Markets Go BOING! (GDX,SLV)

We’ve got our eyes fixed on several items at the moment – the first is the dollar, the second the bond market, particularly the long end of the Treasury curve.

 

We’ve discussed both at length, and readers of these pages are familiar enough with our views.

 

So for those who are new to the glorious halls (and impeccable wit) of the Normandy mansion, we sum it up for you here in brief –

 

  1. First, the dollar will continue to rise, particularly as the U.S. equity market and American assets are come to be seen as the last game in town.

 1

  1. The bond market will continue to sell off, with the lion’s share of the fund flows streaming into equities, as inflation and rising rates begin to bite, and all become convinced that the current tightening cycle is for real.

 2

  1. Both of the above processes will gather momentum as soon as the Fed is perceived to be behind the curve, and inflation becomes a thing to be feared rather than desired. But this last development could be a ways away.  Numbers #1 and #2 are not.

 

Paying More?

Have a look at the following –3

Inflation, as the above chart shows, now has a foothold above the all-important 2% level, the threshold at which the Fed begins looking to rein in excesses in price.

 

But we hold that they won’t pull the trigger fast enough, worried as they are that equities might get wounded if they’re too quick on the draw.4

 

Bank on it: all in all, we’re only at the beginning of an immense tidal flow of cash that will eventually crash upon American shores, a swell that’s growing daily, and that will be positively buffeted by the rise of Donald Trump.

 

Have a look here –5

The amount of money that was transferred to our shores in just the last week is truly staggering.  As the chart above shows, we’ve not seen a weekly figure of this order any time in the last decade and a half – and this was just into financial ETFs!

 

In the week ended 16 November, a full $23 billion arrived into U.S. based equity funds, the most since 2014, and the third largest surge of its kind on record, according to Lipper Data.

6To put it bluntly, there are a lot of folks around the world who perceive the president-elect as a net asset for America and, potentially, a corrective for the world.  They look at an America that has been on the wane – in their view – and Trump as a means of restoring, at the very least, financial greatness to a nation that was once indubitably financially the greatest.

 

It’s that inspiration, that renewed confidence, let’s call it, based on a perception that may or may not be grounded in the new president’s policies (or any other reality), that will continue to drive massive fund flows to our economy and markets.  It also means new investments and rising asset prices across the board – including everything from downtown Detroit real estate to Monet paintings to angel investing and private placements in start-ups to NYSE stocks.

 

The writing is already on the wall.

 

And there will be other forces in play that boost this jalopy into overdrive.

 

  • For instance, next year, calendar 2017, will see a return to the tsunami of corporate share buybacks that drove much of the early years of the bull market. According to figures offered by Goldman Sachs, investors can expect corporate America to pony up over $780 billion in the coming twelve months in an onanistic self-stock buying spree.

 

  • Sentiment, too, will play a key role in driving cash into equities, and here we’re talking about Main Street’s return to the investment arena.

 

As the chart below illustrates, that move looks already to have begun –

7According to the AAII’s latest weekly survey, bullish sentiment climbed back above the 40% level for the first time since October 2015.  And it’s been almost two full years since we’ve seen bullish sentiment at its current 46.70.

 

And it’s not going away, friends.

 

The bull market is still on.

 

And don’t let anyone convince you it’ll be anything but a slap-happy ride to the stupidest heights imaginable.

 

And know, too…

 

That if you miss it, you’ll be kicking your backside for a good long time.

 

Because it won’t last forever.

 

You have to trade it.

 

Closing the Old and Opening the New

 

We’ve got two trades today to attend to.  After that, we’ll roll on to our bet for the week.

 

Get out your pencils…

 

The first was opened just a month ago in a letter called WAR! GOLD! DICTATOR! TRUTH!, wherein we urged you to buy the SLV March 17 PUT for $1.18 and sell the GLD March 112 PUT for $1.28.  Total credit on the trade was $0.10.

 

We’re going to close out half the trade today and look for an opportunity to shut down the other side at a later date.  Why?  Well, the precious metals are not behaving as we’d expected, and because they’ve already fallen significantly and we’re now expecting a bounce, we figure the timing’s just right.

 

The SLV PUTs trade today for $1.72.  Dump them and keep your eyes here for advice on the short GLDs.

 

The second trade was opened August 9th in a missive called Golden Roadblock Dead Ahead.  There, we suggested you sell the GDX November 35 CALL for $1.35 and 27 PUT for $1.17, for a total credit of $2.52.

 

Last Friday, the PUTs closed in-the-money, so we find ourselves the proud owners of one lot of GDX with a breakeven level of $24.48 (27.00 – 2.52).  GDX now goes for $21.05.

 

Our trade for the week is an effort to recover from this setback.

 

Take a look at the chart –

8

The miners are currently testing long term support at $20 (yellow line).  We believe that test will take a while to complete, so we’re selling a near term ratio straddle to take in some cash.

- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]

One CALL is covered by the shares, the remaining straddle is not.

 

With kind regards,

 

Hugh L. O’Haynew

Share your thoughts...

We encourage people to join in on the discussion. Please keep in mind however, that all comments are moderated according to our comment policy, and all links are nofollow. Let's keep the conversation professional and meaningful.