positions and financing, along with the usual QE and supply data in a report to follow. In any case, there are no surprises.

This situation is unfolding on the timetable we expected. The wildcard is the Fed’s RRP slush fund, which has been hovering around $1.5 trillion. The uncertainty lies in the fact that we don’t know how long that will last. What we do know is that the drawdowns will start very soon, perhaps this week.

The Primary Dealer data might give us some idea of how long the RRP slush fund will last before the bond market really starts to crack. It’s not an open and shut case that the holders of the RRPs will use all $1.5 trillion of it. I continue to think that some will stay put, content to leave their cash in these overnight RRPs with the Fed instead of moving back into T-bills. The sooner the amount of RRPs outstanding levels off, and the higher the level remaining outstanding, the more bearish it will be for Treasuries and stocks.

But first, since we last looked at the Primary Dealer data in late October, the dealers have dumped a ton of long Treasury inventory. They’re still highly leveraged, but their net long position is the lowest it has been in 4 years. They’re getting prepared for the worst. Whether that will help them weather the storm is an open question that we will monitor closely.

At the very least, we need to be prepared for xxx xxxx xxxxx xxxx (subscriber version) in stocks, and what should turn into xxx xxxx xxxxx xxxx in Treasuries and other fixed income securities. Here’s what I would do about that.

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Reason for Hopeful Pessimism on Gold

It’s not great, but there are benchmarks that would signal that this pattern may be turning bullish.

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Short term cycles have turned up. The 4 week cycle projection is a nice target, but there are no guarantees here. It would certainly be helpful to the bigger picture if it is reached. The 13 week cycle still has some vulnerability for 3-6 more weeks. A breakdown below xxxx (in subscriber version) would be a bearish sign as it would complete a head and shoulders top pattern with a measured move target of around xxxx.

Gold begins December below a couple of key trendlines on the monthly chart. It would need to end the month comfortably above xxxx to reduce the risk of another slide that could carry into the xxxxx. Conversely, if it ends the month above xxxx, that would be a bullish sign.

As for the mining stocks, the shortest cycles rebounded due to the rally of the past 2 days, but that wasn’t enough to keep the 6 month cycles from falling to the sell side. 13 week cycles remained at more than 90% on the sell side. With 6 month cycles now negative and not yet extreme, any bounce xxxx xxx xxxxx xx xxxxxxxx (in subscriber version).

There are 34 buys and 2 sells from the swing trade screens of 52 gold mining stocks from Tuesday’s action. I looked at the charts, and these buy signals did not impress me as anything more than a dead cat bounce that would probably fizzle out. I decided to wait for better setups before re-entering after closing all but one of the picks that had been on the list in previous weeks.

The 7 picks closed out from November 2 through December 2 had an average gain of 9.9% with an average holding period of 43 calendar days. Not bad considering how uneven the performance of the sector has been.

1 pick hit its stop over the past week and was closed as of the stop price with a gain of 23.4%. That left just one pick on the list, hanging on with a loss of 1.2%. I’ve tightened the stop on that one.

See table and charts (subscriber version).

The strategy and tactics suggestions in this report are for informational and entertainment purposes, and illustrative of one approach. Nothing in this report is meant as personalized investment advice and you should not construe it as such. No representation is made that it is the best approach, will be profitable, or suitable for you.

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Gold Trader Publication Schedule Note

This report will be posted on Wednesday morning instead of Tuesday this week. I will be on the road all day. I usually travel by train, where I can get the report done. But with the pandemic raging here in Poland, on this trip I have driven.

Thanks for your patience. See you Wednesday!

Lee

What I Did Won’t Surprise You, as Buy Signals Surged in Swing Trade Screens

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This Friday’s screens had 50 buys and 16 sells. This was a big reversal from the previous Friday’s 17 bullish and 145 bearish signals.  That was a big number that indicated downside thrust. The week before that was also lopsided on the sell side, a precursor to last week’s broad selloff.

The current number now suggests a reaction rally.

1380 stocks met the initial screening criteria in the current screen. 4.7% of them rendered signals on Friday, which is normal. 3.6% of the stocks that met the minimum criteria had buy signals. This isn’t enough to indicate a big broad based move, but there are 4 days to go this week where anything is possible.

