Archive for month: August, 2022

US Fed Is Battling Excess Global Capital – Which Is Creating Inflation

The US Fed continues to bring the big guns, raising rates another 75 bp (0.75%) on July 27, 2022. Even though they stated the economy is softening, current Inflation and CPI data suggest otherwise. The US Fed may be forced into another 75~100 bp rate increase next month if the US economy continues to show strong CPI and Inflation trends. There is only one other time in recent history like the current market environment – 1998~2004.

The DOT COM Bubble was unique in the sense that excess capital flowed into technology/internet companies’ hand-over-fist. It seemed all you had to do was register a URL, come up with some crazy business plan, and go talk to investors/VC. It was not a crisis like the 2008-09 Global Financial Crisis event. The DOT COM Bubble was a process of unwinding/consolidating excess capital away from a euphoric speculative phase in the markets.

I believe the current Pre & Post COVID market rallies are, again, very similar to the DOT COM rally phase – although this time, the focus is on foreign/global economies.

Fed May Have To Disrupt Global Currencies/Economies In Order To Tame US Inflation

There are some similarities to the 1998~2004 DOT COM bubble scenario in the current US markets. First is the rise in CPI and the huge increase in Inflation. CPI continued to rise throughout 1998~2008 – all through the DOC COM bubble disruption and up to the peak in 2007. The same type of thing is happening in CPI right now.

The reason why I believe the US Fed will continue to aggressively raise rates is because US Inflation is RED HOT, and the past few rate increases have done little to disrupt US economic trends.  Yes, housing, retail sales, and manufacturing are starting to see a shift in demand/activity. But the Fed is trapped in a very difficult situation where they must attempt to unwind the capital excesses throughout the world by adjusting rates and capacity here in the US.

That means the global markets will react to what the US Fed is doing and attempt to chase opportunities in a stronger US Dollar until the US Fed is able to break this cycle (see the change of direction in currencies near 2003 below).

The Big Bang Event For Global Currencies Should Be Less Than 12 Months Away

I’m not going to try to predict when global currencies/economies will relent to the extreme pressures inching forward by the US Fed, Inflation, and other trends. But I will state that the GBP & JPY are already at a combined lowest ratio level compared to the US Dollar over the past 25+ years. I can only imagine the intense economic/valuation pressures that are stressing many foreign global economies/currencies as the US Dollar continues to strengthen. Debts, liabilities, ongoing expenditures, and essential services all need to continue for the people affected.

It may be just a matter of time before bigger cracks start to appear. We may see more uprisings and riots as we saw recently in Sri Lanka. We may see additional regional economic collapse events as at-risk nations strain to maintain their debts/liabilities. We’ll possibly see various aggressions ramp up as currency valuations get pushed toward the extremes.

Look at the US Dollar Rally in 1998~99 on the chart (above). Even though we had the DOT COM bubble burst in 1999~2000 and the 9/11 terrorist attacks in 2001, the US Dollar continue to strengthen until it broke down in late 2002 – nearly two years after the peak in the US stock markets.

If the US Dollar were to rally above 110 and potentially peak above 115, that would represent an additional +7% rally in the US Dollar – and possibly represent another -10%~-15% collapse in the JPY and GBP.

Let the currency wars begin. The Fed must continue to try to break US Inflation. To do that, it may have to break multiple foreign currency capital functions and push global capital functions from one extreme (speculation) to another (contraction).

LEARN FROM OUR TEAM OF SEASONED TRADERS

In today’s market environment, it’s imperative to assess our trading plans, portfolio holdings, and cash reserves. As professional technical traders, we always follow the price. At first glance, this seems very straightforward and simple. But emotions can interfere with a trader’s success when they buck the trend (price). Remember, our ego aside, protecting our hard-earned capital is essential to our survival and success.

Successfully managing our drawdowns ensures our trading success. The larger the loss, the more difficult it will be to make up. Consider the following:

• A loss of 10% requires an 11% gain to recover.
• A 50% loss requires a 100% gain to recover.
• A 60% loss requires an even more daunting 150% gain to simply break even.

Recovery time also varies significantly depending upon the magnitude of the drawdown:

• A 10% drawdown can typically be recovered in weeks to a few months.
• A 50% drawdown may take many years to recover.

Depending on a trader’s age, they may not have the time to wait nor the patience for a market recovery. Successful traders know it’s critical to keep drawdowns with reason, as most have learned this principle the hard way.

