Are the Predominant Macro Trends About to Reverse?

[adam-taggart-2 (Adam Taggart)]

I felt a great disturbance in the Force

-- Obi-Wan Kenobi

If you've been watching the precious metals closely – what a day! Both gold and silver plummeted in overnight trading. And by "plummet," I mean the gut-wrenching vertically-straight-down kind of free-fall (silver was down nearly 10% over a matter of minutes). Then, after a few hours of partial recovery and stabilizing, the precious metals went parabolic in the up direction.

The below charts from CoinInfo.com show the crazy price action over the past 24 hours:

Many leading technical analysts have guided that precious metals prices needed to retest their mid-term lows before a true reversal in trend could be possible. Gold came close to its low of $1,320 (getting as low as $1,340 this morning), and silver smashed below its own before recovering. So does this count? Have gold and silver prices bottomed?

As with all one-day events, it's much too soon to call. But today's action sure does feel like a strong bounce off a bottom.

Of course, Chris and I will be tracking this closely and sharing our thinking as it develops.

But the inspiration for this post is larger than just today's volatility in the PMs. Through recent conversations with Chris and Peak Prosperity's contributing editors, Charles Hugh Smith in particular, I'm becoming more confident that a major market turn almost upon us, if it's not indeed arriving now.

Over the past year and half, we've seen an inexorable march upwards in the equity and bond markets – much stronger in both intensity and duration than most had predicted. Victory goes to the Fed and the world's other major central banks. Their massive liquidity measures have supported asset prices around the world, from financial markets to housing (with the notable exception of the commodity complex; the precious metals in particular). In fact, the uptrend has become so relentless that it has become farcical.

Capital managers are aware of these realities. And up until now, most have chosen to dance while the music played. And they've made a lot of easy money by not fighting the Fed.

But they've learned over their careers that trees don't grow to the sky and markets don't go up in straight lines, despite the recent trending suggesting otherwise.

To the chorus of voices like Chris' warning about the fundamentals, those who practice technical analysis (TA) are also beginning to warn that this market rally is long in the tooth.

Peak Prosperity has gone on record calling for a large correction in the stock market in or before September. We stand by that forecast, which will be complemented by a new report by Chris in the next 24 hours clarifying the various dangerous bubbles (in both number and magnitude) that have re-emerged from the Fed's money printing program.

So if you're a fund manager and want to take your gains out of the market, the question is: Where to put them next?

Forthcoming reports from Chris and our other authors will tackle that important answer.

But for now, I just wanted to share our growing belief that the market status quo is ending: We're feeling a disturbance in the Force.

This is a companion discussion topic for the original entry at https://peakprosperity.com/are-the-predominant-macro-trends-about-to-reverse/

[sailaway]

 

Peak Prosperity has gone on record calling for a large correction in the stock market in or before September. We stand by that forecast, which will be complemented by a new report by Chris in the next 24 hours clarifying the various dangerous bubbles (in both number and magnitude) that have re-emerged from the Fed's money printing program.

 

Thank you Adam, look forward to reading Chris' report. My question that maybe will find an answer in this report is: if like it has been reported the Central Banks directly (or indirectly) buy stocks, how could the equity market go anywhere by up?

 

[charleshughsmith]

Hi SailAway:
I'll take a shot at answering your excellent question: it's a matter of size.  The equities market in the U.S. is around $14 Trillion as I recall, and most of the trading volume is performed by machines and large players using "dark pools" (non-exchange trading).  Much of the rest of the stocks are held by pension and mutual funds.

The Fed and other central banks are probably buying a few billion dollars of equities via proxies, probably on a scale similar to the Fed's POMO ($2-$5 billion a day).  It is generally accepted that the Fed leverages its purchases (via proxies) by buying the SPX e-Mini futures contracts:  Buy a ton of futures contracts before the open and – voila! – the market opens higher.

Since the quant-bots (trading algorithms) seek to follow trends, a move higher with a large volume of futures contracts will persuade the trading programs that the trend is up and they will buy.  Given a low volume environment (like now), this makes it relatively easy to manipulate the markets higher with relatively modest sums of money ( a few billion dollars leveraging a $14 T market higher is extremely high leverage.)

However, if the managers of the bulk of that $14T in equities become concerned that the top is in and it's time to book profits/go to cash, then $100B or more might trade in a few hours, blowing the Fed's few billion into irrelevance.

This is why the Fed's key job is not manipulating the market with POMO and proxy buying, it's manipulating expectations and belief structures so participants actually believe the Fed can control the market and will continue to guide it higher at will.  Once money managers believe this, then it only take a few billion to push markets higher. But if managers lose faith and decide to cash out their profits, the Fed will be powerless to stop the selling.

The Fed may find that quant-bots can work against the Fed as well as for it–once the selling triggers key technical levels and volume levels, the selling will cascade as the trading machines sell in size, making the Fed's job of reversing it essentially impossible.

