Are stocks really invincible? Can they soar indefinitely as the Plunge Protection Team continues to save them?
What are the implications for miners?
Stocks rallied. Again and again. Against quite many indications. Is this the only way in which they will move now?
Are the Powers That Be going to save stocks in all cases?
That’s what we heard not just once but many times in the past. You know when we definitely heard it?
In Japan in the late 80s and in mid-1990.
The Japanese stock market was after a huge, prolonged rally and after the initial move down. The late-1990 rally must have triggered a lot of “the rally is back; stocks are never going to fall profoundly” comments.
After seeing a rally this big, it was natural to expect it to continue. Everything was great right before, and it’s just a sharp correction, just like the one that we saw in the 1987… Right?
It turned out that this wasn’t the case, and The Powers That Be weren’t able to save the stock market. It finally bottomed many years later, in 2008.
The late-1990 rally was actually the “return to normalcy” stage of the bear market that, to many, still looked like the bull market.
And this market juncture makes it very difficult to stay calm and objective.
The “return to normalcy” stage is when the vast majority of market participants expect the previously unsustainable rally to be continued, even though much has changed and it’s already a different stage of the market. It’s no longer a bull market.
I’m writing about the stock market here, but the emotionality spreads to other markets as well. That’s most likely why people are not reacting to the massive increases in real interest rates as much as they “should”.
Where are we now in general? And by general, I mean globally.
We’re in a situation where stocks repeat their 2007-2008 performance.
Namely, world stocks corrected about 61.8% of their preceding decline, and that decline started from the same levels as the 2007/2008 one.
Please note that the initial decline is now bigger than what we saw in 2008. Back then, stocks corrected about 61.8% of their initial decline before tumbling. And exactly the same thing happened recently!
Also, the RSI just turned south and back in 2008; that was the final confirmation before the waterfall selling.
Just as the 2008 rally wasn’t bullish, the most recent corrective upswing wasn’t bullish at all.
Real interest rates are rising, which is bad news for businesses. People appear to live on “hopium,” expecting the Fed to turn dovish and throw money on the market, but the data doesn’t support this outcome at all.
Given the analogy to 2008 and the fact that the initial slide was bigger this time, the following slide could be even bigger than what we saw in 2008. Naturally, this would be profoundly bearish for junior mining stocks.
This means that nothing really changed, and the situation remains extremely bearish based, i.e., on the analogy to what we saw after previous invalidations of long-term breakouts.
As a reminder, in early 2022, I wrote that the situation was very bearish as invalidations of previous breakouts were usually followed by massive declines – not just in stocks but also in precious metals.
When stocks invalidated their 2006 breakout in 2008, their prices truly crumbled.
We also saw that on a smaller scale in 2014, 2015, and early 2018.
And we saw it recently.
To clarify, we’re actually seeing the aftermath of the invalidation. The huge decline is already taking place.
The difference between now and 2008 is that back then, the slide was more volatile, and we didn’t really see a visible correction during the plunge. This time, the decline is more measured, and we saw a correction to one of the most classic retracements imaginable – the 61.8% one. This correction doesn’t change the trend, which remains down.
Based on what happened in 2008, it seems that stocks are about to move much lower in the following months.
So… It looks like the “return to normal” is a global phenomenon.
Now, the above index excludes the U.S. markets, but… Can one really think that in today’s globalized economy, U.S. stocks can really be on their own while the rest of the world experiences declining stocks?
Here’s the U.S. stock market chart once again. The second chart features today’s overnight trading in the S&P 500 futures.
The S&P 500 futures soared in today’s overnight trading, but it is doubtful that they will be able to hold those gains given what’s happening in the rest of the world.
Plus, the RSI indicator that you can see on the above chart already moved above 70, and given today’s overnight move higher, it’s already in the extreme zone that stopped even the most profound rallies, including the one that we saw in mid-2022.
Is the stock market soaring in hopes of seeing a rate cut based on the AI-world-changing narrative? That’s quite possible. After all, the investment public that likely drives the market right now is not known for rational decisions.
It could be the case that we see a big reversal close to or after today’s interest rate decision and the following press conference.
And what does it all mean for the junior mining stocks?
It’s not even close to being as bullish as one might think.
If stocks continue to move higher, junior miners are likely to decline anyway, just like they did yesterday.
Junior miners moved to a new monthly low yesterday. That happened while the S&P 500 moved higher.
If junior miners don’t get that extra push from stocks, they would be likely to decline, anyway.
But when juniors finally do get that extra bearish push, they are likely to truly plunge.
That’s what happened in 2020, and that’s what happened in 2008. And that’s what’s likely to happen this year. In fact, the yearly top is most likely already in, and we are already in the medium-term decline.
One more note regarding the stock market and the AI hype. Please note that we’ve already seen this before. It was a long time ago – during the dot-com bubble, but the final implications are analogous.
In the recent flagship Gold Trading Alert, I wrote the following:
Just look at the NASDAQ chart and take just a second or two to compare the 90s rally with what we saw recently.
They’re very similar, and it’s clear at the first sight.
This time the volatility wasn’t as big, so it’s no wonder that the final top, initial decline and then the correction took more time. I marked both periods with black rectangles.
