Is “FANG” Going to Top Next??? —Mike Swanson (04/02/2017)

As you know I have been eyeing this gold

stocks setup with the GDX now for the past

two weeks. I have core positions in individ-

ual mining stocks myself and physical gold

and silver and have 20% positions in GDX and

CEF/GLD in the model rebalancing portfolio.

I use 20% positions as a money manage-

ment technique and by rebalancing these posi-

tions in the long run that helps to lower

volatility and boost returns in an account.

This is explained on the second to last page

of this report.

The volatility in GDX and gold itself

has died out and both simply drifted last

LOOK FOR MAJOR BEAR

BOTTOM IN THIS SEC-

TOR….p3.

LOOK FOR TWO STOCK MAR-

KET EXHAUSTION

TOPS...p.5.

WHERE WE ARE GOLD AND

GOLD STOCKS….p.10

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week. They could continue to do this a couple more days or even another

week as low volatility now seems to be the order of the day for the finan-

cial markets.

But the fact that they have not surged here yet has caused a lot of

people to worry. I still think a breakout to the upside of this triangle

pattern is coming and that we’ll see gold go through the $1,300 level this

summer with a nice move in gold stocks. After that though I’m really not

sure whether they will consolidate from there and move up further or end

up having one more final pullback before they go up for good.

I’ll talk about that later in this report. I did not add on to my

GDX position though last week. I was considering doing so in order to

have a pure trading position that I’d sell on a rally, but I have not done

it. I am actually deciding against it for now.

The reason why is I’m starting to look ahead to future trading and

investing possibilities. I really do not want to be solely trading gold

and gold stocks. The biggest mistake people really make in the markets is

to be fully focused on one single market and one single trend. They tend

to simply just put all of their money into it and then they lose all ob-

jectivity so when the trend changes they don’t adapt. Then they lose

money and sell in disgust.

Most people right now are super bullish on the stock market and have

no plan at all on what to do when the next bear market comes, much less

want to even think about it. They just want to buy and believe.

Their real mistake that is causing what will be a big mistake though

is that they simply want to invest in one market and one trend and so are

making it impossible to do anything but want to believe. And when you fo-

cus on one trend and one market you miss the opportunities elsewhere when

they come.

I say these things from learning from my own past experiences and

mistakes I made long ago in the markets.

There are two big trading and investing opportunities I see outside

of gold and mining stocks coming this year and I want to be on top of

them.

Right now I have a 40% cash position in the model rebalancing portfo-

lio and a similar cash reserve position with my own money. It is easy to

look at the markets every day and want to do something and I’m tempted to

diverge away from my 20% positioning by adding on to gold stocks for a

trade, but I’ve actually decided not to do it.

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The reason why is that I have concluded that having these cash re-

serves right now is helping me to be patient and right now I think that

patience is a critical thing to have in the stock market.

I see these two big trades coming and think I am best to sit and keep

my eyes on them rather than try to make a big gold stocks position and

trade it. In reality I find BIG trades rarely work out, because when you

have a big position it is easy to get shaken out of it.

The tough reality in the financial markets is that there actually

have been few great entry points over the past few years. The stock mar-

ket went sideways for years before it finally broke out in November after

the election with the DOW going through 20,000, but that’s just a rally

and not a great buy point like a bear market bottom like we saw in gold

stocks last January. Last year’s rally in gold stocks was 100% off of the

bottom and came after a five year bear market decline. The real opportu-

nities come with key bottoms and tops that only come every couple of

years. But we have some ahead of us and they cannot be missed.

LOOK FOR MAJOR BEAR BOTTOM IN THIS SECTOR

We are now going on the three year anniversary of the oil bear market

that started in the summer of 2014 when the commercial oil futures traders

built up for themselves what was a net 492k net short contracts. These

4

commercial traders are the giant producers and hedgers and tend to be cor-

rect at key market turning points. For oil they represent major oil com-

panies and control nations such as Saudi Arabia. That oil commercial

short position in the summer of 2014 was a record short position.

After the summer top of 2014 the Saudi oil minister that Fall said

that they wanted oil prices to drp in order to keep control of the oil

market and wreck American oil fracking companies. He said that it would

take a few years to make them go bankrupt.

We saw oil prices dump of course and rally and now the oil commercial

traders have built a new record short position to surpass their short po-

sition size of 2014!

And they reached this new record just a few weeks ago. Since then

oil has dipped below $50, but oil stocks have been among the worst per-

forming sectors of the entire stock market so far year to date.

All this makes me think that we’re going to see oil and the energy

stocks decline this year and most likely substantially. Oil could very

easily fall below $30.00 to restest its lows of 2016.

Yes the XLE energy stock ETF put on a huge rally from its lows last

year, but there is no reason it cannot decline again. It already is act-

5

ing as among one of the worst sectors of the stock market. The last bear

market in gold stocks went on for five years!