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We invite you to join our group of active traders who invest conservatively together. They learn and profit from our three ETF Technical Trading Strategies. We can help you protect and grow your wealth in any type of market condition. Click on the following link to learn how: www.TheTechnicalTraders.com.

Chris Vermeulen
Founder & Chief Market Strategist

In investing and trading, we often hear debates on the merits of fundamental vs. technical analysis. Both aim to improve our probability of a profit.  Both methods have their usefulness when correctly applied.

They are not the same by any stretch, so it’s not a debate over one “apple” vs. another.  It’s a comparison of two completely different approaches, and the comparison is more of the “apples vs. oranges” variety.   

Trading vs. Investing

Before we get into the fundamental vs technical analysis, there are important distinctions to be made between investors and traders.  Investors are more long-term growth-oriented, while traders focus on immediate income or aggressive account growth.  Market participants tend to be focused on one approach or the other.  But many are a mix of both.

Investing and trading are different worlds, and it can be challenging to master either domain, much less both.  The key is to know what style is best for your timeframe, to what extent, and why.

Technicals vs. Fundamentals

The Technical Approach

Technicians are students of price patterns.  Technical analysis looks at the price movement of a security and uses these data to predict future price movements.  In general, the more liquid the product, the more reliable the price patterns on the chart.   A high-volume index product like the SPY ETF will more reliably chart investor and trader sentiment than a thinly traded penny stock.

Technicians focus on chart price action, often supplemented by choosing among literally thousands of “indicators” and combinations thereof.   I can’t tell you how often I’ve heard from hardcore nerd technicians something like, “This indicator (or set of indicators) works in all markets and all timeframes.”  

Uh, no.  I haven’t seen that yet in over 30 years of trading. Beware of too much chasing of a holy grail set of indicators.  That “forest” is vast, and you may never find your way out.  A relatively small group of indicators and patterns can serve technicians well.  The key is to know under which conditions to apply them and how.    

The Fundamental Approach

The fundamental approach looks at economic and financial factors that influence a business over the longer term.  Fundamentalists study financial statements, analysts’ reports and ratings, earnings reports, and forecasts.  

If a company has earnings “X” that are expected to grow at “Y%”, it is still up to market participants to decide what value to place on their assessment.  And they can be a moody bunch. 

Why I Lean Toward The Technicals

My opinion of a “correct” valuation is essentially meaningless.  But as a technician, I care about what the big money thinks and how they move their capital.  The price action from the chart is a reflection of what the big money thinks.  That’s our edge as technicians.  We’re following the money rather than our opinions on valuation.

Technicians are all about picking high-probability entries and exits.   As a technical trader, do I even care about fundamentals? Perhaps not. The charts can tell me what I need to know about what the big money is doing.  

Can technicians safely ignore fundamental analysis?  There’s a case to be made based on the assumption that everything currently known about fundamentals is baked-in into price.  Efficient market theory, as it were.  Technicians can be quite successful by focusing just on price action.  But chart patterns and indicators can and do unexpectedly fail.   So good risk management is always a requirement.

A hybrid approach for Buy-and-Hold?

 A herd mentality often drives markets.  One of the classic texts about market behavior is “Extraordinary Popular Delusions and the Madness of Crowds,” written by Charles Mackay and initially published in 1841.  It’s been commented on and analyzed ever since, and it seems not much has changed about human behavior.  History rarely repeats precisely, but it does tend to rhyme.

If you’re a long-term investor of the “buy and hold” variety, you could dismiss technical analysis.  But you’d be doing yourself a disservice.  Why?  Because the economy and markets are cyclical and there are times when it is best to move to the sidelines to avoid large drawdowns.  Fundamentals can be far out of sync with price action when fear and greed take over.  “The Market can be irrational for longer than you can be solvent.” 

Staying fully invested through major economic and price corrections can be costly to long-term results.  At other times, technical analysis can help buy-and-hold investors to see when a security is oversold, bottomed out, and may have a high-probability re-entry.   Again, good risk management is essential to protect our capital.

Fundamental vs. Technical analysis – summary

Which is better for you?  It depends not just on your time horizon but also on what suits your personality better.   I doubt I can do fundamental analysis on a public company and gain some insight that few others see.  That would make me a first-order participant with no edge vs. an army of institutional professionals.  As a technician, I’m a second-order participant.  My goal is simply to assess the price action as accurately as I can and make decisions accordingly.

