first majestic silver

Springboard Buy

August 25, 2014

Signs Of The Times

"Sources said broker's margin calls were met, but the event unnerved the Structured Finance Market (STACR)."

- Reuters Hedgeworld, July 27.

"Eight Companies About To Issue IPOs That Will Turn The Last Quarter Of 2014 On Its Head"

- Money Morning, August 8

"Banks are lending to companies and individuals at the fastest pace since the financial crisis, helping propel profits to near-record levels."

- Wall Street Journal, August 11

Stock Markets

On the bigger picture, the stock market has soared to excessive readings on sentiment and momentum. These are only registered as a cyclical bull market peaks. This is a process and market forces are beginning to change.

The item with the most constant support has been the A/Ds for the S&P. This was constructive right up to the high it set on July 3rd. In trailing the actual index since, it becomes a warning.

On the near-term, Sunday's ChartWorks noted that the decline was sufficient to register a "Springboard Buy". Typically, these occur in an uptrend and the last significant one occurred in October. Distinctively, Ross pointed out that this "Springboard" is within what seems to be an ending pattern.

Recent examples included the tradable high in 2011 and the cyclical peak in 2007.

Other "indicators" include credit spreads which reversed to widening in June. Our July 24th view was that the trend change was quiet but some drama would influence the stock market.

Lower-grade bonds and spreads broke down later in July and while noticeable the hit was not really dramatic.

Otherwise, the performance trio, Rosy Scenario, Goldilocks and Lady Bountiful have been commanding the stage.

Mother Nature and the Drama Queens are waiting in the wings.

As represented by the STOXX, Europe has been a leader.

Recently it was to the downside, as it took out the 30-Week ema in mid-July.

This moving average provided the "buy the dips" opportunities in the bull market that peaked in 2007. That "takeout" occurred in that July.

This time around, it did the same from November 2012 until a few weeks ago.

Last week, the S&P briefly dipped below its 30-Week ema, which is at 1920. The index is at 1932 and a decisive takeout would get the US stock market in line with Europe's.

For the S&P, the trading range at close to the 1880 level that lasted from March until May could provide support. The equivalent on the STOXX was 3150 and it was taken out in mid-July.

The next support line for the SPX is the 200-Day. This is at 1865.

The next failure for Europe was the 200-Day ma which was at 1326. That was taken out at the end of July.

Our July 21st advice was to sell the rallies.


The CRB rallied on our "Rotation" theme from a double bottom at 272 set in November and at the end of December to a double top set at 313 in April and in June.

The decline since took out the 50-Day and 200-Day moving averages.

At 292, the index could recover for a few weeks, but most commodities are vulnerable to developing problems in the credit markets.

Within this, base metals (GYX) were late to "Rotate", but rallied from 321 in March to 376 a few weeks ago. The Daily RSI reached 72, which was somewhat overbought.

The index declined to 365 and has recovered to 369. This could continue for a few weeks, but base metals are vulnerable to deteriorating credit markets.

Agricultural prices (GYX) remain weak.

There are two ways of looking at this. One is that the recent low of 317 extended the bear market that started at 570 in March 2011. That high was set as our Momentum Peak Forecaster called for a cyclical bear market in the hot commodities. Including the precious metals.

The other way is to consider it as so oversold that a rally would be a natural. We have been considering this since June, but good growing conditions continue. The chart is now in a saucer pattern that could lead to a rally.

The struggle involves the guessing the weather as well as developing credit concerns.

Good grief, but crude oil has been acting like the European stock market. The recent decline has taken out the 50-Day and 200-Day moving averages. So let's look at the bigger picture.

The rally made it from 91.24 in January to 107.68 in June. In looking over out shoulder, this sees to have fit our "Rotation" theme. Actually, the chart became somewhat overbought on the Daily and set a double top.

The decline has been to 96.55 and is not oversold.

However, there is support at the 97 level and crude prices could be steady to firm over the next few weeks.