Last week, I added 4 shorts to the list. I set one of the existing buys to be closed out last Monday. Two others hit stop prices and were closed out from the tracking list at the stop prices. These theoretical trades are shown on the table below (subscriber version only).

I was underwhelmed with the setups on the charts that rendered signals this week. I only found one buy and no shorts that I liked enough to put on the list, as shown on the table below (subscriber version only).

In total, this will bring the list to 12 open picks, of which all but the one new pick are shorts. I’ve added stops to 4 of those picks.

I continue to view stops, particularly trailing stops, mostly as a mechanism for closing out picks that I want to close out. I don’t like them for protection because they just as often get picked off on trades that turn into winners. So I’m willing to roll the dice on the rest this week. I’ll decide week to week whether to pull the plug, protect, or keep rolling.

As of Friday, the average gain of open picks and those closed last week was +8.1% with an average holding period of 18 days. This was a strong performance compared to recent weeks, especially so given the rotten market action. The list was on the right side of that. The previous week the list had an average gain of +2.2% with an average holding period of 20 days.

The table and charts of open picks are below (subscriber version only).

Table (subscriber version only)

Charts (subscriber version only)

Technical Trader subscribers click here to download the complete report.

The strategy and tactics opinions expressed in this report illustrate one particular approach to trading. No representation is made that it is the best approach, or even suitable for any particular investor.

These picks are illustrative and theoretical. Nothing in this report is meant as individual investment advice and you should not construe it as such. Trade at your own risk. 

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Here’s Why Truncated 6 and 12 Month Cycles Are Scary

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We’ve seen this before – a market break that was out of synch with where significant intermediate tops should have been, time wise. The last time it happened was March of 2020. It doesn’t guarantee a similar outcome here, but there are keys to watch to tell us just how bad this turn will be. Is it another BTFD opportunity, or the beginning of a crash, or a terrible, multi-year bear market?

If you follow the monetary trends data on Liquidity Trader, you know that the current situation is more fraught with risk than any we have seen since the Yellen Fed Balance Sheet Normalization period of October 2017 to December 2019. In fact, the liquidity outlook is even more bearish now than then, so I take these technical signs of weakness in the market here very seriously, despite the fact that they appear to be out of synch with where the biggest swing cycles say the market should be.

Cycles – Both the 10-12 month and 6 month cycle up phases were truncated early. When such failures have happened in recent years, the up phases have usually reasserted themselves within a few weeks. But that wasn’t the case in March 2020. Because liquidity factors are about to turn extremely bearish I take this turn seriously. True, it may be a false alarm. But it seems more likely to be a warning shot across the bow, or something far worse.

The 13 week cycle down phase came on schedule, but it was sharper than it should have been with the 6 month and 10-12 month cycles both in up phases. The market would need to bounce hard this week, in an overdue 4 week cycle uptick, for this to turn into a benign consolidation. A weak uptick this week, or no uptick, followed by a break of trend support around xxxx (subscriber version) would suggest that something big to the downside was under way.

On the Third Rail Chart, the market needs to clear a downtrend line that runs from  xxxx to xxxxx (subscriber version) this week to signal a short term rally. Conversely, dropping below  xxxx  would suggest a move back to the October low around 4300.

On the weekly chart, 3-4 year cycle momentum has formed a sharp negative divergence at the price highs, which is now confirmed by a price trend break. This suggests a 3-4 year cycle top is finally in progress. Tops on this cycle normally take 10-12 months to develop with a series of rallies and declines, with multiple peaks ultimately failing to surpass a previous high. An instant crash such as in March 2020 is the exception.

Another sign of possible top formation is the renewed failure of the long term trend resistance breakout, and the break of an uptrend line dating to March 2020.

The monthly chart now shows the conditions suggesting the formation of a 7 year cycle top. If the S&P ends December below xxxx (subscriber version), the uptrend would be broken, and the target would then be the trendline now at  xxxx. Conversely, if that area remains intact, the way would be clear for a move to  xxxxxxx xxxxx in early 2022.

Cycle screening measures The aggregate indicator fell to its lowest level since October 2020, low enough to suggest that a significant short term bottom is imminent. Therefore the odds favor a bounce from here.

