I hadn’t planned on submitting anything this weekend, however in light of Friday’s action I felt it may be useful.  After Friday’s smashing in the commodities and precious metals market many investors are now rattled and may have bailed from the sector already.  It is not my purpose to recommend  holding or selling, however I would like to lay out for you what is going on beneath the surface…the process that the markets are undergoing.

First off one should see Friday’s action as only short term noise.  It is my view that it was triggered by the markets reaction to the Trump tariffs and the fear of it hurting global trade.  Here we see the gap down action in the CRB.  It chose to stop at the 150 EMA and its lower Bollinger Band:

The action of late in the CRB has been pretty bearish to the downside with its gap off of the top followed by a failed bear flag right under the 50 EMA.  Even though the upside move is still intact, I for one, am on the lookout for the top in commodities for now.

One could say that the move down in gold and silver was collateral damage due to the drop in commodities.  That’s a reasonable assessment, however there could be a more sinister element involved which entails a paper smash of the gold market.  We have seen numerous cases of this in the past and it looks likely that’s what this was also.  But if you are resistant to believing this stuff happens, that’s fine also as what you should know is that as these price dives occur, physical metal is being taken out of the market and being delivered to stronger hands.  These hands will not be shaken in the future as they are the hands of central banks which are not involved in the gold price suppression scheme.  As .999 gold gets bought up and refined into .9999 metric it goes into deep storage and it wont be available for export sales.   These gold tonnages cannot be replaced at today’s prices.  Stated differently,  the physical supply bought up in these high volume gold smashes gets taken out of the market and moves to entities where it will serve as the collateral to the national currencies of the future.

Below we see the daily gold chart and its smash down from just under the overhead resistance of the 200 EMA.  It certainly looks grim and may very well continue down, however one can see in the second chart below the weekly view which shows an intact uptrend.

Below is the weekly showing the bull market uptrend still intact, however price remains below a now downward sloping 30 EMA sitting right at trendline support.

Silver

Silver has shown recent relative strength to gold, however it has trailed gold in turning up to the upside.  You can see in the chart below it needs to break above the forming NL.  The smash Friday put this process back on hold.

Bottom Line PM:

The metals and the PM stocks appeared at the cusp of a break upward before Friday’s smash.  After Friday’s whacking many gold newsletter writers have now advised their subscribers to sell and seek safety.  They may be proven right, however nothing has changed in my view.  The forces of a bull market continue to coalesce.  Selling out ones position in this sector is an error in my view.  Weak hands are letting go their positions right now, I prefer to hold onto quality companies.

Connecting the Dots and solving Mr. Market’s puzzle.

Above we see the chart view, however what I really want to show you is the big picture.  The underlying strategic process that is occurring underneath the surface of these markets.  It is the story that IS NOT being told.  It is the essential story,  the underlying process that is driving these markets.  If you understand this you have a chance of not only capturing the next major uptrend, but also protecting yourself from the next bear market.

It is said that Americans have the attention span of a major league baseball season.   I am not even sure investors can keep a thought in their head for that long.  So to think that the average investor can formulate an investment theme and comprehend it unfolding over several years may be too tall an order.  But that’s what we have to do if we are to understand and ride the trend change which is occurring right now.

The End of the Super Cycle and the Post Bubble Contraction

The world has been in a secular expansion since the late 1940’s.  This credit cycle began with public and private balance sheets at low debt levels.  We are now in a fully mature end of cycle, where these balance sheets must be ratcheted down.  This process entails a post bubble contraction of credit.  Typically the process unfolds over a period of 20 years. This is what we now face and historically it is an environment bullish for gold and gold stocks.

The 1937 Bear Market- You heard it here first

Since late last year, I have pointed out that the current bull market resembled the bull market from 1932-1937.  I heard of no other source making this claim until now.  The 32-37 bull market is the only bull with declining volume throughout its lifespan, just like our current 9 year bull has shown.  The 32-37 bull was driven by a perception that the government was going to spend us out of a depression, a close cousin to today’s various QE programs.  It has been my hypothesis that since the current bull has such a close resemblance to the 32-37 bull that it may end in similar fashion.

Well, this month Robert Prechtor wrote several pages in his monthly EW letter laying out a similar scenario regarding the 1937 bear market which ensued.  Welcome to the same conclusions we have arrived at Robert, I believe we are in good company.  So let’s compare today’s market with what occurred in 1937.

First off let me say I have reviewed Rambus’ charts of the overall stock market averages.  I see how the long term uptrends remain intact and viewed from a long term perspective they continue to appear in upward trajectories.  What I show below is an internal view of the averages and what the movement of the averages this year seem to be telegraphing according to DOW Theory principles.

