Six Sigma Metals

 We are living in interesting times. Talking about the SPX or Mag7 earnings is like talking about the weather as World War 3 begins. The precious metals is where the action is. Its where fortunes are being made and lost. Its where longs and shorts are involved in a bloody battle. Last week, shorts finally capitulated and FOMO bulls overstepped their bounds.  

Hindsight is 20/20. Given how long and strong the uptrend in gold and silver were, it was likely to end in a highly volatile and spectacular fashion. The precious metals have stood out as the strongest of the speculative assets since September. By then, China was also catching the fever. China has only added fuel to the fire. 

Unlike stocks and bonds, China is a major player in commodities. They are not just a tail wagging the dog. They are one of the big dogs. They were the ones inciting a short squeeze in silver with their rampant speculative buys in the Shanghai futures market. COMEX shorts in silver were getting squeezed indirectly by the speculative longs in Shanghai. The Shanghai silver premium has been hovering around $12-14, way above the low single digits in the fall. China caused the blowoff top. 

It was about as extreme a parabolic move as I have seen in a major asset since Nasdaq in 2000. While a lot talk about the crazy move in silver, the move in gold is more spectacular from a monetary view.  Silver is much more speculative, much smaller, and easier to push around than gold. Gold going up 12% over 3 days and then dropping 14% in 1 day is literally off the charts.  I am a counter trend trader, but instinctively, I knew that it was dangerous to short silver and even gold. I did try last Monday and was too early and bailed out for quick losses. 

Before the blowoff top, the upside potential was still unknown. The risk in being short was high because of the unknown upside. Because of the weak shorts out there, waiting to be taken out by sharks smelling blood. Investment banks have a full view of all the positions in the futures market. Word spreads quickly among bankers. They know who is running low on margin. They know who are feeling the pressure and about to stop out. It doesn't mean that shorting before the blowoff is dumb. Just high risk. Of course, this risk comes with big rewards. The big reward was the six sigma down move on Friday. 

To get these kind of moves, major players must have been throwing in the towel. It was a super deep cleanse and flush out of positions. It changes the calculus moving forward. Weak shorts have been taken out in full. This will make short covering pressure nearly non existent. 

On Friday and Monday, the tables were turned.  Friday and Monday combined was a savage 1-2 combo aimed straight at leveraged longs who stayed with the trend.  Longs have finally experienced some serious pain.  You also had extreme volume at the top, creating tons of bagholders. They will act as future resistance. With the shorts taken out, it will be longs that will have total control of the market for the next several weeks.  That is not a good thing.  Short covering was one of the main drivers of this move higher from the fall to now.  Now short covering will no longer be a factor going forward.  

Following a blowoff top, you usually get a reflexive bounce that retraces 50 to 70 percent of the down move from the top.  Investors who don't like to chase or buy near all time highs come in to buy, and they support the market for 1 to 2 weeks. After this latecomer led rally, with shorts already taken out, saturated long positioning and bloated prices weighs on the market.  You make lower highs and then suddenly the market cracks again, dropping sharply.  This usually happens 1 to 2 months after the blowoff.  

The SPX and NDX markets seem uninteresting by comparison.  As they say, nothing ever happens.  The action overnight was not in SPX futures, but in precious metals, and Asian indices, in particular, the Kospi.  The Korean stock market is now one of the hot, crowded markets filled with fast money longs.  They got a deep cleanse on Monday.  Its still only back to the previous all time high levels of just 10 days ago.

For the US market, you still have the occasional Trump news bombs but the market is getting used to it, and reacting less and less.  The VIX remains bid, but there haven't been big one way moves to justify it.  Its been choppy, but going nowhere fast.  Put/call ratios are rising, and you can sense the nervousness.  I see very little edge and its unpredictable.  I am watching on the sidelines.  It is notable that the big down move in MSFT was due to AI capex spending concerns.  We are now seeing the market punish big capex spends in AI if there are no increases in revenue to justify it.  META got a pass this quarter because it was already beaten down for it 3 months ago.  We are getting closer to the end game for the AI circle jerk.  I give it 6 months, at the most before the house of cards come crumbling down.  

When you get panicky moves in markets like you saw on Friday and Monday, you see where the fast money is.  You locate where the biggest pain points are in the market.  1. Precious metals.  2.  Asian indices, in particular, the Kospi.  3.  Cryptocurrencies, which has had all the downside but none of the upside.   

Got a small long in gold bought on Friday, will look to buy some more if it dips some more.  This is to play for a short term bounce.  It could last 1 to 2 weeks.  I will look to reverse to a short after a bounce.  Not looking to make any moves in SPX or NDX.  Tax refunds will be pouring in hot and heavy due to OBBA.  February and March will be the 2 biggest tax refund months, and that liquidity will be a positive for US risk assets at the margin.  So don't want to fight those inflows.