The point is: if the Fed /Treasury could manipulate markets ever higher, then why did we have stock and housing crashes? If they could suppress gold for years on end, why did gold rise from $300 to $1900 in a low-inflation environment?  Answer: the Fed's control is on the margins. Volume overwhelms their proxy buying and POMO. It's the belief in the Fed's godlike power that sustains the manipulation more than the actual dollars invested in futures contracts and POMO.

[wendy-s-delmater-2 (Wendy S. Delmater)]

. . . if the managers of the bulk of that $14T in equities become concerned that the top is in and it's time to book profits/go to cash, then $100B or more might trade in a few hours, blowing the Fed's few billion into irrelevance.

In other words, all someone has to do is shout that the Emperor hs no clothes.

Succinct.  Thank you, Charles.

[sailaway]

Thank you for the detailed reply Charles, very interresting! I'm wondering if the Fed will ever sell the contracts it's buying today or if they just going to end up forever on its ballance sheet like the MBS it purchases. 

[davefairtex]

I've heard some of these forever, but Charles (for some reason) just triggered in me the desire to figure out once and for all if there was any truth to them.  Note: Charles didn't suggest Meme #2, but its a popular one so I figured I'd toss it in there too.Note #2: I'm onboard with his overall philosophy - possible to influence at the margins, but serious participants will swamp any marginal influence.
But I digress.
Meme #1: Somebody Buys Futures Premarket
And this has resulted in the market levitating since the 2009 lows.
If you had bought SPY (an ETF proxy for the S&P 500 Index) at the close of business every day, and then sold at the open, you would be up (net) about 379 SPX points over our 887.50 point rally since March 1 2009.  Buy-and-hold would have you up…887.50 points, or 43% of the move.  Hmm interesting…but…
During the move from Jan 2003 - June 2007, if you'd done the same thing, you'd have netted 487 SPX points of a total 627 move, or 78% of that move.
Are we suggesting the Fed was also buying 2003-2007?  If so, they were buying more effectively back then than they are now.  Its not a smoking gun - tough to prove the negative - but I'm willing to suggest: Overnight Moves are Just What Happens during Bull Markets.  [A manipulator might be able to move a market out of whack for a time, but not for 4 years, unless they decided to take a permanent, large position, which brings me to]
Meme #2: Fed Buys Futures
And this has resulted in the market levitating since the 2009 lows.
For this to function, the Fed would have to retain its futures over time.  If this were happening, we should see the impact in the average open interest - the number of futures contracts outstanding over time.  Has this occurred?
Not so much.  Growth rate in OI has actually slowed since the crash.  The most I could say was, there are some interesting OI spikes in 2008/2009 and at end of 2011, but no pattern of increasing open interest.

[kathyp]

http://jessescrossroadscafe.blogspot.com/search?updated-max=2013-05-18T12:47:00-04:00&max-results=7&start=3&by-date=false
 

[ramoore]

Your answer touches the surface of the manipulation taking place in the markets today. I personally think the Fed will eventually shoot off both feet with these dramatics in the stock indexes. We alreay know that about 70% of the volume is created by computer trading and when that " fat finger" hits the wrong key again the Fed will be unable to stop the animal it has created. I also think a correction is very close at hand and we normally have the sell in May deal happening so September is more probably the time frame for this to begin. This is a great web site with much to offer in thought.

[westcoastjan]

Hi ramoore,
I see that is your first post - welcome! And yes, this is a great web site with much to offer in thought! I attribute some of that to the diversity and eclectic nature of those who are members. Whether one is a renowned subject matter expert with the academic credentials to go with it, or an average Joe or Jane who have enough curiosity and passion (Hello Bob - gooooooooo Tigers!) to realize that there are seriously important things going on out there, and to also realize that this is (in my mind) the best place to gather knowledge and understanding in a respectful and supportive way. I've visited lots of other web sites in my quest for knowledge and understanding, but none I have found give you the breadth and width of subject matter along with intelligent, constructive debates all in one place, as this one does.

As to this article, timing of a correction is exceptionally difficult to call. However, where this site excels is in reading/assessing the tea-leaves so well that we readers who value/use this information might manage to stay a bit ahead of the curve when that out of control train comes roaring down the tracks. That is what it is all about for me. The Fed and the markets will do what they will do and there is not a damn thing I can do about it. But I can use the knowlege found here to help me deal with the wreck after the fact.

While on the subject of wrecks, I am humbled by the power exhibited by Mother Nature in Oklahoma, and pray for the many who have been affected. Such disasters do underscore the point of how important it is to do a risk assessment of where one lives, and take some concrete steps to plan a mitigation strategy. Information on how to do this is also on this site, which is why I think it is the go to site for people who want to learn how to not just prepare, but also find ways to prosper in the face of challenging times. The best thing I have ever taken away from this site is understanding the true meaning of "prosperity".

Jan

 

[adam-taggart-2 (Adam Taggart)]

Here's the new report from Chris mentioned in the article above:
https://peakprosperity.com/blog/81951/four-signs-were-back-dangerous-bubble-territory