But all bear markets one day come to an end and a decline in energy

stocks and oil would eventually bring a wonderful investment opportunity

to buy into stocks paying big dividends.

This is probably going to be the next best big investment opportunity

and I’m planning on putting a 20% position in oil and energy stocks.

But when? Well oil stocks have fallen in the first three months of

this year, but that simply looks like the start of a decline that will

last until this Fall or even into the first half of next year, but when it

is over it will be a great time to buy!

Most likely the decline in energy stocks will also be associated with

a drop in the US stock market. So they could bottom at the end of a stock

market drop. Right now everyone is pretty much ignoring what is happening

in energy stocks and gold for that matter to focus on the fad of the mo-

ment. In December that was buying bank stocks and now it is once again

trying to chase Apple and Facebook and the FANG fad as the banks and in-

frastructure plays have faded.

The point is that most people only focus on what is going up the most

at that moment, because that is all that CNBC talks about. But by keeping

our eye on energy stocks we’ll be able to prepare for a real buy point.

It may take months or even a year, but patience pays off and it is pa-

tience that enables you to take investment positions AFTER bear market de-

clines.

LOOK FOR TWO STOCK MARKET EXHAUSTION TOPS

The next big money

making opportunity I see

coming at this point is

to bet on a stock market

drop! The market vola-

tility has shrank to

nothing and there are

signs that the market is

now in a topping process.

Take a look at the

DOW transportation aver-

age. It is now lagging

the market. When the

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market went up in November just about every single stock went up and there

was a massive rally in bank stocks, transportation stocks, and infrastruc-

ture stocks.

Most of these stocks though have actually peaked out already and the

internals for the market are slowly weakening. The transportation average

though looks like it topped out. It was a Trump sector that is fizzling

out. Banks stocks also look like they peaked and a lot of the individual

infrastructure stocks in the VIS ETF that I bought last year and sold this

year are fading fast.

In December a lot of stocks that simply surged in November topped out

and have been slowly dropping. These were mostly just junk stocks though

that simply went up with the market.

I looked through over 1,000 stocks this weekend and I see two peaks

that were made inside the stock market with lots of stocks. The first was

in December and the second and more important one was in March when the

banks stocks, DOW, and S&P 500 made their last peak. But one final key

internal top is likely to come.

We saw a straight up rally in the US stock market averages from No-

vember to March that ended for the DOW and S&P 500 (along with the market

internals and Russell 2000) at the start of March. The move ended with a

final 300+ point rally in a day that looks like a simple exhaustion top,

7

because the market gave up the ghost the very next day. Since then the

DOW and S&P 500 have been pulling back, but doing so at such a slow pace

that it doesn’t feel like a drop at all for people. The indices hit their

50-day moving averages and bounced, with leadership flowing into tech

stocks on that bounce.

On CNBC they were talking about how this represents a new massive

leadership shift and pounding the table on buying tech last week.

In effect what this means is that in November when the rally started

it was broad based with everything going up. Then in March most stocks

fell while now people are obsessing on those dozen big cap tech fads to

lead again.

When nothing is working except those stocks then you are approaching

a market top. That’s what happened for instance in July and December of

2015 before the market had its last two declines.

If you can recall at the end of February I did an update saying that

the stock market was going up at such a rate with so little volatility

that it had the textbook makings of an exhaustion rally that would lead to

a major top. I couldn’t predict when that top would come, but when you

see a market go straight up like it was doing for 30-60 days without a

pullback you get a very significant top.

That is in fact how the top in silver was made in 2011 and how the

top in oil was made in the summer of 2007. Commodities often top out with

an exhaustion rally. What was amazing though is that I looked at how far

away the US major market averages were from their 200-day moving averages

and they were even further away from them then they were in March of 2000!

The only comparison I could find to a major stock market was Japan in

1998. I have a chart of Japan on this page, but I talked about this com-

parison first on February 26 on page 5 of this report:

http://wallstreetwindow.com/reports/wswreport02262017.pdf

I sold the long positions I

had associated with the “Trump

trade” in my accounts and in the

model rebalancing portfolio in that

report. The DOW’s actual peak was

made a few days later.

When you get an exhaustion top

in any market typically what you

see happen next is a move to a mov-

ing average where there is some

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sort of bounce or pause and then a

move through that level to bring a

sizable decline that takes everyone

by surprise.

I can’t predict how things will

happen exactly, but it does look

like we indeed saw an exhaustion top

in the DOW and S&P 500 to start the

month of March out. If so we can

expect the market to continue to

SLOWLY trend down over the next few

months probably down to their 150

and 200-day moving averages where

they would pause or bounce again.

If on that bounce the internals re-

main weak then we’ll know that it is

going to be a bull trap to lead to a

big drop and even probably start a

new bear market.