Update on DOW/TRAN

Above one sees the process of correcting the JAN/FEB flash decline which I have termed the “Slaughter of the Volitility Traders”.  It came off of the upside buyers capitulation of Dec-Jan.  The top occurred within the context of bitcoin blowing out on the upside and in the timeframe of typical bubble tops of the past. (Turn of the year tops 1973, 1989 Nikki, 2000 USA & others)   After the crashette bottom the market underwent a failing rally and violated the closing lows in late March & early April for the transports.  This triggered a secondary reaction classification to the move.  If both market indexes violate the Mar/Apr lows it will deliver a Dow Theory Bear Market signal to the market.   The only way to eradicate the secondary reaction classification is for both averages to go on to new highs.  The market has been attempting this, however it has been struggling in this endeavor.   Over the past week the averages may have put in a false BO above their rising channel depicted by the blue lines.  My interpretation is that this channel is a bear flag, to be taken out to the down side.  We will see.

A rolling top, similar to the 1937 rolling top?

Here is where it gets interesting.  When we compare the process of what we discussed above to what happened in the rolling top of 1937.

Above we see the top of early March.  It’s a broad H&S with a very strong RS bounce after a 14.7% drop to form its NL.  It then squeezed out all of the shorts with a 2 month rally finishing up in early August.  What then followed was nothing less than total rapid annihilation. Over the next 2 months market participants were violently smashed with little means to exit the market.  The market then went on to lose 50% over the next 12 months.

Could this happen today?  I can’t say, but recall this bull market of the past 9 years resembles the 1932-1937 bull market more than any bull over the past 120 years. After the top the 37 bear underwent an initial 14% decline.  We saw a 12.3% decline in our current initial sell off and it has been struggling to ever since to recover the highs.  For those holding out for the averages to resume their upward climb I remind you of Inspector Callahan’s line…. Do you fell lucky?… Well do you?

The Post Bubble Contraction Progresses

Grinding away in the back ground the post bubble contraction continues its process.  Historically as rates rise, credit stress occurs at the periphery of the economic system. Eventually economic problems get transmitted towards the economic center of the financial capital of the reserve currency.

We see this now starting to occur.  As the FED rises rates the weaker periphery currencies and economies start to blow up.  Over the past month we now see this occurring in the Italian bond market the Argentine currency and Brazilian and Turkish stock market among others and it’s spreading.

Brazil

Turkey

Rising rates spells trouble for credit expansion.  However even though nominal rates are rising, real rates remain negative which over time is fuel for a gold bull market. Remember at this part of the cycle the FED rises rates until something blows up.  We are now starting to see this occur as emerging currencies and markets implode and the shock gets transmitted towards the center.  Eventually the flow of funds will desire safety and will seek out the most liquid of assets: gold and treasury bills of the senior currency.  The USD captures the flows and starts its rise. At that time it will be game on in the PM space.

This is the big picture process that is occurring now beneath the surface.  It’s the slow motion process that the average investor does not have the attention span to keep in his head.

Risks to early stage bull market in gold and silver

So we now can see the process actually taking hold.  Now that it is beginning to occur can we now start to deploy in size in ones gold portfolio?   This is hard to say, since historically the mining stocks take a hit in the initial stage of a stock market decline.  They decline in sympathy as they are equities and they act as a source of liquidity to draw on.  Once the initial decline is over however,  the bull market can resume.  In the last crisis of 2008 this period lasted about 2-3 months. Next time is anyones guess.  Remember markets learn, maybe next time it lasts much shorter, if at all.

The Dow and Transports: Looking from across the room

Looking at the above DOW/TRAN chart from an 18 month duration perspective one can see the current consolidation between the blue lines as a possible bear flag.  It can continue to consolidate,  but if it breaks below the flag by late summer the 1937 analogy presents itself front and center. We will remain objective and let the market speak its language…we’re listening.

Conclusion

The daily action in the general averages attract the eyes of the average investor.  He sees the Russell and Nasdaq going to new highs giving him comfort and validation of the constant stream of bullishness he hears on CNBC.  The FANGMAN stocks capture his imagination and dreams.  He has no ability to see beneath the surface and piece together the market puzzle as we have done today.  This is what is important and it’s unfolding before our very eyes.  May you live in interesting times.

…………………………..

Editor’s Note : Plunger is the resident Market Historian and an Associate Writer at Rambus Chartology. His views based on Dow Theory and a lifelong study of Market History are welcomed by Rambus , even as sometimes they may be in opposition to Rambus’ Charts .

I had intended to post part III of my interest rate series, however market conditions dictate that I post views on the current market.  This market is now communicating that it is at high risk.  For two months now,  I have been advocating a strategic retreat.  Head for the sidelines and watch the action with an unemotional detachment.  The market is now sounding the alarm and one should be on high alert for a downside acceleration.