HOW WE CAN HELP YOU LEARN TO INVEST CONSERVATIVELY

At TheTechnicalTraders.com, my team and I can do these things:

• Safely navigate the commodity and crude oil trend.
• Reduce your FOMO and manage your emotions.
• Have proven trading strategies for bull and bear markets.
• Provide quality trades for investing conservatively.
• Tell you when to take profits and exit trades.
• Save you time with our research.
• Proved above-average returns/growth over the long run.
• Have consistent growth with low volatility/risks.
• Make trading and investing safer, more profitable, and educational.

Sign up for my free trading newsletter so you don’t miss the next opportunity!

We invite you to join our group of active traders who invest conservatively together. They learn and profit from our three ETF Technical Trading Strategies. We can help you protect and grow your wealth in any type of market condition. Click on the following link to learn how: www.TheTechnicalTraders.com.

Chris Vermeulen
Founder & Chief Market Strategist

Chris Vermeulen of TheTechnicalTraders sits down with David Lin, Anchor for Kitco News, to discuss new stock market buy signals and the complacency rally to come. Looking at the broad stock market, we can see a complacency rally that is ready to start – if it hasn’t already. This is a great opportunity for potential trades that can last several weeks or months.

We are in that phase right now where shorter-term investing in growth stocks should come back to life. Based on the weekly chart for the S&P 500, our long-term investing signals are in red, meaning we are technically in a long-term downtrend. This complacency rally is thus a counter-trend rally affecting shorter-term investing. To protect capital in this environment, profit targets and exit stops have been tightened up. As we can see this market continue to rally for several weeks, potentially several months, it pays to be conservative.

Chris goes into a detailed explanation of how he sees the markets as a technical trader. Get a closer look at what our subscribers already know about how the strategies at TheTechnicalTraders.com can protect your capital and, at the same time, conservatively grow your accounts.

Overall, if we are going into a true complacency rally for the stock market, gold and miners should perform really well. During this phase, they tend to become market leaders.

TO LEARN MORE ABOUT NEW BUY SIGNALS AND COMPLACENCY RALLY, WATCH THE VIDEO

TO EXPLORE THE Total ETF Portfolio, PLEASE VISIT US AT The Technical Traders. YOU’VE GOT MORE TO GAIN THAN TO LOSE WHEN SEEKING INFORMATION!

Disclaimer: None of this material is meant to be construed as investment advice. It is for education and entertainment purposes only. The video is accurate as of the posting date but may not be accurate in the future.

Many traders are focused on Gold as price has contracted over the past 5+ weeks, and the $1700 level is being retested. This prompted my team and I to do some research related to the US Federal Reserve’s recent rate increases and how Gold has previously reacted to rising and falling interest rates.

Exploring Price Patterns Between Gold and Fed Rate Decisions

I knew from the 2008-09 Global Financial Crisis and the 2020 COVID-19 event that Gold initially moves downward as extreme selling pressures drive almost all assets lower. Yet, in both cases, Gold quickly rebounded and began to move higher within 5+ weeks after setting up a bottom.

I started my research by outlining “Normal Fed Activity” and “Extended QE Fed Activity” to see if I could identify any difference in how Gold reacted to fear and uncertainty in these phases. My thinking was that Gold would react more muted in a price range in Normal Fed Activity phases because crisis events and economic uncertainty are more muted overall. When the Fed enters an expansive QE phase, this activity is associated with a US/Global economy that requires extraordinary measures to prompt expected normal capital functions.

I quickly learned that Gold tends to stay fairly muted through Fed rate increases and decreases in the absence of Fed QE functions. Yet, I learned something even more extraordinary about how Gold trends within extended Fed QE Functions: The Two-Stage Capitulation Bottom.

The Two-Stage Gold Setup In QE Fed Activities

This unique pattern seems to be associated with extended fear related to the US Fed (and global central banks) decisions to print extended capital and provide extraordinary capital support for global equity markets and the economy.  It does not appear to happen in credit contraction phases. So keep this in mind as we continue to watch global central banks navigate future economic concerns.

My belief is that extended central bank QE functions are already baked into the current Gold price pattern and will continue to drive the two-stage pattern over the next 24+ months.

