A subscriber asks, ‘When will the top in stocks be?’ My answer is of course ‘I don’t know’. Barrons answer is not yet, which should worry people as you will see below. In terms of making a case for this, my best guess based on things that matter is when speculators have had enough of shorting the market, which is in fact not yet. As mentioned last week in our sentiment study, open interest put / call ratios are still high on too may ETF’s in order to expect significant downside. Enter the Fed’s hawkish comments of late, and we have yet another counterintuitive short squeeze. Bottom line is you don’t short stocks in this environment unless you are the only guy doing it, because the machines will find the shorts, no matter if the field narrows, and squeeze them out. That’s what they are programmed to do.
And if stocks were to start falling in earnest, you can bet the Fed is so worried about Trump getting in, it would pull out all the stops to support stocks in spite of recent hawkish comments. This is just a ruse because it’s working right now, again, causing a counterintuitive squeeze in stocks, not to mention, smashing of precious metal prices. This was expected however, along with the propensity of precious metal shares to remain relatively buoyant, in the neighborhood of 200 on the Gold Bugs Index (HUI) – closing basis. And again, based on the observation the GDX and DUST put / call ratios don’t see radical change moving forward, any volley’s in precious metal shares lower should not be lasting, even if the HUI closes below 190 (important support), especially as the month clicks over and options expiry approaches.
Back to the stock market for a minute. You will remember from here a few weeks back I thought it was possible the rally in stocks would continue until the S&P 500 (SPX) / CBOE Volatility Index (VIX) Ratio (see below) vexed the sinusoidal, again, because of all the speculators long volatility, and I am still in this camp, becoming an ever closer reality. So if you are wondering exactly when it would be a good time to short stocks / buy puts, assuming broad market ETF open interest put / call ratios are not higher, this would be it. Because while it’s always possible it goes to the extreme sinusoidal rail in the monthly picture below, still, you would likely be in the ballpark. Because all this tension associated with the ‘Trump thing’ right now will fade eventually, which should exhaust the nervous money at some point. (i.e. halting the squeeze.)
This post was published at GoldSeek on June 13, 2016.
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