Plunger’s Bullet Points 

Here are the main points I have presented over the past few weeks:

1. The market has been in a final Phase III since the Trump election- it lasted 16 months.
2. Secondary Reactions rarely occur in Phase III- Therefore, any major decline could very well be the end of the bull market and not just another correction.
3. Dec 2017-Jan 2018 was a classic buyers capitulation which traced out as a steeple top in many indexes.
4. The proper course of action for investors should be to execute a strategic retreat and head towards the sidelines. One could redeploy capital once the market resolves itself according to DOW Theory methodology.
5. Rising rates are in the process of bursting the largest credit bubble in history.
6. The bursting of the bubble will usher in a Post Bubble Contraction.
7. Gold stock bull markets are most robust within the confines of a PBC.
8. Phase I of a new bull market in the gold stocks began in Jan 2016.
9. Phase II started in Dec 2016, however initial action is characterized by further consolidation and lethargic action resulting in investor doubt and discouragement.
10.  Excessive bearishness in the gold sector is unwarranted despite weak looking price action.

The largest financial bubble in history is concluding and one should prepare his bomb shelter and know how to protect oneself.

Supreme Complacency

I am standing on a mountain top and shouting-REDUCE YOUR RISK

Am I calling for a crash? – No, I am not, however conditions exist which would allow a crash to happen.  We are now 2 months after the highs put in by the major indexes world wide.  This is the timeframe that crashes have traditionally occurred.  1929 and 1987 are classic examples.  Complacency reigns supreme as dip buyers are getting lathered up for another romp to the upside.  Don’t believe me?   Check out this Charles Schwab email I received in my inbox and don’t miss the name of it:

Bullish Investors typically continue buying one third of the way into a bear market, up until the point of recognition. After this point the pain becomes too great and they then retreat.

The arrogance and cluelessness of both the average investor and the financial establishment astounds me.  Take the FED, they think they can create $4.5 T of QE and then simply yank $1.8 T of it right out of the market while simultaneously increasing government borrowing by $1.2 T/year, all while threatening the largest buyer of T-Bonds with a trade war!  So after years of QE they think they can just turn the dial the other way and reverse it… astounding. Problem is, it doesn’t work that way.

This historic giant bubble is in the process of bursting- it’s now just a matter of time.

But enough of what Plunger has to say, let’s turn our eyes towards the market and listen to its message.  You know the line: I report…you decide:

First we will look at the big picture according to Dow Theory, then individual market leadership to include the FANGS and the FAB 4 then we will update our tour around the world.  Hang on as its going to be a wild ride…

DOW Theory Update

Friday’s action was huge as we now are poised to trigger a secondary reaction in the senior index.  I have gone back and reviewed the works of the great DOW theorists and conclude that we will use closing prices, not intraday extremes to determine market action.  Therefore the DOW has now violated its February lows and the Transports sit right at the lows.  One more closing down day in the transports triggers a SR classification:

Next we see a line chart with intraday prices:

The significance here is in the volume.  Note down days are on elevated volume.  I have posted numerous times the 10 year chart of decreasing volume throughout this bull market and compared it to the 1932-1937 analog.  It is the only bull market that resembles what we have seen from 2009-2018.  The 1937 bull market ended with a 50% decline in 12 months.

Now here is the shocker… The throw over top has now broken down into the channel. This is very bearish action judging from past historical outcomes.  Don’t forget to review that declining volume! :

Do I need to remind you of the risk here?  Check out what happened in a prior occasion:

The FANGS

Moving on let’s look at everybody’s “I wish I had bought” stocks. First let’s look at Facebook.  There will be a special private place in hell reserved for this company and its founder.  This company is becoming the poster boy for corporate abuse of its customers.  Just check out what Zuck thinks of his subscribers:

One should be asking themselves in light of recent revelations why would one knowingly volunteer to place oneself into an intelligence gathering operation on oneself?

Plungers recommendation: Cancel your Facebook account if you haven’t done so already. Then short the stock!

Daily chart… keep in mind this has been a market leader for the bull market:

And its not over yet:

AMZN NFLX GOOG I haven’t marked up these charts, but I leave it up to you to draw conclusions.  I would be out of them even though AMZN and NFLX have not broken down yet:

The Fab Four- The generals of the market

Over the past year the Fab Four (MCD, BA, MMM, CAT) have led the market higher and powered its advance.  Every market needs its generals and they were it.  Note how these 4 generals are all in the process of breaking down.  Once the market broke in early February and the bounce began these stocks should have resumed their advance to a new high due to the flow of money resuming back into them. The fact that this has not happened tells one the market has changed.  Worse still they are now in full breakdown mode:

MCD

Boeing

MMM

CAT- Heartland Favorite

Financials

They say a bull market has to have a healthy financial sector. Let’s take a look at the ultimate money center Rockefeller bank:

A Trip Around the World- Global markets imploding

In the following series of charts keep your eye trained on the following patters. Upside acceleration from December to January indicating buyers capitulation followed by upside exhaustion.  Steeple tops resolving into Island reversals.  And finally notice how contracting triangles have built out on the NL of the right shoulder.

