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Gary Tanashian
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Gary Tanashian is proprietor of NFTRH.com and Biiwii.com. Actionable, hype-free technical, macro economic and sentiment analysis is provided in the premium market report 'Notes From the Rabbit Hole' (http://nftrh.com/nftrh-premium/). Complimentary analysis and commentary is available at the... More
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Notes From the Rabbit Hole
  • NFTRH Email Update (January 19) 0 comments
    Jan 27, 2012 6:50 AM | about stocks: ERF, DIA, SPY, GLD, SLV, QQQ
    Notes From the Rabbit Hole

    One long, confused sounding (really, just doing the mental work needed to sort things out) email update NFTRH subscribers had to digest one day last week pre US market open.

    A lot of this update's questions are well on the way to being answered in the more obscure indicators we review with discipline on an ongoing basis. And no, I am not bullish the US stock market, regardless of what prices do. Much better places for cash in 2012.

    In rising toward the equivalent of SPX 1340/1360, the stock market is merely doing what we had projected it to do in the heretofore most favored scenario. Yet the gold stock sector is not doing what I had projected, at least not yet. It has not even made a serious threat to HUI 550, let alone act as a leader. And I am still waiting on the likes of Almaden, Sabina and Keegan to kick in to a would-be 'January Effect' rally.

    Meanwhile items positively correlated to the global economy are rising, with the industrial metals (GYX) finally having turned up to a decent degree and even uranium looking interesting. China (NYSEARCA:FXI), Hong Kong (HSI) and the Emerging Markets (NYSEARCA:EEM) have broken upward out of the triangle consolidations and the European markets continue to look good. This is all in line with current analysis.

    Back in December as the SPX declined to and temporarily through support in the face of end of the world style bear calls (and a string of concerned 'MF Global' type emails I received), it was easy to write about a rally that could potentially be strong enough to get up to target and reset sentiment from over bearish to over bullish. Check.

    But I am susceptible to the bull case because a) I am naturally a doer and a builder, not a doom sayer or fear monger, and more importantly b) because an investment theme of NFTRH is and has been the emerging world in ascension vs. the old debt choked world which is descending. In other words, the "global leveling of the playing field" is a future investment theme.

    Now, where does that phrase come from? Well, many readers know it comes from my friend Jonathan, whose unique specialty brokerage not only resides on the top floor of a building in Manhattan, but all over the emerging and frontier world in the form of boots on the ground; specifically Jon's boots on the ground. So while this reputable brokerage has to this point put out bearish technical analysis (on US and global markets) by the smart gentleman (I have met him and read him regularly) sitting a few terminals away from Jon, the big fundamental theme remained unchanged. Imagine that, a brokerage firm putting out forthright analysis that for an extended period was CONTRARY to its main investment theme and bread and butter. That's what makes them special and what has given me hope, whereas before I believed a lot of the cartoon commentary about 'Wall Street' being rotten to the core.

    Anyway, on point... the analysis is apparently changing (per a report I received yesterday) at Jon's shop with the idea that Brazil currently looks the most bullish, with "bullish implications for resources, energy and of course, EM."

    There is my problem. I am susceptible to one of NFTRH's sub themes as I am more portfolio manager and less trader. I do not want to miss a major theme if this is indeed the start of the new up cycle we have been looking for in NFTRH. Now, nothing is going on in the EM's that we have not been charting all along (broken triangles/bottoming patterns) but I have to this point been giving a lot of respect to the 'interim renewed deflation scare and broad market correction' scenario.

    The analysis coming out of this brokerage in a way upsets me because it is now stacked with a growing list of things that are forcing me to reevaluate. The primary one being the wildly over bullish state of US dollar sentiment and the corresponding over bearish state of the euro. There is also the election year theme, the potential bottom in the Silver-Gold ratio and various economic numbers (cooked or not) that refuse to support the bears' claims that the world as we know it is about to end.