Six month cycle measures weakened. Six month cycle current status broke down from neutral. That’s bearish. A weak bounce from around these levels would suggest  x xxxx xxxxxxxx xxxxxxxxxx  xxxxx (subscriber version).

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These reports are not investment advice. They are for informational purposes, intended for an audience of investment and trading professionals, and other experienced investors and traders. Chart pick performance changes week to week and past performance may not indicate future results, as you know. Trading involves risk, and these reports assume that you understand those risks and manage them according to your tolerance. 

Why It’s Big Trouble that Real Time Tax Data Shows Economy Still Growing Fast

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The withholding data is the real deal. It continues to show the US economy growing rapidly. Inflation will continue to run very hot, and the Fed will remain under pressure to reduce QE. That showed up this week in Powell’s statement that the Fed will stop saying the bad word, “transitory” because people misunderstand what the Fed means by it.

Of course the real reason is that the Fed has been horribly, disastrously wrong, yet again. Just another in a series of compounding policy errors that work like compound interest over long periods of time. After a while, suddenly you’re talking about real money, and unimaginably big problems. So the Fed has a big problem now of its own making. There’s really no way out of this that doesn’t result in a mess.

The other change out of the Fed this week is that Fedheads are now talking about doubling the rate of cuts in QE. That would bring QE to zero by March instead of June.

Mark my words. That’s not going to happen. The markets will crash before that, and the Fed will reverse course, and restart QE, yet again. But how much damage will have been done already, and will the market still have the ability to get up off the mat again and punch the lights out on the upside?

My outlook now has more of a hard edge than it had a month ago. The Fed has demonstrated its cluelessness yet again. Therefore, I think that it is much more likely to be too late in response to the approaching “unexpected” crash that “no one could have predicted.”

Now, as they embark on another insane response to their previous insane policies, they face the massive compounding of the fragility they have caused in the financial system. The Treasury market simply won’t be able to maintain current prices and yields when the debt ceiling is finally lifted.  The Fed will be sharply cutting its purchases or indirect funding of Treasury issuance just when massive new Treasury supply will flood the market. It will be ugly.

So the rally in Treasuries has once again presented us with a gift horse. If I were trading Treasuries, I sure would not xxxx xxxx xxxx (subscriber version only).

Here are the data, charts, and analysis that tell you why you would want to protect yourself, and even profit from what’s coming at you very soon. It also analyzes the likely timing. Be ready.

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Here’s What to Key on With Gold on the Brink of Failure

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Last week was bad, no doubt about it. But it wasn’t a catastrophe yet. This report tells you the key benchmarks to watch to let us know whether this will turn out ok, or not, for gold and the miners.

See table and charts (subscriber version).

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Second, Even Bigger, Explosion of Sell Signals in Swing Trade Screens

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This Friday’s screens had  26 buys and 136 sells. 9 of the buys were inverse ETFs, meaning that only 17 of the signals were bullish and 145 were bearish. This is a big number that indicates downside thrust, but it can also mean that it’s time for a minor bounce first.

This week’s numbers compare with 19  buys and 53 sells which was a pretty good indication that last week would be bearish. 11/22/21 51 sells is still a big enough number on the sell side to make me sit up and pay attention. I was overconfident on the long side, and overstayed several of the longs on the pick list without trailing stops. I’ve instituted them, and a few outright sells this week.

Only 1246 stocks, about 100 less than usual, met the initial screening criteria in the current screen thanks to the semi holiday shortened session. But a whopping 13% of them rendered signals on Friday, which is more than triple the norm. Last week there were 4% sell signals. 11/22/21 That’s a more than a typical percentage of new signals on a given day. So it’s time to look for a possible rollover and more shorts to add to the list.

Last week, I added 6 shorts to the list and put stops or sells on most of the longs. 8 of them were closed out as a result. I have added a sell condition to one pick and have stops on 3 others.

On this week’s list of sell signals, most had dropped to or near support. As a general rule I would not short a chart where price was at or near support. This might be the rare time that they crash through, but I must go with percentages. Despite the 145 bearish signals I only found 4 charts that were weak enough but far enough above support to add to the list as shorts this week. They’re shown on the table below.

