Happy Halloween... Trick or October Pivot 2?

The run up and aftermath to the FOMC’s QE announcement last month brought a surge of bullish optimism to market players – especially those in the over bought precious metals – that was unsustainable. Enter the predictable October fright fest that has seen big-name US earnings reports routinely punished and sentiment knocked down across the broad markets.  It should be clear to all by now that the US economy is decelerating.

Of course, one look at the Copper-Gold ratio tells that story well enough and has been telling that story since the spring time.  Gold is a counter-cyclical asset that benefits when policy makers are pressured to attempt to compromise their currencies in service to economic growth.  Copper is a cyclical commodity that goes in line with economic growth.

The economy and markets got a little bump last year in Q4 amid all sorts of bearish calls by the most visible market callers.  People were terrified and for their fear were served up a heaping helping of bull after what we called the ‘October Pivot’ a year ago.

That was then; what about this year?  Well this time our work has been following a decelerating economy and the inflationary policy used to battle it.  Inflation is not a good thing even though it’s promotion can help manufacture temporary bullish environments.  Also, within an inflationary regime some assets will respond better than others.  Hence the initial ramp in the precious metals that is now being corrected.

We cannot know for sure what will come out of today’s meeting of the interest rate and debt manipulators at the FOMC, but we do know that they have the backing of an October deflationary lean with precious metals, commodities and now stock markets all playing their October roles to near perfection.  I wonder how Prechter masks are selling this year.

Here is the USD chart from NFTRH 209.  Uncle Buck found support after becoming deeply over sold with the QE party.  The red box shows converged and down turned moving averages that will act as resistance.  We are allowing for USD to ding the 200 day averages at around 80.50 on its counter-trend rise.  Like so many markets, the USD remains on an intermediate trend – in this case, down – which would only be broken by a successful rise above the moving averages.

The competing Euro has a moving average box of its own.  In this case a cluster of rising averages that would act as support.  If the Euro breaks down, chances are the whole broad market bull is going to break down.  But here’s the thing; they have not broken down yet and imposing your will on the market – whether that will is bullish or bearish – is not advisable.  Sadly, all too many people do it; while talking their book so to speak.

The correction in the broad markets – including in the precious metals sector – was expected, is normal and is now maturing.  It will continue to mature into its conclusion very shortly or it will mature and morph into something more virulent and end the broad market rally that got so many people off sides last summer.

As difficult and pained as the process was, we caught that rally last summer and has not yet abandoned the bull case because this October has played to near perfection to the existing plan.  The plan calls for the USD being held at 80.50 or lower and various markets – most notably for our main theme, the precious metals – holding certain support levels.  One of them was shown yesterday for silver.

Let’s see what the FOMC does and let’s understand that the market needed to punish the QE momentum players in a fitting October correction.  Let’s resist making the mistakes that the doomsayers made one year ago until it is actually time to make such calls.  Meanwhile, the bull is intact.  My preferred theme is the precious metals, now that dangerous over bullishness is getting cleared out.  There are other themes out there.

For example, if the bull is to continue as expected one might consider the positive risk vs. reward setup in Emerging Markets vs. broad US stocks as illustrated by the above EEM-SPY chart.  Perhaps as the rally renews into its final up phase the more speculative stuff will out perform.

To answer the title question, I had expected what was termed an October “issue” within a still-bullish bigger picture and taken and advised necessary risk management steps.  Yet nothing has changed with the bullish view as yet.  Let the US dollar break 80.50 to the upside, let the gold-silver ratio (risk off indicator) break its 200 day moving averages to the upside (it is at the 200′s now), let junk bonds lose the 50 day averages and let T bonds break their downtrend and I will be happy to revise the plan.

For now, the costume I plan on wearing for Halloween has two horns and no, I am not talking about the devil.  I invite you to follow my work by twitter, sign up for the free eLetter and/or keep an eye on biiwii.com for ongoing analysis of the current market situation.  It is bound to be interesting as we head through spooky season into year end.


Gary Tanashian