A priority market update sent to premium subscribers this morning, for the consideration of eLetter readers…

The plan [per this week’s NFTRH 357] as best my logical mind could foresee it was for a potential Monday (Margin Monday?) swoosh down with a bounce toward broken support soon to follow. But this swoosh down would not have brought indexes so close to the October lows just yet.

Well, so much for logic.

The main theme is still in effect, but it appears we are going to get the big bull/bear test at the October lows sooner rather than later.

This is actually good news if you are the type who wants to get on with things, on the bigger macro picture.  To review, the October low is generally the major point that markets need to hold in order to avoid putting in a bear market signal.  A lower low there to close a day or especially a week or month, would be bearish on the big picture.

Not being a resolute bear trader, I am going to settle for cash and patience, although it seems we will need less of the latter than originally thought.

Things to watch for (potential)…

• An in-day collapse and furious reversal (i.e. ‘V’ recovery)
• In-day volatility with big swings up and down
• A leaden down day that just keeps sinking, taking bulls’ spirits down the drain

Thing 1 would hold the October lows on a closing basis and keep open the prospect that this is all just an amazing summer shakeout prior to da boyz comin’ back from da Hamptins to guide the market to new highs.

Thing 2 is an argument for cash and a calm orientation, letting others sweat the outcome.

Thing 3 would bring a crash scenario front burner and usher in a bear market to boot.

I am not a river boat gambler.  So you know my orientation is to establish what the macro trend is out ahead and be in line with it.  I may try a couple circus acts, like shorting volatility (VIX) or leverage longing the S&P 500 or NDX.  But the biggest interest remains the question about the next phase.

If October’s lows are lost and held, gold, which is down slightly this morning (and positive against everything else not named Euro or Yen) would get a big fundamental underpinning for itself and especially for those beleaguered people who dig it out of the ground.  That underpinning would be a trend change in gold vs. the US stock market.

But as we saw on Friday, the pressure can hit the miners too.  Silver is down as if it thinks it is the commodity that it often is.

We are in full deflation mode now.  The Fed is looking stupid with its flapping Jawbones and tough talk on rate hikes.  The biggest fundamental of all for the gold sector is a loss of the pervasive confidence these people have gained during the post-2011 bull atmosphere.

We may see that big macro change happening in real time, but remember, the average casino patron market participant, does not.  So you can be right but also be early.  A lot of patience is still advised on a bull stance in the gold sector.

Bottom Line

The decision on whether this is a shakeout prior to a new bull market mania leg (ref. 1998 to 2000 when not coincidentally an Asian Contagion was an accelerant) is going to be made sooner rather than later.

If the macro shifts, gold and its counter cyclical miners take center stage.  But the short-term could be volatile.

If this is a shakeout and the macro resumes toward bull mania, gold is going to be left looking mighty conspicuous with its safe haven bid.  It would be vulnerable.

Most people should probably let the short-term play out comfortably in cash, as we have noted all along.  Take a front row seat and let it play out.  Traders can take the above information and their own research and place their bets.  The key for all of us is to be calm while other lose their wits.

While I have a difficult week that will have me away from my desk off and on, we will keep a tight watch on events and update as needed.  It may or may not being in real time, which is probably for the best in a volatile environment.

* Aside from any physical gold holdings, which as we often note never goes out of style in this type of monetary/financial environment. 

For consistent, high quality analysis (weekly report and in-week updates on markets and individual equities) that keeps subscribers on the right side of markets, consider an affordable premium subscription to NFTRH.

Two weeks ago, I started off this missive stating:

“Well…after months and months of indigestion, the markets MAY, and I repeat MAY, have finally come to a decision to end the current bull market run.

The chart below is updated through LAST Thursday’s close. (click for larger version)

The reason I say MAY, and not definitely, is that we have seen initial breaks of trends previously (red circles in the chart below) that were quickly resolved by rapid Federal Reserve interventions.”

As I stated last week:

“In years past, when you had this kind of technical deterioration, a move to substantially all cash within portfolios would have been both a wise and timely move. However, the problem currently is that the ongoing interventions of Central Banks globally are keeping asset prices inflated which increases the risk of being “wrong” with respect to the timing of a ‘risk reduction’ strategy.”

The time has now come to start moving more heavily to cash. As I will discuss throughout this weekend’s missive, including the 401k-Plan Manager, it is now time to “OPPORTUNISTICALLY” REDUCE PORTFOLIO ALLOCATIONS.

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