Ill winds mark its fearsome flight,
And autumn branches creak with fright.
The landscape turns to ashen crumbs,
When something wicked this way comes... (Ray Bradbury)
There is a certain maneuver in military strategy that involves the act of conveying a warning to an opposing captain by way of firing a missile or (in ancient times) a cannon ball across the bow of his ship. It was akin to the throwing down of the gauntlet or slapping a man across his cheek with one's glove and represents a signal that one is prepared to do battle. Your response will be "coming to" and hoisting a white flag if you are not willing to engage.
Last week, the Good Ship "MMT" (Modern Monetary Theory) had two such events with the first being the revelation that the U.S. Justice Department was invoking the RICO statute to indict our old nemesis, JP Morgan, alleging that it conspired to manipulate the gold market and in doing so, named senior managers as masterminds of the scheme. What was the shocker was NOT the indictment itself but rather the fact that they brought in RICO. RICO (RICO Act) stands for "Racketeer Influenced and Corrupt Organization Act" and "focuses specifically on racketeering and allows the leaders of a syndicate to be tried for the crimes they ordered others to do or assisted them in doing, closing a perceived loophole that allowed a person who instructed someone else to, for example, murder, to be exempt from the trial because they did not actually commit the crime personally." It allows prosecution of large criminal organizations such as the Cosa Nostra or Mafia and for it to be brought to bear upon a major legendary American bank is nothing short of astounding and a seriously large and menacing projectile whizzing across the bow of financial market complacency.
The second cannon ball to soar across the bow of investor confidence was of even greater significance. Tuesday morning, the first day of the FOMC meetings, the Federal Reserve undertook a $53 billion "repo" operation, which was effectively a Herculean hypodermic injection of liquidity into the banking system, and before all those "WTF?" bubbles go sailing around the blogosphere, operations of this magnitude are only done as "emergency measures" such as market crashes or the seizing up of the interbank lending facility such as was happening in 2008. I was on a train when my news feed lit up and my first and near-automatic response was "Someone is in trouble."
Now, there have been no official reports of anyone "in trouble" but the response of traders to this news was predictably and frustratingly robotic but why shouldn't it be? There are no humans left to trade anymore. The algobots that implement pattern recognition software were searching out "Fed rate cute" and "Trade war moderates" as their cue to buy stocks and having found nothing ominous in neither a major banking leviathan charged under the RICO Act nor a $53 billion repo (the first since the 2008 subprime meltdown), went on their merry way of buying any and all dips because "the Fed has their back." The days of my unbridled self-flagellation and distemperate outbursts, the nature of which subsided dramatically after gold broke out above $1,375, have crept back into the room and are threatening to dishevel me, a condition not appreciated nor tolerated by those around me. Emotional chaos is nigh, and it is not good.
At the risk of sounding like an alarmist, I am so concerned with the liquidity scramble that is being undertaken by the banks that I fear that there lurks a large ticking time bomb ready at any minute to derail the current stock market rally, which is within a chip shot of all-time highs for the S&P. It really isn't all that surprising that stocks are being bid higher; there isn't really an alternative for the young money manager trying to preserve wealth. The usually wrong majority have been avoiding bonds like the plague despite the 30-year Treasury up nearly 10% year-to-date, while the traders continue to trade the big names despite softening macro conditions. Collapsing German PMIs, weakening forward guidance, Fedex warnings—these are all symptomatic of "The Wall of Worry," a phrase that was relevant back in the pre-PPI (or at least limited PPI) days, when humans made investment decisions.
Today, there is no "Wall of Worry" that bull markets climb but there IS a "Cliff of Confidence" that is the Fed. Markets are scaling the "Cliff" because no matter how bad the outlook, there is ALWAYS a bid. Even last December when things looked irreversibly bad, the "Invisible Hand" of Smilin' Stevie Mnuchin came to the rescue and investing since then, as they say, has gone "swimmingly." Despite all just opined, I remain alarmed and on the "dedicated defensive."
There are a few of us around that recall the words of Ben Bernanke in the early stages of the banking crisis of 2008 when he described the subprime contagion as "contained." For this reason, when I see Jay Powell saying that the REPO liquidity injections are not to be misconstrued as a "policy tool," I am reminded of that famous joke, "How can you tell if a central banker is lying?" Answer: "His lips are moving." The Fed does NOT inject vast sums of cash into the banking system if everything is going "swimmingly well"; it does so usually during times of stress when one or more member banks are in trouble due to a default or a trading mishap. We have heard absolutely nothing this week as to exactly WHY the overnight lending rate spiked to 10% but you can be that someone did not want to give up any "liquidity" unless they got a big fee for doing so—meaning—someone or someTHING needed liquidity real bad.
Silver continues to recover, albeit with fits and starts, off the lows I identified via my Twitter posts on September 13th. I quite like Twitter not so much for being able to see what the Kardashians had for lunch but more so for being a tracking tool for market calls, both good and bad. Stockcharts.com is a terrific tracking tool as well as the "Saved Charts" feature time stamps all saved charts so my "buy" and "sell" signals are locked into posterity for all to either admire or ridicule.
Just when I thought I had achieved "legend" status for buying the JNUG (Direxion Daily Junior Gold Miners Index Bull 3X) at the May lows around (split-adjusted) $30 and selling it in June at $45, I wanted to take a ball-and-chain hammer to my forehead in July after pulling the trigger roughly $60 too early, watching in abject horror as NUGT (Direxion Daily Gold Miners Index Bull 3X) and the GLD (SPDR Gold Trust) August call options spit in the eye of the Commercial traders and screamed northward. That is why hubris is the most dangerous of all trader foibles and a great lesson for all to heed.