In total, this will bring the list to 13 open picks, of which 2 will be longs, and 11 will be shorts. That’s up from 6 shorts last week. I don’t remember ever having as many shorts since starting this swing trade chart picks a couple years ago.

As of Friday, the average gain of open picks and those closed last week was +2.2% with an average holding period of 20 days. That’s not bad considering the S&P tanked last week. As long as we have a  plus sign when the broad market is down, it has the smell of victory.

However, it compares with an average gain of + 3.6% with an average holding period of 27 calendar days. And that was a drop from an average gain of 8.5% on an average holding period of 25 calendar days 3 weeks ago. I previously allowed the list to age too much without installing trailing stops. Then last week, while I was Jack be nimble, I was not quite nimble enough.

The table and charts of open picks are below. I have stops in place on aged picks, but I’m leaving fate to the wind on the picks from last week, and this week’s new picks. Have to give them time to breathe. I will add stops as they age.

The table and charts of open picks are below (subscriber version only).

Table (subscriber version only)

Charts (subscriber version only)

Technical Trader subscribers click here to download the complete report.

The strategy and tactics opinions expressed in this report illustrate one particular approach to trading. No representation is made that it is the best approach, or even suitable for any particular investor.

These picks are illustrative and theoretical. Nothing in this report is meant as individual investment advice and you should not construe it as such. Trade at your own risk. 

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When the Fed Balance Sheet Will Hit the Fan

This report examines and illustrates the most important line items on the Fed’s weekly balance sheet. It tells you what to look for to recognize when the markets will crash.  Because that’s coming.

The markets are in a state of suspended animation while the Treasury is still paying down T-bills, and the Fed’s RRP institutional money market slush fund remains huge.

But the Fed seems determined to cut QE, with the byproduct showing up as slower growth in its balance sheet.

That will run head on into a surge of Treasury issuance. The debt ceiling will be lifted, and the Treasury will flood the market with T-bills.  The RRP slush fund will act as a shock absorber for awhile, but it will plateau when some holders of RRPs decide to leave their cash parked there for good.

That’s when the real trouble will start for the Treasury market, with stocks to follow.  I track the trends of those key Fed weekly balance sheet line items for you.

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Market Variant Not As Bad As It Looks

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Cycles There’s no evidence yet of downturns in the 6 month and 10-12 month cycles. They’re still in up phases, but currently without projections.

The 13 week cycle has obviously turned down, ideally due to last xxxxxxx xxxxx (subscriber version) . What can’t be known yet is the shape that the down phase will take.  If the xxxx area breaks down, the target would then be around xxxx . But if the xxxx  area holds, they could bump back up to the xxxx  area by year end.

On the third rail chart the SPX fell into a No Man’s Land on Friday. Support is xxxxxxx xxxxx (subscriber version). It rises to xxxx at the end of the week.  If it breaks, the targets would be xxxx, then xxxx. If the xxxx area holds, then the market should quickly rebound to the xxxx area.

 

xxxx (subscriber version).

On the weekly chart, updated long term cycle projections as of October 10, 2021 show targets ranging from xxxxx to xxxxx for cycles of up to 7 years.

As long as the market is above xxxx (subscriber version) at year end, it would still be in a long term uptrend and the projections would still be doable.

Long term momentum indicators suggest higher for longer. They normally form negative divergences long before price peaks.

On the monthly chart, the market uptrend channel lower bound is at 4300 in November. They’d need to break that to show any sign of possibly ending the bull market. Clearing the long term trendline around xxxxx would set a course toward xxxxx in November and possibly xxxxx (subscriber version)  in December or January. The monthly long term cycle momentum indicator remains bullish.

Cycle screening measures broke down, a week after I was skeptical about the negative indications. Now we know. 6 month cycle measures are now neutral. Another down week would turn them negative. The cumulative line is on the cusp. Market weakness this week would trigger a  xxxxx xxxxx (subscriber version)

Technical Trader subscribers click here to download the complete report.

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Not a subscriber? Get price and time targets, and weekly swing trade chart picks, risk free for 90 days!  

These reports are not investment advice. They are for informational purposes, intended for an audience of investment and trading professionals, and other experienced investors and traders. Chart pick performance changes week to week and past performance may not indicate future results, as you know. Trading involves risk, and these reports assume that you understand those risks and manage them according to your tolerance. 

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