    Back to the gold sector... recall that a theme that crept into NFTRH over the last few weeks is one where the gold stocks would lose their status (in my view at least) as a 'unique' investment. In performing like $#!& over the last few weeks, could they be telling us this very thing? Have we already hit the inflationary upside phase where the gold stocks would have been leaders (when did they lead anything? I must've missed it) prior to the whole asset spectrum kicking into gear for an ultimately bullish 2012 featuring rising costs in precious commodities, resources and markets of productive economies?

    Okay, slow down. Again, the broad market is not doing anything we did not expect. Sentiment is swinging to bullish, just as expected. As I was writing a blog post yesterday on the QQQ's target, I riffed along about my general confusion, but also noted in an edit the state of Tim Knight - a cool guy that I think gets too married to a black and white bearish view - who is near throwing in the towel to the triumphant bulls. http://www.biiwii.blogspot.com/2012/01/qqq-on-its-way-to-target.html

    But we had all of this bull activity on radar, and indeed it has been the favored short term plan. Maybe the fact that I am confused and writing this update is further confirmation of some very bearish interim things that will visit within the next few weeks. I cannot abandon the analysis just because I have got a case of the bullish yips. But I will be damned if I am going to miss my own themes, which are 'inflationary 2012' and again hat tip to Jon, 'a global leveling of the playing field'.

    So at the very least, I think it is time to back off the near exclusionary focus on the gold stock sector by capping NFTRH exposure at current levels. This does not mean I am going to jump whole hog into the 'inflation trade' today, but it does mean I am going to selectively pluck some things from around the emerging and resource world. In fact, dividend payer Enerplus (NYSE:ERF) was added yesterday as it tanked to long term support (on share diluting financing news).

    The perma-bulls may or may not end up getting the last laugh. The perma-bears are sure becoming dispirited, once again apparently snatching defeat from the jaws of victory. But the current analysis was created for a reason, and that reason was to be aware that a strong rally to reset sentiment was likely.

    Sentiment is getting reset, including potentially that of your writer. Part of my confusion is that I am not sure whether to get contrary myself or stay in line with me. What I do know is that I am not short or bearish anything at the moment even as I hold a bunch of under performing precious metals stocks. That gives me strength and helps me retain an unbiased view. I believe the gold stocks, per the monthly chart shown here http://www.biiwii.blogspot.com/2012/01/gold-stocks-vs-s-500.html are set up to out perform the broad SPX going forward. Sentiment in the precious metals sucks, as opposed to what it is doing in the broads.

    So, the way I read things currently is to hold at least a core of precious metals stocks (incl. silver stocks) selectively pluck a few things out of the resources and emerging world as opportunity presents, but BE READY for the heretofore current analysis - calling for an interim hard correction - to visit within the next month or so. If things look to go that way, I would manage risk by selling hard or by initiating bear hedging or positioning. But if 'inflationary up cycle 2012' is already starting, I will try to understand this as soon as possible, retain positions and scout new macro opportunities. I would look forward to not burning commissions left and right and just set it and forget it (to the degree I ever forget anything, which is not a great degree :-)) for a while.

    I hope that by expressing my confusion or mixed feelings it helps other people start an inner dialogue as well. To summarize, the preferred plan of generally SPX to 1340/1360 --> hard correction --> triggering 'inflationary 2012' is on watch for modification to 'inflationary 2012 in process'. The primary reason being the sentiment state of the anti-market, the USD and of course the state of long term US treasury bonds, in which the huddled herds cling to perceived safety from a deflationary depression. In other words, a contrary setup (for the 'inflation trade' and against deflationists) is already in place.

    Regards,

    Gary

    http://www.biiwii.blogspot.com
    http://www.biiwii.com
    biiwii.com/NFTRH/subscribe.htm

    Disclosure: I am long ERF.

    Additional disclosure: Long the precious metals sector, as of Jan. 26, short a few sectors which have less favorable risk vs. reward profiles.

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