The rectangle covers volume and that’s not accidental. The action in it confirms that the situations are indeed analogous. The final tops formed on volume that increased rapidly, then it declined along with prices, and it stayed stable during the final pre-slide correction. That had been the case in 1999 / 2000, and it was the case in the recent months, weeks, and days.
Back in 2000, tech stocks declined and mining stocks (XAU Index is a proxy for gold and silver mining stocks and it’s marked with orange on the above chart) moved higher, but that was when those two markets had been negatively correlated in the long run (based on the 250-session correlation coefficient that you can see at the bottom of the above chart).
The correlation has been positive for a long time now, which means that when tech stocks slide now, they are likely to take mining stocks with them.
And are tech stocks likely to tumble soon?
Yes! That’s what the analogy to the Dot-com bubble and all above-mentioned signs point to.
Moreover, please note that the 50-week moving average (marked with blue) has almost always been on the rise. In the recent decades there were only three times when this moving average turned down in a noticeable way.
- One was at the 2000 top.
- Second warned about the 2008 slide.
- The third time was earlier this year.
Is this time different?
No, it isn’t. Tech stocks are about to slide, and mining stocks are likely to slide along with them.
But wait, there’s more!
The orange rectangles on the above chart mark times between the moment when the long-term mining-stocks-other-stocks correlation turned positive right to its top.
The particularly interesting thing is that when the correlation topped, it was only a matter of time before huge declines in the XAU Index followed.
That worked in four out of all four cases that we saw in the previous decades. And, in fact, ever, because the XAU Index didn’t exist before mid-80s.
And we saw this indication also in the previous months. Since that time, we saw a sizable decline and a corrective upswing that’s similar to the one that we saw in 2012. Since the 2012 rally wasn’t able to reverse the massive bearish indication, the recent one most likely wasn’t able to achieve that, either.
What followed the 2012 corrective upswing? A powerful slide. One that was in tune with the previous huge declines that we saw after the long-term correlation peaks.
The history is likely to rhyme, as above-featured German philosopher Georg Hegel pointed it out – people don’t learn from history.
At least most of them. And this “most” is the same “most” that is not making money in the long run.
Don’t be among those “most”.
What does it all mean in the short run?
Truth be told, it doesn’t have any very short-term implications, as it tells us how enormous the decline in mining stocks is likely to be in the following months, but as far as the day-to-day performance is concerned, more short-term charts are needed to estimate what’s the likely course of action.
All in all, the situation in stocks is not as bullish as it seems at first sight. Please remember that “bullish” and “bearish” relates to the outlook and not to something that just (or recently) happened. Looking at the situation from the global point of view and taking into account more than just the recent price performance (situation in tech stocks, technical indicators, overall sentiment, and analogy to bull/bear market stages) is likely to provide a much better overview and thus help one construct better forecasts. And at this time, the above suggests that the next big move in stocks is going to be to the downside.
The implications for the precious metals sector are between neutral (if stocks continue to rally) to extremely bearish (when stocks finally decline).
PS. To clarify some confusion and misleading information that you might find “out there” (probably spread by those that are not analyzing the precious metals market but that rather cheerleading it) regarding my profitability and the kind of positions that I’m opening in my Gold Trading Alerts (both: long and short), here’s a complete (!) list of trades that I featured since 2022.
“A trade” means that it was completed, I am not featuring the currently open positions (we have two: in GDXJ and FCX), but details of those positions are available to Gold Trading Alert subscribers.
Whenever discussing profits, I mean the nominal profits based on the basic, unleveraged instrument, like GDXJ and FCX); selection of instruments is not something I’m accountable for, and each investor determines it on their own, thus I’m not responsible for using options, leveraged instruments like futures / leveraged ETFs etc., and the way it might affect the rate of return.
Yes, all eight out of eight were profitable. And while I can’t promise any kind of performance of the current positions (nor any other), in my opinion, their potential is enormous.
Here’s the complete (!) list in inverse chronological order (please click the links for the actual analyses in which I described when the profits were taken; feel free to verify hours at which it was posted and where markets were trading at those times):
1. On May 25, 2023 we took profits from the short position in the FCX (practically right at the bottom; opened on Apr. 5, 2023).
2. On Mar. 17, 2023 we took profits from the short position in the FCX (almost right at the bottom; opened on Mar. 8, 2023).
3. On Mar. 1, 2023 we took profits from the LONG position in the GDXJ (very close to the local bottom; after the “easy part” of the rally).
4. On Feb. 24, 2023 we took profits from the short position in the GDXJ (almost right at the bottom; and that’s where I wrote about the long position from point 3).
5. On Jul. 28, 2022 we took profits from the LONG position in the GDXJ (entered on Jul. 11, 2022; we were buying around and very close to the bottom).
6. On Jul. 8, 2022 we took profits from the short position in the GDXJ (very close to the bottom).
7. On May 26, 2022 we took profits from the LONG position in the GDXJ (very close to the top; just several days before the top).
8. On May 12, 2022 we took profits from the short position in the GDXJ (that was exactly the monthly low and reversal; and that’s where I wrote about the long position from point 7).
Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim targets for gold and mining stocks that could be reached in the next few weeks. We invite you to subscribe now and read today’s issue right away.
Sincerely,
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief