Happy Halloween… Trick or October Pivot Two?

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Photo by Toby Ord

The run up and aftermath to the FOMC’s QE announcement last month
brought a surge of bullish optimism to market players – especially those
in the over bought precious metals – that was unsustainable.


Enter the predictable October fright fest that has seen big-name US
earnings reports routinely punished and sentiment knocked down across
the broad markets.  It should be clear to all by now that the US economy
is decelerating.

Of course, one look at the Copper-Gold ratio tells that story well
enough and has been telling that story since the spring time.  Gold is a
counter-cyclical asset that benefits when policy makers are pressured
to attempt to compromise their currencies in service to economic
growth.  Copper is a cyclical commodity that goes in line with economic
growth.

The economy and markets got a little bump last year in Q4 amid all
sorts of bearish calls by the most visible market callers.  People were
terrified and for their fear were served up a heaping helping of bull
after what we called the ‘October Pivot’ a year ago.

That was then; what about this year?  Well this time our work has
been following a decelerating economy and the inflationary policy used
to battle it.  Inflation is not a good thing even though it’s promotion
can help manufacture temporary bullish environments.  Also, within an
inflationary regime some assets will respond better than others.  Hence
the initial ramp in the precious metals that is now being corrected.

We cannot know for sure what will come out of today’s meeting of the
interest rate and debt manipulators at the FOMC, but we do know that
they have the backing of an October deflationary lean with precious
metals, commodities and now stock markets all playing their October
roles to near perfection.  I wonder how Prechter masks are selling this year.

Here is the USD chart from NFTRH
209.  Uncle Buck found support after becoming deeply over sold with the
QE party.  The red box shows converged and down turned moving averages
that will act as resistance.  We are allowing for USD to ding the 200
day averages at around 80.50 on its counter-trend rise.  Like so many
markets, the USD remains on an intermediate trend – in this case, down –
which would only be broken by a successful rise above the moving
averages.

The competing Euro has a moving average box of its own.  In this case
a cluster of rising averages that would act as support.  If the Euro
breaks down, chances are the whole broad market bull is going to break
down.  But here’s the thing; they have not broken down yet and imposing
your will on the market – whether that will is bullish or bearish – is
not advisable.  Sadly, all too many people do it; while talking their
book so to speak.

The correction in the broad markets – including in the precious
metals sector – was expected, is normal and is now maturing.  It will
continue to mature into its conclusion very shortly or it will mature
and morph into something more virulent and end the broad market rally
that got so many people off sides last summer.

As difficult and pained as the process was, we caught that rally
last summer and has not yet abandoned the bull case because this October
has played to near perfection to the existing plan.  The plan calls for
the USD being held at 80.50 or lower and various markets – most notably
for our main theme, the precious metals – holding certain support
levels.  One of them was shown yesterday for silver.

Let’s see what the FOMC does and let’s understand that the market
needed to punish the QE momentum players in a fitting October
correction.  Let’s resist making the mistakes that the doomsayers made
one year ago until it is actually time to make such calls.  Meanwhile,
the bull is intact.  My preferred theme is the precious metals, now that
dangerous over bullishness is getting cleared out.  There are other
themes out there.

For example, if the bull is to continue as expected one might
consider the positive risk vs. reward setup in Emerging Markets vs.
broad US stocks as illustrated by the above EEM-SPY chart.  Perhaps as
the rally renews into its final up phase the more speculative stuff will
out perform.

To answer the title question, I had expected what was termed an
October “issue” within a still-bullish bigger picture and taken and
advised necessary risk management steps.  Yet nothing has changed with
the bullish view as yet.  Let the US dollar break 80.50 to the upside,
let the gold-silver ratio (risk off indicator) break its 200 day moving
averages to the upside (it is at the 200′s now), let junk bonds lose the
50 day averages and let T bonds break their downtrend and I will be
happy to revise the plan.

For now, the costume I plan on wearing for Halloween has two horns and no, I am not talking about the devil.  It is bound to
be interesting as we head through spooky season into year end.

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