The Donald is in a hurry to deregulate the financial industry by chopping the Dodd-Frank legislation. If you have easy money, then regulations can help control bubble formation, and in the absence of regulation, you need hard money to control the greed that leads to bubbles. A deregulated financial system and easy money, is a recipe for disaster. That is what happened during the 1920’s, and look how well that turned out. (Although the easy money was a result of gold flows from Europe, not purposeful easy money like it is today, the pro-business Republicans were, none-the-less, kept out of government until 1980.)
If the Donald is going to deregulate, then the FED has to tighten the money. That is why we expect the upward bias in rates to be maintained, and that three rate hikes this year which will keep the dollar strong, inflation reasonable, and gold under pressure. The market, however, is focusing on the deregulation candy while it dismisses the FED’s medicine of “every meeting is live”; the CME FED tool is pricing in only a 13% probability of a hike in March, and only a 33% chance of a hike in May. Too much candy could lead to market indigestion. Stay tuned.
Equities
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The Rydex bear:bull asset ratio (chart below) has registered a historical low and is starting to turn up. This type of pattern has indicated major market tops in the past (red arrows on the chart).
The put:call option ratio (chart below) continues to carve-out a down-spike in the 8-week moving average which corresponds to a market top 80% of the time.
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The long-term moving averages continue to demonstrate bullish strength, but the RSI is approaching over-bought territory. However, the green shading on the chart below shows how the RSI can stay extended for some time while the SPX continues to rally.
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Gold
We continue to emphasize that gold follows, not leads the big markets; Treasury rates, the dollar, the USD/JPY ratio, and inflation. Gold has turned back from its 61.8% Fibonacci retrace line, and the dollar and rates have started rising again. The upward trend in these markets is still up, so we expect that gold will have a downward bias.
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Source: Nicholas Gomez