As I begin the weekly missive here on Thursday, the U.S. equity markets are experiencing the worst daily assault since that fateful day back in 1987, when the Dow lost 23% in a single trading session, sending thousands of Gucci-clad stockbrokers to the Sears re-fit aisle. Being the incredibly prescient individual that I am (tongue firmly planted in cheek), I have attempted four times since 6 a.m. to put words to paper, and four times I have deleted every paragraph and no fewer than ten different charts.
I have tried humor, I have tried humility, I have tried hubris, I have even tried cheerleading. Alas, at the end of the day, I am proceeding on the premise that followers of my work want a simple opinion on one thing: tactics. What are the tactics that I intend to employ to show a positive return for the year 2020? (Subscribers will have my blueprint in the subscriber section, which may be accessed at this shamelessly offered e-mail address of [email protected].)
First, I want to talk about the gold market and its pitiable inability to hedge one's net worth against a market meltdown. While the chart below clearly shows that gold investors are still (barely) ahead, 0.27% versus the S&P down 16.09% and the DJIA down 18.76%, the strategy was based on the assumption, from its behavior in 1987 and 2009–2011, that gold would advance in the opposite direction to stocks, but that in the event of a crash, it would initially suffer, then outperform.
However, it had lost a good deal of the 2020 gains in Thursday's session—at one point, it was down over $80 per ounce as obvious margin selling took its toll. While it is indeed outperforming stocks, it is still getting smacked, and that is little solace to investors in the gold miner exchange-traded funds (ETFs) and junior explorer/developers (not to mention silver).
COT Report: Observe the vast differential between the Large Speculators and the Commercials, where the open interest was at record levels. With the late-week crash, massive short covering by the Commercials will be matched off against similar capitulatory selling by Large Specs. It is part and parcel of all that is wrong with this incessant "control freak" tendency whereby the New York banks, with support from the D.C. morons, allow gold to be capped and stocks to be "bid," which played out again by week's end in spades.
Twelve years ago, the Fed stepped up and bailed out the banks as a reward to the American people, told them to buy stocks, and then juiced the markets to record highs in the ensuing years. This afternoon, in response to a highly stressed 30-year bond auction, the Fed added $3 trillion to the REPO facility. It remains obvious to this investor that the problem in the markets is indeed a financial crisis, as opposed to the protests of the pundits and market gurus that are sluffing this off as "simply" a health crisis (it's that too).
I "faded" the immortal words of the late Marty Zweig, whose #1 trading rule was "Don't fight the tape and don't fight the Fed." Back in 2001, and in 2009, and again in December 2018—as in all three instances—the major averages reversed and then went on to new highs. I would be sitting in my humble office humming darts at pictures of Bernanke or Yellen or Powell as the "invisible hand" of the New York Fed swooped down and saved the day, just as the averages were threatening to enter either correction mode or bear market mode.
Through the past eleven-year bull market, the stock market's role as an economic barometer faded purely because of the machinations and interventions of the mystical miasma of late afternoon shenanigans in all markets deemed "crucial to National Security" or, more appropriately, the reelection of the incumbent.
So, with the CNN Fear and Greed Index at "1" and abject terror filling the hearts of all investors (amateur and pro), I turned bullish on Thursday for the first time in over a decade. That all asset classes got smoked that day in a gut-wrenching drawdown of immense proportion is a testimonial to the leverage currently in use across the entire spectrum of financial markets. Thirty-something math geeks using sophisticated algorithms deduce that a 10-standard deviation move in a position in which they have notional value fifteen times the asset value of their fund could never occur. And yet it does. And they get wiped out.
In a manner not unlike the spread of the COVID-19 microbe across the planet, the "Sell Everything" contagion infected the vast majority of over-leveraged funds, with their prime brokers issuing margin calls at an alarming (but not surprising) pace. Remember, conditions like these are the fertile breeding grounds for new bull markets.
I began to finish the weekly missive Friday afternoon with gold down US$85 per ounce (–5%) and silver down US$1.50 (–9.5%), placing gold in correction territory and silver in a full-on bear market. While I have largely avoided the bulk of the drawdown by avoiding the senior and junior gold ETFs, a late-week flash crash has them all at shockingly low levels.