Gasoline's drop was impressive. The high was 3.12 in June and last week's low of 2.70 pushed the daily RSI down to only 25. Steady to firm is possible over the next few weeks.

Credit Markets

Junk became overbought at 41.81 late in June. In two steps it dropped to 40.06 when we noted the degree of oversold. That was in our July 24th edition.

The rebound has made it to 40.95. There is resistance at the 41.12 level and we can't see it going much further.

Last week there were stories going around about "massive" redemptions of junk-bond funds. The emphasis was on "massive" and it is by the public. The carry-trade is still buying. Well, the spreads must be very appealing.

The Hunt brothers attempt to corner silver reached a monumental crescendo in early 1980. This boosted the real price to unheard of level, but the public took massive amount of silver objects out of the attics and basements and sold them.

The public was correct on that that massive miss-pricing of silver. It could be very right on this massive miss-pricing of interest rates.

Last year's hit in price amounted to 4 points and was sufficient to clear the market. This one has clocked less than 2 points to become oversold. This would not have cleared any problems out of the market.

Five years of reckless central banking have, indeed, caused amnesia and the next slide in lower-grade bond prices will be in the season when financial disasters have been discovered.

The bond future was likely to rally to around 140. The high on Monday was 140.3 and the action was not overbought. The correction could continue for a week or so. The next slip in the stock market could prompt one more rally in the USB.

However, our theme has been that the theories of central bank interventions have always been a highly speculative notion. Moreover, the practice of late has also been highly speculative. On top of this the public and fund managers have been buying bonds, largely compelled by very low rates in shorter-maturities.

Unravelling of this unprecedented condition will be very interesting.

Precious Metals

Some things we have been concerned about seem to be working out. The precious metals sector as an indicator has been anticipating a significant change in the capital markets.

This became more intense today when silver dropped 19 cents as gold increased by 6 dollars.

Since the opening this has relaxed a little, but one of the features of a developing financial crisis has been sudden drops in silver relative to gold. It is more significant if silver actually declines as gold rises. The value of the signal can be enhanced if a silver analyst states that there is no reason for silver's hit. After all, supply/demand numbers are always positive.

Two weeks ago this page noted that the gold/silver ratio had risen through both the 50-Day and 200-Day moving averages and that it was a plus for the trend. Also noted was that rising through 67 would set the uptrend, which would indicate mounting financial pressures.

The low was 61.7 set in mid-July and it is now at 66.5.

The other indicator is gold's real price. Our Gold/Commodities Index (GCI) is a proxy and it set what we took to be a cyclical low in June and in turning up it began to anticipate change in the capital markets. The chart follows.

Earlier in July we thought that the rise could correct. It did and it is now close to breaking above the 3.90 level. That would be one big step towards the general discovery of credit problems.

The decade-long bull market in the precious metals sector completed in 2011. One indicator on that peak was that the RSI on the silver/gold ratio soared to 92. The only time this had been accomplished was in the fateful January 1980.

Speculation had become dangerous.

The decline in the GCI since 2011 represents a decline in fortunes in the gold mining industry. We have been taking the recent low as the start of another cyclical bull market for gold's real price.

This will improve operating margins.

But, the pending cyclical bear for orthodox investments will pull down most gold and silver stocks.

Gold in dollar terms could continue firm, but there could be days when the dollar is strong. In which case, gold will get hit.

This has been our theme for a while and it includes that silver could be weak relative to gold.

Gold / Institutional Advisors Commodity Index

  • As an indicator, the turn up in the GCI is anticipating the end of the cyclical bull market in orthodox investments.
  • Breaking above 3.90 would technically mark the beginning of a cyclical bull market for the gold industry.
  • The turn down from the cyclical high in February 2009 signaled the end of the panic and the start of the financial bull market.
  • The turn up in June 2007 anticipated the post-bubble financial collapse.

Courtesy of Institutional Advisors

Bob Hoye is the chief financial strategist of Institutional Advisers.

A one-ounce gold nugget is rarer than a five-carat diamond.
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