Defining The Two-Stage Gold Pattern

This pattern is relatively simple to understand when one considered the psychology behind the price moves. It starts with a Fed Funds Rate Increase after an extended period of lower Fed Funds Rate levels. When the Fed starts to raise rates, Gold tends to experience an almost immediate rally. Here are some recent examples:

Dates	FFR Rate Increase	Gold Increase
Oct-93 ~ Feb-96	3% ~ 6%	+22%
Apr-99 ~ Jul-99	4.75% ~ 6.5%	+33%
Apr-04 ~ Jul-06	1.0% ~ 5.25%	+95%
Oct-15 ~ Aug-19	0.13% ~ 2.42%	+46%
Mar-21 ~ Now	0.07% ~ 1.21%	+24%

Each of these Gold rally phases was accompanied by a second-stage Gold rally when the US Fed suddenly reversed direction and started lowering Fed Funds Rates. It appears this panic by the Fed sends a jolt of fear into the markets – driving Gold & Silver into a potential parabolic price trend if the conditions are right. Here are some examples.

Dates	FFR Rate Increase	Gold Increase
Oct-93 ~ Feb-96 ~ Dec-98	3% ~ 6% ~ 4.63%	+22% ~ -28%
Apr-99 ~ Jul-99 ~ Dec-03	4.75% ~ 6.5% ~ 1.0%	+33% ~ +67%
Apr-04 ~ Jul-06 ~ Sept-11	1.0% ~ 5.25% ~ 0.08%	+95% ~ +245%
Oct-15 ~ Aug-19 ~ Apr-20	0.13% ~ 2.42% ~ 0.10%	+46% ~ +49%
Mar-21 ~ Now	0.07% ~ 1.21% ~ Unknown	+24% ~ Unknown

Examples Of This Two-Stage Precious Metals Rally Pattern

The most recent examples of this two-stage precious metals rally pattern happened in 2008-09 and 1999-2001. The COVID-19 example is still a valid example, yet that setup/cycle concluded very quickly as an anomaly event.

Global Financial Crisis

In 2008-09, after the initial rally phase prompted by raising rates from Apr-04 to July-06, Gold collapsed as the 2008-09 GFC crisis unfolded. Gold quickly recovered back to near previous highs over an 18-week span after establishing a bottom. Then, Gold consolidated for 33 weeks before launching into an incredible parabolic rally phase – close to 10 months after Gold bottomed in October 2008 (see the Green Arrow Rally on the Gold Chart Below).

Recession

From 1999-2001, a similar price pattern unfolded in Gold. This time, the bottom in Gold setup in February 2001, and it took an additional 67 weeks for Gold to rally back to near recent highs before stalling and rallying further upward as the US Fed reacted to the 9/11 attacks.

Current Gold Price Action

Currently, Gold has collapsed to price levels near $1700 after trading above $2000 just a few months ago as the US Fed aggressively raised interest rates attempting to combat inflation. I’m not trying to guess if/when the Fed will change course, but I do believe Gold is poised for a very significant rally from any bottom set up by the current two-phase price pattern.

If history is any example, this current contraction in Gold and Silver is very likely a reaction to the sudden inflation crisis event and may prompt future price rally anyone’s imagination. Global central banks around the world are continuing to push QE in some form while the US Fed is attempting to raise rates. If the US Fed suddenly shifts towards more Dovish policies, I believe a new wave of fear will drive Gold higher – starting the second phase of the rally.

If the Fed raises rates one or two more times before changing policy, that would simply build more momentum for any future breakout in precious metals.

Concluding Thoughts

As long as some quantifiable measure of stimulus or QE exists throughout the US/EU/Chinese economies, I believe this expansionary two-stage cycle in Gold & Silver will continue to play out.

We have already experienced the early rally phase associated with the initial Fed rate increase. Now, we are in the contraction price phase where a bottom will set up – which may take many weeks or months still. We are waiting for the Fed to “flinch” and begin to decrease rates. That will start the new bullish price phase for Gold and Silver – and possibly send us into another parabolic price phase.

HOW WE CAN HELP YOU LEARN TO INVEST CONSERVATIVELY

At TheTechnicalTraders.com, my team and I can do these things:

• Safely navigate the commodity and crude oil trend.
• Reduce your FOMO and manage your emotions.
• Have proven trading strategies for bull and bear markets.
• Provide quality trades for investing conservatively.
• Tell you when to take profits and exit trades.
• Save you time with our research.
• Proved above-average returns/growth over the long run.
• Have consistent growth with low volatility/risks.
• Make trading and investing safer, more profitable, and educational.

Sign up for my free trading newsletter so you don’t miss the next opportunity!

We invite you to join our group of active traders who invest conservatively together. They learn and profit from our three ETF Technical Trading Strategies. We can help you protect and grow your wealth in any type of market condition. Click on the following link to learn how: www.TheTechnicalTraders.com.

Chris Vermeulen
Founder & Chief Market Strategist
TheTechnicalTraders.com