Saturday, March 05, 2011


As we continue forward during this very unique time in history, I present you with yet another anomaly I have never seen before. The above Gold chart shows something that is just astounding to me and something I don't think we will ever see again once it ends. This has principally led to me making an incorrect call for a major top in Gold a year ago, that was dead wrong. The arrows show about as conclusive a case as you could ever see for the fact that the Small Speculators are driving the whole Gold market rally.

You can see virtually every little move be it up or down, is accompanied by an identical move in the Small Speculator net position. I have never seen this before in any market go on for this long. As a student of the COT report, which is published by our good friends in the government, I have learned that prior to recent times, it has been an absolutely fabulous tool for predicting market swings. Until QE started of course.

If you just think about it logically, which at times can kill you in trading, it is typical for the public band wagoners to hop aboard the train right at the worst possible time. You can find one example after another historically, where the Small Specs got increasingly bullish right at a market top, and bearish right at a market low. I will show some examples of this in a moment. However, in this case, they have been "dead on balls accurate." ( One of my favorite movie lines from My Cousin Vinny )

Now on the far right of this chart we see that the net long position of the Small Specs has rocketed up to it's second highest level in history. The beginning of Feb of 2003 is the only time it was ever higher than it is now. That preceded a sharp decline, but one very short in duration. Then we launched on this record making run upward. There was a second run up in Small Spec longs that followed shortly thereafter, which led to a decline of some magnitude, but again short in duration. Below is a chart of that time period and the two examples of this.

I have a horizontal line drawn at the net level that we have right now, extended back in time for reference here. You can see the first time we exceeded it, we then had a several week decline, which ultimately led to a big rally. The second occurrence is a little more like what we have right now, with the net position being slightly lower but close enough. We had in that instance a false breakout to a new high that quickly reversed ( a trap ). The same thing then happened, with the overly bullish long position getting worked off leading to a great buying opportunity. With these prior two instances as reference, this is what I think will happen now. We are going to get another decline which will work off this excessively bullish Small Spec position. Once that has taken place, it will likely lead to another launch upward here.

What I also find interesting just to ponder as a possibility is the following. Some of the cyclical references I have for this year in stocks show a June/July significant top. If you look at the duration of the declines above they are 2 to 3 months, which would take us about into that time frame. Since we have kind of morphed away from GOLD tracking stocks now, and being a flight to quality place, it logically follows that if we get a nasty stock decline, it could lead to a GOLD rally.

In summary, I am looking for a decline here right now to last for a couple to 3 months, which will lead to another lift off further delighting the gold bugs and small specs, who will undoubtedly drive it as they have been even though it makes no sense at all. It is what it is.

Here are a few charts that show what had been the historical tendency of heavy Small Spec bullishness. As you can see it is not consistent with what we see here. However, trading is about adapting. What has historically been true just is not right now, so don't fight it by being righteous.

You can see 3 instances where what should happen did with the large increase in Small Spec longs. Of course there is a possibility that has to be considered here. There may well be a change in who is being classified where in the report. It may very well be that groups that are not truly Small Specs are being lumped into that category, which could be distorting the figures. There is no way we will ever know if that is true or not, but with all the manipulation that is going on, it certainly cannot be completely dismissed as a possibility.

On that same subject, a problem confronting the PPT is developing. Certainly John Q Public has greatly benefited by this magnificent rally they have sponsored. I seriously doubt the average Joe has any problem having watched his 401k completely recover all of it's losses. However, here is a problem they have created for themselves. We now have a very bullish climate for stock prices, I doubt many are worried about a big decline, sentiment numbers certainly bear that out. We are now starting to get some people confident enough in the recovery, that they are back in full bull mode and putting money back into the market.

I wonder how the same people that are thrilled with the PPT will feel if we get another 50% decline? It is my contention that if they then become educated about how they were suckered back in at the absolute worst time, just to see there hard earned money disappear again, they will not be too happy to learn the whole rally was a manipulation. If that were to happen, I think the public pressure on this whole scenario would be overwhelming. These guys better hope this rally they have created can run on it's own. If you watch the last week or two, you can see that at times when they have stepped away, prices have fallen quickly, forcing them back in to save them. This tells me at this moment this cannot run on it's own. Maybe that will change I have no idea. It does seem to me in the market overall right now we have natural forces wanting to drive prices one way, and unnatural ones another. It is making for very choppy wide swing type of trading.

I still maintain this a time to lighten your long exposure to stocks. This has been a historic run and with it only happening one other time in history, this % this fast, odds do not favor it continuing at this rate. I will close with an anecdotal story. I was in New Orleans last week, talking with a friend of mine. He told me he had all of his company 401k money in his company stock. He had achieved a fantastic return having seen it skyrocket in value. He asked me what I thought. I told him the first thing he should do the very next day is move it all out of the stock. I further said that is the dumbest thing you have ever done and don't be greedy. You literally got away with murder. You did the worst possible thing anyone could ever do and got away with it. I asked him if he had ever heard of Enron, he had but did not really understand what happened with many of those people.

His final comment on the subject was, " I have done so well I don't want to sell here." Of course we all know what will likely happen there, he will get wiped out. It is the greed of people combined with fear, that lead them to make these types of decisions. However, it also is an anecdotal story of an average person that is very bullish on stocks and not even considering the possibility that something could change. This is why I think a big top is close along with the things I talk about in here every day.

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