The S&P500 has now rallied 130 points in 15 days and the bulls are frothy like a dog in heat. If the market keeps at this pace, it will be at 1900.00 level by the middle of November, right? That makes sense, doesn’t it? Since the market started at 1400.00 at the start of the year, a rally to 1900.00 would only be 36% higher on the year. That makes perfect sense for the current market conditions, considering that everything in the world is fine (sense the sarcasm).
The resolution of the debt ceiling has provided the emotional catalyst that advanced the markets to record highs over the last 12 trading sessions. Witnessing this price move leaves many traders conflicted in their opinions. There is no denying that we have been sounding the warning bells on numerous occasions over the last few months, yet the bulls are relentlessly advancing the market on the back of traders’ skepticism.
Despite market internals suggesting vulnerability, the path of least resistance remains to the upside for U.S. and Canadian equities as every moderate pull back is bought into by the perma-bulls. This is not a time to throw caution to the wind, however the U.S. Volatility Index (VIX) has dropped back down to pre government shutdown levels. The VIX is known as a fear guage for the markets. As it climbs, it is an indication that implied volatility on options is expanding as traders and investors look to hedge risk and uncertainty. As it drops, traders and investors are believed to be less concerned with risk.
We are changing the way we portray our stance on the markets. The term “Crash Alert” was meant only to observe when market conditions have deteriorated making the market vulnerable. It is not about us using a crystal ball predicting a horrible event, but rather us recognizing that over the last 15 years the market had very ugly declines under similar conditions.
Natural Gas prices hit an important multi-year low during the August decline down toward $3.25/BTU. Since that low, we have seen some relatively positive price action into the now seasonally strong period going into the winter. Will we see the advance continue?
Wednesday we issued our crash alert because all 4 criteria were met for the signal, but the alert came after 14 trading sessions of market selling that saw the market regress 90 points (4%). The selling was even more significant in the Dow that experienced a 1000 point drop over that same time. When selling occurs in such an orderly fashion, the short sellers that are trying to profit from the drop get very comfortable. We wrote: We are in crash alert because all of our criteria have been met but the market is significantly oversold on the short term and it would not be out of line for us to see a relief rally over a day or two. We anticipated the bounce and it ended up being a relatively strong one as we saw 40 points on the upside.
Goldman Sachs is fast tracking the Twitter IPO into the market. Is Goldman signalling the top of the market? It was originally thought that the initial public offering of Twitter was going to happen sometime early next year, yet now there is talk that it will occur before the turkey is on the table for the U.S. Thanksgiving.
Gold prices are at an important crossroad. If the bulls can beat the $1325.00-$1350.00 zone above, we could start to gain interest. In the same respect, any deterioration below $1275.00 on gold would show that the sellers are still too dominant for a short term bottom. If the bulls are successful, it may be the first technically positive price action this year as it will be supporting evidence that the $1200.00 bottom was a significant intermediate and potentially long-term bottom. If validated, even just a 50% retracement of the last gold bear market drop would see gold trade back to the $1500.00 level.
I have been asked numerous times if the debt ceiling issue was not going to be the catalyst to spur on a market correction. While the debt ceiling issue in 2011 in fact was the headline catalyst that drove the crash, we are reluctant to believe that lightning will strike twice in the same spot. Market corrections and crashes tend to be driven by investor uncertainty and the fear of the unknown. In this case, investors have now seen this and can quantify its impact, so it has a diminished risk of being the catalyst for the decline.
Anyone that has owned gold stocks over the last 2 years is probably sick of hearing bull arguments and frustrated seeing the stock’s decline with such severity. This is an indiscriminate gold miner bear market that is now leaving investors confused as ever. But when going through history, it is surprising how common it has been for the gold mining stocks to go through these bear market declines. In the last 40 years there were 6 distinct gold stock declines that wiped out 50-77%.