Ratiohead – Capitulation Police

So many of the GLD and GDX ratios are at long-term extremes, but we still can’t take any action until money flows and momentum start coming in to the sector. Just to give some perspective, here is the GDX:GLD ratio, and you can see that we are at a place where miners start to outperform the metal. This does not mean that miners will go up, but it is an opportunity to either buy miners directionally long with tight risk management, or for those that want to try a different type of trade, go long GDX and short GLD. Here is where we are on the charts:

March 6th GDX GLD

As always, define your risk before placing any trade, and let the price action dictate your trades. This is not about being right, it is about making money.

Good trading all.

Steve Chapman, TRI

Intraday Update – March 6th, 2013

It looks like the relentless selling in GDX and GLD might be taking a temporary break. We have MA Envelopes mean-reversion signals in both, so those that want to jump into miners today should do so with a stop below the lows. That’s about 3% risk, so position size accordingly. The momentum is still sharply down, so expect some wild intraday swings if this move continues up from here and don’t get shaken out as they are volatile to begin with. There exists multiple multiyear extremes in sentiment and ratios, so there could be fireworks in the short term, but our target remains the downward-sloping 50 MA to begin with. As you can see in the chart below, when the trend gets too far away from the 50 MA and the bulls or bears get too loaded up on one side of the trade, it allows mean-reversion to happen:

March 6th GDX MA Env

Good trading all.

Steve Chapman, TRI

Daily Report – March 5th, 2013

Let me be the first to congratulate the Dow Jones Industrial Average on a new all-time high. A five-and-a-half year dip to get back to square one in nominal terms isn’t too shabby, but when you factor in that our homes are worth less, our purchasing power is worse (gold was about $700 back then), and gasoline only cost $2 a gallon (don’t get me started on food), I don’t really feel like partying at the moment.

What I do feel like doing is navigating these markets with a Refined and risk-conscious approach. Now that we finally have some new information, let’s see what opportunities are out there and act accordingly.

The SPX most likely formed a daily cycle low on Feb. 25th. With the cushion of $85 billion per month at its back, equities will tend to go up in a straight line, absent of volatility, and then have an unnatural day when something finally disturbs the peace. We saw this happen in February and July of 2007, except it wasn’t QE at the time that was supporting the market, but the mass bundling of mortgage-backed securities. That is what makes going both long or short equities at this point so risky. Someone that goes long can see months of gains wiped out in a single day, while someone who goes short is going against momentum without defined risk management.

Now I don’t want it to sound like I am bashing equities – I just believe that the time to go long was four years ago when everyone was scared of the market and valuations were cheaper. After a 130% move, it’s time to realistically acknowledge how much appreciation we can expect to see before a significant correction, and whether that presents a good risk/reward ratio going forward.

What we are really searching for as Refined Investors are assets that right now are in the same position that the SPX was four years ago, with the opportunity for maximum growth. According to our core strategies, we are not trying to pick a bottom in an asset just because it is beaten down, we need to first see some money flows and momentum supporting price. Value investing on the fundamental side a la Ben Graham or Warren Buffett is an excellent way to approach the markets, but if your time horizon is that long then buying some shares in Berkshire Hathaway is probably a better investment for you than this newsletter.

For those that want to chase the SPX right here, understand that the 2007 highs are 37 pts. away (less than 3%) and that they usually don’t get broken without a fight. Keep positions small and stops under the recent highs for risk-management purposes. I’m not going to be that mother that keeps her kids from seeing a PG-13 movie, but I am going to send them with some earplugs just in case. Be careful out there even though the momentum is strong:

March 5th SPY Daily

The same goes with our IBB trade. We will continue to define our risk as price moves up, but we are not going to overextend ourselves up here. If price keeps running then great, but this is not a hero trade:

March 5th IBB Daily

Volatility has still diverged from equities at this point, and it is one of the markets to keep an eye on. If you think I’m hesitant to buy equities up here, buying XIV at this point can be like picking the wrong door to run through on The Eliminator of American Gladiators (I’m dating myself here). Bam!

Gold (and silver) remain the most intriguing asset classes out there, and the MA’s continue to swoop down as price consolidates. We have a mean-reversion long trade still in effect for gold, and unless the Feb. 20th lows are violated we will stay in the position. We could run down the list of bullish contrarian indicators for gold right now, but price is still the only thing that matters and it hasn’t gone anywhere in two weeks at this point. The upside definitely outweighs the downside, but we might have to see the dollar break down or fear/inflation enter the market before we see some intriguing price action:

March 5th GLD Daily

The red headed stepchild of gold, the miners, continue to push the limits of patheticness*, and we will patiently watch for either a collapse or a strong swing low. We don’t like buying things at 52 weeks lows with momentum straight down, but we do watch them like a baseball scout with a radar gun, waiting for their fastball velocity to start picking up. Miners tend to outperform in the first half of the 4 year gold cycle as their margins rapidly expand, followed by underperformance in the second half due to poor management, CapEx investments, and rising costs.

The strange correlation between AAPL and GDX might be something to keep track of now that AAPL finally filled one of the most watched gaps of all time. Just file it in the “huh” category if we get a bounce in both.

March 5th AAPL Daily

The dollar may be moving into its daily cycle low, so keep an eye on which assets benefit while it moves down. Oil is also interesting here, and that would be a good sign for commodities in general. The $CCI and $CRB indexes formed swing lows today after extended moves down, and that is the first step in the right direction:

March 5th UUP Daily

March 5th WTIC Daily

Stay patient, stay nimble, and keep risk small until the market makes some more decisive moves.

Good trading all.

Steve Chapman, TRI


Intraday Update #2 – March 5th, 2013

Our IBB trade has had a nice breakout from its highs after a long consolidation underneath. That kind of move should create strong momentum if it is valid, with the worst-case scenario being a retest of the breakout point on a pullback into the short-term MA’s. Those that are content with the trade so far can take profits on the gap up above the Bollinger Bands, and those that would like to hold should move their stops from under Friday’s low to the 148 area to better manage their risk. Once we see what the first pullback looks like, we can make a better judgement on how to define our risk strategy.

March 5th IBB Daily

Good trading all.

Steve Chapman, TRI