THE DEVIL IS IN THE DETAILS
I noticed something a bit unusual this past week when reviewing the COT data. You can see in the above chart in the Dollar Index that on the last bar that made a new low for the last couple of years, we have had a spike up in Small Spec longs. This is a bit unusual, normally individual investors are selling heavily at lows like this and buying at multi-year highs. Generally, we want to be opposite the little guys in trading, so this on the surface just plain vanilla, is a sell signal. However, generally these types of things occur opposite a move in the market with the Commercials and with the trend with the small fries. This is the opposite of what normally occurs. We would all be hard pressed to find someone bullish on the dollar right now, which generally is a reason to be bullish, this is a CONUNDRUM.
If we look back historically for other instances where this has happened, there have been a few.
Here is one that is interesting, and this is what I think is going to happen here. You can see we were tanking in this instance, we broke down to new multi-year lows. Initially the Small Spec longs increased, but then you can see they quickly got scared and covered those positions selling right into what became a big low. We then had a more normal pattern, where the small fries were selling heavily, and boom the market went up. Since we have several cyclical things telling us to look for a June/July top in stocks, it would logically follow that a low point will be made in the Dollar at that same time. These two markets are inversely correlated and tied at the hip for the time being. This does not mean I am looking to buy this market at this point, I am not. However, I am a big believer in traps, and I think one is being set here. Our fearless leader Ben has made many of the normal rules of trading invalid by the artificial manipulation he has orchestrated. It is his doing that has made the Dollar this weak and I am sure glad that no inflation has occurred as a result of this crap, ...oops, uh well....., there is no inflation if you just take out all the things that have gone up out of the inflation report.
Here is another example.
This chart for the most part shows the more normal pattern you see in most markets. You can see the Small Specs buying and being wrong as the trend keeps going and they get wiped out. The first example is the only one that shows some heavy buying right at a low, but it is still not really what we have going on here today. In summary, it is hard to know exactly what this means, but it is my thinking that it will result in a sharp move down that scares these newcomers out, and that will result in a sharp rally. This will take place over the next few weeks if it plays out that way. We would need to get a sharp enough run down first to scare these folks.
The Silver market is going parabolic at this point. I have to tell you I don't know anyone who is trading this market at these levels in either direction. To say this is dangerous is the say that Barry the intern is an idiot. It is the biggest understatement I could ever make. When markets get into these phases they are untradeable. The ADX has now reached about 80. Keep in mind most market tops occur in the 50 to 60 area with ADX, so this is extended so far beyond that it is incredible. When I go back and look for prior times when we have had these readings, it is a mixed bag. Some have just absolutely cratered, like the 1980 top. There are others that have continued on for a couple more months before crashing. They all crashed that is one thing they have in common. I think even the Metals bulls are worried about this now.
There is no doubt that for the man/woman, who picks the top correctly in this market, it is literally a billion dollar trade if they have size when this collapses. However, who in the world knows when that will be. The problem with this type of move, is there is not even a reasonable spot to have a stop underneath to protect your long is you are long. Please do not buy this market here. It could very well keep going, but if you look at history, there is not a single move that has ever happened that looks like this that has not formed a major multi-year top and imploded eventually. I cannot even say I wish I was long this market now, it is far too dangerous to be involved with something like this unless you have been long for a couple of years. This is not a time to initiate a position.
Here is the 1980 top, but there are other charts I could show that show the market continuing on for a bit with this same condition. I have no idea at all who is buying this market here, or for that matter who would be selling it. I suspect this is just being driven by the funds at this point even though it is not completely clear in the COT report who is doing this.
For this week coming up I have noticed there is a huge Small Spec short position in 10 Year notes, so longs should be considered there. I am also looking at longs in Cocoa and Sugar and a few other things. I don't expect any major downside in the stock indexes this week, they will likely be flat to higher.