This is in effect a topping

process that plays out over this

summer to lead to a big decline in

the Fall. That decline would likely

smash oil stocks and could hurt just

about everything in the stock mar-

ket.

However, the Nasdaq has shown

strength and has not been falling

like the S&P 500 and DOW did in

March. On CNBC they are getting ex-

cited about that, but I think it’s a

sign of trouble when most stocks are

falling except a few now.

For the rally to last all year

that needs to change. If this con-

tinues this month then it will be a

sign of coming trouble.

We have earnings again start in

two weeks. It will be very impor-

9

tant to see if the DOW and S&P 500 can do well this month or if they con-

tinue to languish.

The bear scenario would be slow sluggish trading in the market in

April just like we saw in March, but with excitement coming from the fad

big cap tech stocks.

But if that happens what I’ll be looking for is a SECOND exhaustion

top in the markets. This would not mean a second big rally for the DOW

and S&P 500, but simple exhaustion tops made in the fad big cap tech stock

leaders. This would bring a likely reversal day in the Nasdaq 100 like we

saw with the DOW at the start of March, but would be much more noticeable

by watching the fad tech stocks. What we’d see is one or a couple of them

have big gaps ups and reversals during earnings with the rest of the stock

market acting sluggish.

If that happens then I think we’ll have the final nail in the coffin

for this stock market rally and then the Nasdaq would begin to fade away

as we saw the DOW and S&P 500 start to do last month.

Again I’m not trying to make predictions here, but am watching how

things unfold. Right now I have a 20% bet AGAINST the stock market with

the HDGE ETF in the model rebalancing portfolio. This is also serving as

a hedge against the long positions in the account. Being fully invested

at this point in time long makes no sense to me anymore after such a big

stock market rally years away from the last bear market bottom. What is

more the only way to be able to buy when you get a great opportunity like

I think will be coming in energy stocks is to not be fully 100% invested

long when that moment comes! I’ll leave short-term trading and chasing to

the “Fast Money” crowd.

Although I’m hesitant right now to add on to my long position in gold

stocks for a trade if the stock market trades out in this bearish scenario

(basically DOW and S&P 500 lag with exhaustion moves in the fad tech

stocks) I’m HIGHLY likely to add on to my bets against the stock market as

I do think it would mean we’re heading for a very significant market de-

cline that would bring a great pay-off. You simply do not see major tops

in the stock market made that often. The last minor top was really made

in July of 2015 and lead to the August flash crash of that year and then

the drop in the first few months of 2016. But that was a minor top. The

last major top was way back in 2007 and in the summer of 2008! So these

things do not come a long very often just as major buys after a bear mar-

ket like we are going to see in energy and oil stocks in the future do not

come along that often either.

This is where watching and being careful and patient instead of try-

ing to do lots of jumping in and out trading pays off. The problem with

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the fast trading is that it takes a lot of energy out of you and thus

makes it hard to remain focused enough on the big market turning points

that you don’t miss them. I consider betting against the stock market and

buying energy stocks the next two big trades to come.

WHERE WE ARE GOLD AND GOLD STOCKS

On a long-term chart right now it’s obvious that gold has resistance

at its highs of last summer around $1,3330 and solid support in the $1,180

- $1,200 area. It’s now basically in the middle of that area, and I think

it’s likely to rally up through $1,300 in the coming weeks or months.

However, I do not know if it will rally from there or come back down

first. Last year we saw a massive rally in gold stocks and nice move in

gold and now where we are is in a sideways consolidation phase after that

rally, that can still last for much of this year. Last year the GDX gold

stock ETF outperformed gold and it has been lagging gold since the peak.

This has a lot of people worried that we are actually about to see a big

11

decline in gold and gold stocks. I think it more likely though that we’ll

still see gold rally, but the gold stocks simply continue to match the

performance of gold or even lag it a bit even with a rally for the time

being.

The reason why is that is actually typical during long consolidation

phases. The reason why it happens is that when you get a period of sub-

stantial outperformance in the mining stocks in which the they go up at

twice or even three times the rate of gold you then are going to see a pe-

riod in which they are going to lag the performance of gold. During a

bull market that happens during these consolidation phases. If it happens

while gold is having a big rise that is typically a sign of a coming top

or correction.

Take a look at the HUI mining stock index from 2002-2008. During

those six years it was in a massive bull marke, but there were three peri-

12

ods that lasted more than a year in which the gold stocks went sideways

and lagged the price of gold as they are now.

During those sideways consolidation periods the upper 200-day Bollin-

ger Band acted as long-term resistance and the lower band acted as long-

term support.

If the GDX rallied up towards $30 as gold went through $1,300 only to

peak again and decline back down during a stock market meltdown it would

still be acting as if it were in one of these simple consolidation pat-

terns.

