A Small Amount of Silver-Lining in the Clouds of a Hurricane

There are different kinds of stormy weather — meteorological, geopolitical, political — and the world is experiencing all of them simultaneously.

  • North Korea testing its nuclear weapon capabilities, and the U.S. threatening a military option if North Korea doesn’t stop those tests and/or threatens the U.S.

September 9 is North Korea’s anniversary of its founding. The day is usually celebrated with parades and mass dances around Pyongyang, but last year it also became an occasion for Kim Jong-un to conduct an underground nuclear test, the fifth since the country first began nuclear tests, in 2006. The markets, including gold, were trading (at least until midday on Friday) as if NK would choose to celebrate its birthday by firing-off another of their special fireworks like they did for the American birthday on July 1st. However, we think it is unlikely that NK will do something so obvious. It may be that they do, or have already done, something that is less obvious, such as hack some important American institution (Equifax). In some ways, that would make a bigger statement and be more frightening than firing-off a rocket. Maybe they will announce (brag) on Saturday that they did the hacking. Or they do nothing at all. It remains to be seen.

  • The U.S. political storm continues to rage on several fronts.

The GOP is being rocked by dissension after Trump crossed the aisle to strike a short-term deal with the Democrats that packages the Harvey relief aid with a three-month extension on government funding and the debt ceiling. Some think that given the differences of opinion in the GOP over the deal that has been struck now, an agreement on a budget resolution and a debt limit increase at year end will feed a partisan stand-off approaching mid-term elections.

There is also increasing skepticism about a tax reform package getting passed before the end of the year (if at all).

Uncertainty about the future of monetary policy has bubbled to the top following the resignation of the Vice Chairman of the Board of Governors, Stanley Fischer. In addition, Ms. Yellen’s term as Fed Chairman expires in February and President Trump has yet to announce if she will be reappointed (it is likely that she would decline the reappointment even if it was offered).

  • Hurricane Harvey barely ended, and now Irma, the most powerful storm ever recorded in the Atlantic, is smashing its way through the Caribbean and Florida, with a third storm, Jose, building and on the same trajectory.

It seems impossible to dissect anything beneficial out of this scenario, but there may be some good that comes out of all this devastation — other than the fact that the loss of life seems to have been mercifully lower than expected from such a powerful storm. Last Fall’s election of the Donald, created the optimistic expectation that fiscal policy would be implemented for the rejuvenation of America’s crumbling infrastructure. So far, nothing has happened and, as a consequence, the Trump ‘reflation trade’ has ended. The devastation from Harvey, Irma, and Jose will force congress to loosen the fiscal purse-strings and rebuild infrastructure, at least across the Southern U.S.. After a lag-time of one or two quarters, this will show up as an increase in GDP and in inflation. It is beyond unfortunate that it takes a human tragedy of this magnitude before politicians start doing their jobs, but it is a small amount of silver-lining in the clouds of a hurricane.


As of last Wednesday, the AAII sentiment survey shows that bullish sentiment increased by 4.3% to 29.3%, the neutral sentiment decreased by 0.1%, and the bear sentiment deceased by 4.2%. Bearish sentiment remains too high for a major top to be forming; major tops tend to occur when bull sentiment is above 50% and bear sentiment is less than 30% (chart below).

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The National Association of Active Investment Managers (NAAIM) index measures the sentiment of a segment of professional investors. The chart below highlights the positive correlation between the NAAIM and the SPX. The average of the NAAIM has dipped over the last two months, but is now working its way back up. There is no negative signal at the moment.

The Rydex fund asset level provides a non-survey based measure of sentiment within the equity-fund management community. Historically, the ratio of bear-assets-to-bull assets (Bear:Bull) has been at a minimum when the SPX makes a major top (red ovals on the chart below). A top in the SPX is signaled when the 36 MA of the Bear:Bull ratio develops a positive slope (i.e. moves higher), but this can be a leading indicator that can start increasing up to 6-months ahead of the SPX making a top, like it did in 2000 (chart below).

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The 8-month moving average remains above the 12-month moving average, and even though the MACD has started to flatten, until the moving averages cross over, there is no damage to the secular bull market (chart below).

Technically, we continue in a bull market.

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We started to reduce our gold short position once gold broke above $1310, but we are holding off on further reductions until the follow-through above $1340 is confirmed; the RSI and the stochastics are extended and over-bought (chart below).

Gold has moved up partially because of the geopolitical situation, but mostly in response to the weakness in the dollar. As we have written in the past, gold moves in response to the really big markets; the dollar index, Treasury rates, the USD/JPY FOREX pair, and inflation.

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The USD/JPY pair, like the dollar index, is also in a 50/50 technical conundrum where the stochastics are over-sold, and the ratio is approaching the 62% Fibonacci support, but the RSI continues to slope down, and the MACD continues very weak. Here also, the next move could go either way (chart below).

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Finally, the commitments of futures traders show that the swap dealers (who know the market best) and the producers have increased their net short positions in gold, while the managed funds (who are usually wrongly positioned at pivot points) have increased their net long positions in gold (chart below).

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