With the Dow down nearly 2,000 points on Thursday afternoon, I fired off a tweet to my followers that was, in itself, one of about five I sent out. But the one shown below was truly how I felt going into the last hour of trading. I was putting my money where my mouth was, and bought two-thirds of a large position that was bleeding from the eye sockets by the time the final bell sounded. "I missed the turn in 2018 and 2008—ain't gonna fight the Fed and the Tape this time (Thank you Marty Zweig)" was my message, and with Friday's 1,985 pop, it had paid off in spades.
Now, if I started taking victory laps because I bought into a crashing S&P running a sub-20 relative strength index (RSI), I would be seen as somewhat disingenuous, because while my handful of SPY calls were doubling, my carefully constructed GGMA portfolio was taking a pounding. While I have been overweight the physical metals and seriously underweight the senior and junior miner ETFs, they took GLD and SLV down hard, with losses topping 3% and 8% respectively, a development I totally did not expect.
Nevertheless, the point here is that now is the time to go overweight the miners and underweight the physical metals, because of this one glaringly expressive chart, which plots the price of the senior miners (GDX:US) against the price of gold (GLD:US). I am not going to launch into a mindless rant about interference and intervention and manipulation, but just as "magical" was the reversal in stocks in the wee hours of the Friday morning (down 600 to up 700 Dow points in less than an hour), you can take to the bank the notion that part of this theatrical display of market dynamics involved sending a powerful message to the naysayers by way of an April 2013-style carpet-bombing of the precious metals, two historic adversaries of equity market cheerleaders (like Larry Kudlow).
The chart shown above has the GDX plotted against the price of gold, and based upon the Friday close, the senior gold miner ETF is now back to valuation levels from January 2016, when the HUI hit 99.17 after a large European sovereign wealth fund puked out its entire gold miner holdings in one session, creating a decade-long bottom. The action in the precious metals and mining shares this week was at once both irrational and bizarre, setting up a generational opportunity for traders and conservative investors alike.
A few weeks ago, I wrote: "I don't want to hear or read excuses that blame JP Morgan or HSBC or the Crimex or the SEC or the "cartel"; I want silver to break free of the shackles of intervention and interference and get into gear today. Period. If silver fails to launch into the slingshot effect, then the integrity and validity of the gold move is suspect and that goes for the Gold Miners as well."
Now we know precisely what the silver market was telling us. And yet, despite the carnage, gold has not yet entered an official bear market. It is in a full-blown correction but if we hold $1,363, the bull remains alive and well, and therein lies the reason that I was a buyer of the miners on Friday, and will continue to do so this week.
For your interest and review, I include the two charts below, of the GDX and GDXJ, which demonstrate just how egregiously oversold they are. RSI readings of 21.19 and 19.01 are synonymous with every bottom that I have ever encountered, and this time is no different. On a side note, the social media comments from all of the newsletter writers were completely consistent with prior bottoms, and I fully expect the usual gang to claim credit for forecasting the bloodbath. But in the final analysis, everyone got smoked, and the heroes are those that lost the least. That is part and parcel of market crashes, and I consider myself fortunate to have a hefty cash position in my trading account to deploy into issues representing such phenomenal value.
The chart posted above is all you need to see in order to ascertain the right course of action. The steps taken this week by the central banks to loosen monetary condition, plus the fiscal measures announced this afternoon by the POTUS, were and are designed to bolster stock prices and re-elect the incumbent. It is really that simple, and while earnings are going to be challenged due to the disruptions caused by COVID-19, the miners generate a ton of cash flow with a $1,500 gold price.
It was a difficult week for all, and it is my sincere wish that everyone stays safe and rides out the current storm in the company of healthy family and friends.
Originally trained during the inflationary 1970s, Michael Ballanger is a graduate of Saint Louis University where he earned a Bachelor of Science in finance and a Bachelor of Art in marketing before completing post-graduate work at the Wharton School of Finance. With more than 30 years of experience as a junior mining and exploration specialist, as well as a solid background in corporate finance, Ballanger's adherence to the concept of "Hard Assets" allows him to focus the practice on selecting opportunities in the global resource sector with emphasis on the precious metals exploration and development sector. Ballanger takes great pleasure in visiting mineral properties around the globe in the never-ending hunt for early-stage opportunities.
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Charts provided by the author.
Michael Ballanger Disclaimer:
This letter makes no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents my views and replicates trades that I am making but nothing more than that. Always consult your registered advisor to assist you with your investments. I accept no liability for any loss arising from the use of the data contained on this letter. Options and junior mining stocks contain a high level of risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. One should be familiar with the risks involved in junior mining and options trading and we recommend consulting a financial adviser if you feel you do not understand the risks involved.