Luckily (as opposed to brilliantly), I quickly drew the conclusion that the landscape had, at least for the short term, changed and just as the gold gurus were advising their sheeple to "AVOID SILVER – GSR going to 100!," I deduced that the long-dated (and very successful) practice of fading all rallies in silver was going to get summarily rejected just as the long-dated (and very successful) practice of selling gold at RSI 75-plus had been rejected with the moon rocket move into the low $1,400s. In July with SLV (iShares Silver Trust) at $14.30, I mentioned in my missive that at the gold-silver ratio of 93, "Shorting the GSR here could be the Trade of the Year" and I did the next morning at 92.40 while buying a record long position in the SLV August $14 calls at $0.68 (June 25 Silver Tweet), which were rolled into the October $15.50 calls at a double, so I took all of my risk off the table but kept the same position with which I started. (Silver Switch) On September 4th, I sold that position along with the remaining 50% positions in the senior and junior miner ETFs (GDX[VanEck Vectors Gold Miners ETF]/GDXJ [VanEck Vectors Junior Gold Miners ETF])(Sell GDX/GDXJ), and then proceeded to sweat it out in abject terror while praying every half day that I would not lose the positions to an all-out vertical spike in the miners. Luckily for me, heavily medicated with Fido hiding once again under the tool shed, I pulled the trigger and reversed with a half-position in the SLV December $18 calls on September 13th (@ $0.42) and followed up with two 50% purchases of both GDX and GDXJ on September 17th and 18th but, alas, I went into this past weekend long ½ positions in the silver calls and ½ position in the GDX/GDXJ dynamic duo. (BUY GDX/GDXJ).
So now that I unabashedly patted myself on the back (choosing to carefully ignore premature stab at the TVIX and SPY puts), you all want to know, I am sure, where we are headed from here and no better way than to look at the chart of December silver posted above. I see a test of the highs of September 4th in the cards for the following reasons:
- RSI is in neutral trending higher
- Volume into the correction from $19.75 to my re-entry low at $17.50 was light as opposed to the massive volume on July–August spike.
- Moving averages all executed positive crossovers during the summer
- Monday's move through uptrend line (down through which it corrected) is powerfully bullish, and,
- MSM pundits are all still in denial of silver's dominance
As for the SLV, you can see that it has now, as of Monday's close, scrambled back above the uptrend line drawn off the July–August lows and is sporting a neutral 61.82 RSI while the MACD/Histograms are only now starting to converge in advance of a positive crossover. The 52-week high for SLV is $18.35 so with even the slightest of month-end hedging in advance of the ignominious month of October, it should be able to mount a respectable assault on $18–$18.35. Hence, if you are a speculator, you can continue to add to the SLV Dec. $18 calls but only on down days. If you did not see my tweet on Sept. 4th (@Miningjunkie) calling the bottom in silver and initiating the buyback of the Dec. $18s, then scale in with a ¼ or ½ position and after you are onside with the initial purchase, average UP to increase the size of the trade. NEVER average down on a futures or option trade. You will wind up with shattered quote monitors and empty liquor bottles adorning your desk and your pockets will be hanging ruefully from your pants while your wife goes looking for a lawyer.
Lastly, there are many professional investors that profess to have systems-based rules that govern their trading practices and while I have great respect for many that follow a discipline, you cannot substitute academic achievement for experience. I have a pretty decent-looking CV (including the Wharton School) but you can take all the courses and all of the degrees and stick them into the Vault of Failed Dreams for all they can do in a meltdown. In the last few trading sessions, I have become increasingly "edgy" and it has nothing to do with October on the horizon or charts or trade wars or ZIRP. It is an "ad hoc" interpretation of impending doom, a "feeling", a "sense," that the recent Fed REPO OPS that were vacuumed away from the headlines by those that CAN were merely early warning signals of a yet-to-be-determined "event risk" out there. I am still holding in excess of 35% cash in the GGMA Portfolio and that is significant given how confident I was in early September that the precious metals correction had run its course. Had I committed all cash reserves to the miner ETFs as I am normally prone to do, I would have added another 4–5% to the performance going into month-end.
I am exercising extreme prudence because if there is an event shock, liquidity is going to be the main issue. Because these REPO OPS are being conducted to shore up bank liquidity with the S&P within a few points of the highs, imagine how sparse the bids will be in a market crash like last October?
Something wicked this way comes—so stay safe.
Follow Michael Ballanger on Twitter @MiningJunkie.
Originally trained during the inflationary 1970s, Michael Ballanger is a graduate of Saint Louis University where he earned a Bachelor of Science in finance and a Bachelor of Art in marketing before completing post-graduate work at the Wharton School of Finance. With more than 30 years of experience as a junior mining and exploration specialist, as well as a solid background in corporate finance, Ballanger's adherence to the concept of "Hard Assets" allows him to focus the practice on selecting opportunities in the global resource sector with emphasis on the precious metals exploration and development sector. Ballanger takes great pleasure in visiting mineral properties around the globe in the never-ending hunt for early-stage opportunities.[NLINSERT]
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Charts provided by the author.
Michael Ballanger Disclaimer:
This letter makes no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents my views and replicates trades that I am making but nothing more than that. Always consult your registered advisor to assist you with your investments. I accept no liability for any loss arising from the use of the data contained on this letter. Options and junior mining stocks contain a high level of risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. One should be familiar with the risks involved in junior mining and options trading and we recommend consulting a financial adviser if you feel you do not understand the risks involved.