Could it get any more ridiculous?
But if it does, we’re going to have to throw in the towel and admit that the tools we’ve grown used to employing over the last several decades are simply no longer of any value.
It will be a sad day, indeed – if it ever comes to that.
We’re talking about the exaggerated lift we’ve seen in quite a number of stocks since the election of Donald Trump as president. The indexes have taken off higher in a manner that continues to astound even the most veteran observers.
Take for example just two stocks – the Dow Jones Transportation Index (DJTA) and global banking and brokerage giant Goldman Sachs Inc. (NYSE:GS).
We’ll start with the trannies.
Here’s the chart –
You can see that the rise has taken the index well into overbought territory (in green), according to that helpful indicator known as the Relative Strength Index (RSI). Again, whether this tool continues to serve as it has in the past is becoming a greater mystery by the day. For while it’s not unheard-of to get extended overbought readings such as these, the fact that we’re now entering the final blowoff phase of the bull market means we could be in store for a great many surprises, including wildly overbought readings that continue without rhyme or reason for centuries!
A Deliberate and Pointless Exaggeration!
The weekly chart of the Transports has also registered an overbought RSI read as of last Friday’s close.
Under normal circumstances, that would also bring about an imminent decline in the index.
But are these normal times?
The tremendous volume that accrued in the last week (in blue) is also likely indicative of an interim top for the index. With 65 million shares turning over for a full week now, against a daily average of just 18 million, it’s clear that new buyers are emerging – perhaps just in time to hold the bag when the shares come off.
Stay alert! It’s just a head fake!
That said, there could be some good news for investors in the latest Transport move higher.
Despite the need for a cooling off period, the transports have also just set new all-time highs, and that means we now have a Dow Theory BUY signal for the market at large.
We’ve given a good deal of attention to Dow Theory in the past, so we won’t delve into deep explanations here, except to say that this is the first unequivocal Dow Theory BUY signal we’ve encountered since the last one expired in early 2015.
And that’s clearly good news.
Our take on the current bipolar nature of the transports is as follows – 1) we will get a pullback, 2) it will scare the Jehoshaphat out of everyone and 3) get the media screaming ‘bear market’ just in time for 4) the smart money (and us) to load up on the trannies before the next surge higher.
Ditto the above for Goldman Sachs, banking warrior firm extraordinaire.
Take a look here –
The overbought condition here is equally egregious (in green), and it appears on the GS weekly chart as well, indicating that a pullback should not come as a surprise in the coming days and weeks.
What is shocking however, is the sheer size of the move – perfectly parabolic – with the shares gaining better than $100 in less than six months (!), a 70% climb, the greatest part of which came in just the last thirty days.
Here, too, we see upside, but not before dread and panic have seized the financial press good and rough by the scruff.
A scare that we expect to ensue within days.
Close ‘em Down and Open ‘em Back up
Before we get to our trade for the week, we’re going to close one down that we opened just two weeks ago, in a letter called Hey Gold Bug, Welcome to the Inferno. You’ll remember that were down mightily on the PMs at that time, saying –
While we may see a bounce here in the precious metals near-term, the fires of hell are only now being stoked for gold lovers… without a bounce that carries to at least GLD $130, the die is cast. We’re headed to $100 and potentially lower.
With that in mind, we recommended buying the GLD March 111 PUT for $3.50 and selling two (2) GLD March 120 CALLs for $1.75. Zero premium was the result.
GLD is trading for $110.40, our 111 PUTs are going for $4.10 and the two 120 CALLs are fetching $1.24 each.
We’re itching to hang on to them, but it’s probably not a wise idea, considering how far and fast they’ve fallen of late. If we get a bounce here, we’ll miss out on what’s on offer.
So we’re playing it safe, selling the PUT and buying back the CALLs for a net profit of $1.62 on nothing expended. Adjusted for minimal commissions, that’s a gain of 980%.
The Future of Gold
We’re not going to belabor it, but suffice to say that things look sickly for the shiny metal, despite the deep slide it has already experienced. As of the close of last week’s trade, GLD’s weekly RSI and MACD indictors have gone sub-waterline. That’s the first time we’ve seen that condition in eleven months, and it plainly bodes ill.
There’s still time to evacuate, friends. No need to take on more water.
Flee to safety while you can still redeploy, and make back some money.
And do it like this …
With Goldman overbought and ready to come off and Gold oversold and ready for a bounce, we’re going long/short with the pair.
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With kind regards,
Hugh L. O’Haynew