Germany

First off Germany wins hands down the most ugliest market chart.  Don’t know why this has traced out such ugliness, but its there:

It’s got everything: Island reversal which left behind a massive zone of distribution and an army of trapped investors.  A massive broad H&S top with urgency gaps slicing right on through the 150 & 200 EMA as if they were not even there.  And now we have the break below the NL.  The weekly below shows how stochastics have flatlined like a dead EKG.

Global Indexes

Here is a look at all the world…gulp.

Here is Vanguard’s take of the world… note the buyers capitulation in the last 2 months leading into the top and the ensuing exhaustion:

The world minus the USA: Whoops.

Europe

The above chart simply is a horror show.  Double H&S Tops and now it has left behind a massive distribution topping range. Trapped Investors!

Another view of Europe-less focused on Big Caps:

London- A major international market

All the patterns are here and its now violated its NL…OMG.

Paris…Ticking time bomb

AMS-  Tick Tock…

Warsaw

Madrid

Stockholm

Zurich- Money Center

Moscow- Interesting as its the only healthy looking market

Canada- watching…

ASIA- The damage has spread around the world

Tokyo- NL drawn off the closing price shows price now violating NL

Hong Kong- World’s 6th largest market and an insight into China.

India- Tech sector not saving it.

Manila- Runner up most ugly contest.

Kuala Lumpur – Setting up

Seoul

The Big Boy- Shanghai. This could be the major pin for an unraveling

I saved this for last in the Asia series since it is so important.  Recall China has $4 T base money supporting a $40 T credit structure. Remember its all about interest rates.

Folks sit for a moment to take in this above chart. Jumping the creek of its NL in powerful fashion.  This is the market transmitting a message that this is not just a marginal break.  This is a deflationary signal of debt collapse.  It’s not messing around here.  Listen up!

Below the weekly gives it up.

The above monthly shows its hand of where it may be going.

Market collapses have signatures.  The powerful shocking collapse of 1929 announced  a deflationary implosion ahead.  No one believed it and read the collapse wrong. It wasn’t until May 1931 that the deflationary implosion signaled by the crash actually surfaced and was recognizable.  People blame crashes for economic damage to the economy, but that is not what a crash is.  A crash is simply a recognition of the underlying deterioration in the economy which has already occurred.  So when I see the daily price action of the Shanghai exchange jump the creek right across the NL with a gapped space on both sides it gets my attention.  It is sending us a message.

Emerging Markets

I have heard a few soothsayers claim this is an oasis.  Not so fast:

I suspect Brasil and Russia is holding this index up.  The message is the same once these two countries are get taken out IMO.

QQQ- The Darling

This index of course has had a religious following.  It topped 6 weeks after the main indexes did.  Big Deal… that’s what it always does.  Same thing in 2000.  And now it is displaying the same weaknesses as all the other indexes.  Island Reversal with a failed declining RSI.

General Stock Market conclusion:

If these charts do not scare the bejesus out of you then I am sorry I can’t get through to you.  I encouraged everyone take a strategic retreat months ago.  Here is my heart felt plea: This is a big deal.  Complacency reigns supreme.  If you care about your financial future… your life… run to your bomb shelter NOW.  Yes we will have a buy the dip moment and it should be tradable, but it is not advisable to think that moment is now.

A Personel Message:

I write these reports with little to no feedback.  Often times it seems I hit the send button and it simply goes off into the internet ether.  I have no idea if I am getting through to anyone.  Perhaps many think these are delusional bearish thoughts, after all the FED and CNBC say everything is going swimmingly.  They say the economy is strong and unemployment is at cycle lows.  But the key to being a successful investor is to be able to see things outside of convention.  That’s what one gets when one reads the entrails of Plunger…take it or leave it.

I have laid out the case that this 9 year bull market has been nothing more than a financially engineered event, similar to the 1932-37 bull market which ended disastrously.  This market and financial bubble are much, much larger than that era and has the risk of deflating even more violently than the 1937 market.  This has now become a global event, there is no conventional place to hide.  I am in cash, and in the precious metals sector with a short DOW position.  Good Luck because you are going to need it.

Coming soon is the bullish case for gold and the gold stocks.

Editor’s Note

Plunger is an Associate Writer and Resident Market Historian at Rambus Chartology

https://rambus1.com/