I’m not predicting that they are going to do that, but I am on guard

for this possibility. In 2008 the gold stocks crashed with the stock mar-

ket and in the Fall of 2000 they initially declined as the stock market

fell too. We will just have to keep our eyes focused very closely on all

indicators and trends for any changes going forward. I still think we can

get a gold rally, but we just have to keep our eyes open this summer.

This could actually turn out to be among the most critical weeks and

months ahead of us in our investing careers in the markets.

People have gotten used to the market not seemingly to do much that

they really are no longer paying much attention to it or doing much trad-

ing. Trading commissions at the major brokers fell 16% last year and are

down again so far this year despite the rally in the stock market. In

fact volume this year is lower than where it was last year. People are

doing less trading and simply piling their money into ETF’s thinking they

are going to hold them forever as I talked about last week.

But in the end they are paying less attention. Even CNBC and Fox

Business is spending more time now talking about Trump for ratings than

the stock market action. What is there to say about daily market action

when the market barely moves?

But the slow-motion market action could unfold into an epic market

top. And if it does it will be one of the most important trend changes

we’ll see and be able to take advantage of and profit from in the coming

years. It’s huge to be able to raise cash at a top and buy after things

decline and even a bigger move to bet against the market and profit as it

dumps.

Volatility is gone even with gold and mining stocks last week. In

the next bear market I expect we’ll see them surge and soar as real safe

havens, but right now they are still going up and down in a range. When

they breakout of that range will be when the next big boom happens with

them. Here are some charts of note for this week:

13

14

The goal of this portfolio is to have five have core positions with no

more than 20% invested in each one that together provide an investment al-

location with a low intra-portfolio matrix. This makes it so that when

one ETF goes down another can go up overtime. Traditionally people do

this with using US stocks and Treasury bonds, but in the long-run a mix of

more diversified assets can generate superior investment returns and if

one day stocks and T-bills go down together then it will be a necessity.

To make the strategy work one must also rebalance the positions to main-

tain the fixed allocation percentages. Rebalancing also boosts returns

overtime and lowers the overall volatility of the account. To make this

work monthly or weekly rebalancing is best.

For more on how this strategy works read my January monthly newsletter

from 2015.

http://wallstreetwindow.com/wswmonthly/wswmonthly01012015.pdf

Also see module 7 of my “Bear Market Power Pack” for several videos and

academic papers about this market strategy:

http://www.wallstreetwindow.com/powerinvestor/?page_id=1346

Right now my recommended mix of ETF’s is the following:

40% - CASH

20% - HDGE: Bear ETF that is short a basket of stocks.

20% - CEF: Central Fund of Canada owns gold and silver bullion.

20% - GDX: Gold Stocks ETF.

This ETF allocation creates a correlation ratio of 0.30. A 50% in TLT and

50% in SPY currently generates a correlation of 0.29.

You can use your own ETF’s or funds to play with correlations by going to

this website:

http://www.investspy.com/

A correlation of 1.00 would mean that everything in a portfolio is trading

together. I have core positions in my trading and investment accounts

roughly invested like this model portfolio is with the bulk of my money.

MODEL REBALANCING ETF PORTFOLIO ALLOCATION

15

The goal of this portfolio is to

have five have core positions with

no more than 20% invested in each

one that together provide an in-

vestment allocation with a low in-

tra-portfolio matrix. This makes

it so that when one ETF goes down

another can go up overtime. Tradi-

tionally people do this with using

US stocks and Treasury bonds, but

in the long-run a mix of more di-

versified assets can generate supe-

rior investment returns and if one

day stocks and T-bills go down to-

gether then it will be a necessity.

To make the strategy work one must

also rebalance the positions to

maintain the fixed allocation per-

centages. Rebalancing also boosts

returns overtime and lowers the

overall volatility of the account.

To make this work monthly or weekly

rebalancing is best.

For more on how this strategy works

read my January monthly newsletter

from 2015.

http://wallstreetwindow.com/wswmont

hly/wswmonthly01012015.pdf

Also see module 7 of my “Bear Mar-

ket Power Pack” for several videos

and academic papers about this mar-

ket strategy:

http://www.wallstreetwindow.com/pow

erinvestor/?page_id=1346

Right now my recommended mix of

ETF’s is the following:

40% - CASH

20% - HDGE: Bear ETF that is short

a basket of stocks.

20% - CEF: Central Fund of Canada

owns gold and silver bullion.

20% - GDX: Gold Stocks ETF.

This ETF allocation creates a cor-

relation ratio of 0.30. A 50% in

TLT and 50% in SPY currently gener-

ates a correlation of 0.29.

You can use your own ETF’s or funds

to play with correlations by going

to this website:

http://www.investspy.com/

A correlation of 1.00 would mean

that everything in a portfolio is

trading together. I have core po-

sitions in my trading and invest-

ment accounts roughly invested like

this model portfolio is with the

bulk of my money.

Disclaimer

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