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The news media went all-in over the weekend trying to explain the significance of the Gamestop saga, but because few traders were asked about it, there was little in this torrent of analysis to enlighten. Most of the reporters, talking heads and pundits focused on the obvious, sensationalizing a story about how the little guys have drawn first blood and are about to stick it to giant hedge funds by targeting their short positions. This kind of claptrap makes for salacious reading, but there’s a much bigger story that has so far gone untouched. Before I explain, here’s some point-and-counterpoint to get you past the disingenuous swill being dished out in the blogosphere and by the mainstream media:

Popular Narrative:  The Reddit/Robinhood mob (RRM) has declared war on hedge fund biggies, and so far the smart money has been getting its butt kicked. Reality: The damage so far is just a mosquito bite on the behind of hedge fund elephants like Steven A. Cohen, and the Reddit mob a five-year-old who has discovered where Daddy keep the matches.

PopularNarrative: “We’re going after Citadel next!” Reality:  Nice try, kids, but this kind of hubris is going to boomerang  on you. As a rallying cry, it makes good headline fodder, since the name ‘Citadel’ conjures up the financial establishment’s most impregnable fortress. In the end, though, you can bet on Citadel & Friends to change the game so that the edge you pishers currently enjoy evaporates quickly, assuming it hasn’t already.

Popular Narrative: “After Citadel, we’re going to squeeze shorts in silver.” Reality: We’re actually rooting for you on this one, since precious-metals markets are manipulated by unmitigated scumbags. And, yes, your merely having announced last week that silver is in your cross hairs seems to have provided a little added boost to silver quotes on Thursday and Friday. But before you take on the commodity markets, better read up on Nelson ‘Bunky’ Hunt, a billionaire when that was real money, but also a trader smarter than all of you put together. He got crushed trying to corner silver even though he’d done everything right. Hunt would have succeeded if Comex had not raised margin requirements to such heights that only two players were left in the game: Hunt and Eastman Kodak.  This killed speculative demand, and eventually Hunt himself.

Popular Narrative: The Reddit/Robbinhood mob (RRM) has been making money hand-over-fist. Reality:  The number of big winners is probably far smaller than imagined by the blogosphere and news media, and the sums are smaller. Don’t assume that all of the greedy little guys got out at the top, or that they will. Some will predictably become such believers in their omnipotence that they may actually buy the top, as occurred at the end of Bitcoin’s first mania.

Popular Narrative: The little guys have outfoxed the smart money. Reality:   For a nanosecond, maybe. But how smart are they, really? Probably not one of them in 500 understands that certain option strategies they love to use, such as covered-writing exploding stocks, can backfire lethally. In fact, out-of-the-money options they’ve sold can be exercised, and this can happen well before the options expire. The unavoidable result is a stock-settlement mismatch that can turn seemingly winning bets into unanticipated disasters overnight. We may be hearing more about this soon.

Popular Narrative: Regulators will soon put a stop to this nonsense. Reality: No, they won’t. For one, the kids haven’t actually broken any laws; targeting shorts is nothing new, and it is only the ease of doing it in the blogosphere that is causing regulators to gnash their teeth and tug at their hair. For  two, the ability of institutions and other players to short stocks with little hindrance is essential to keeping the markets running smoothly.

The Power of Desperate Buying

Now to my salient point, and it is this: A mere week’s worth of short-targeting shenanigans has permanently altered the game in ways that will have deep and lasting consequences. To be clear, let me say again that SAC, Citadel and the Comex do not fear the mob on social media; rather, they understand that the would-be giant-slayers eventually will self-destruct because of their ignorance, inflated self-importance and reckless boldness. However, the Smart Guys do recognize that the war is asymmetrical, since the little guys don’t need to put any skin in the game to trigger off a massively costly short squeeze.  All the little guys need do is mention in a chat room that a particular stock has short interest greater than, say, 25% of the float, and the squeeze is on. This kind of war is so very asymmetrical that Big Money cannot possibly fight it.

What this implies is that over time, short interest will eventually diminish to the point of insignificance. The bottom line for the stock market is that bull markets will become less bullish, and bear markets more bearish. Why? Consider that short covering is the most powerful propellant of bull markets. That’s because it is the only source of demand sufficiently urgent to push stocks through otherwise impenetrable layers of supply and daunting prior peaks.  I say ‘urgent’, but ‘desperate’ is probably more accurate, since short covering is driven by margin calls from brokers frantically worried about a customer’s solvency.  When we talk about buying the dips, the main buyers on market weakness, even moreso than bargain hunters, are short-covering bears.

How Bear Markets Work

Short-covering is also the force behind the breathtaking rallies that occur in bear markets. From a psychological standpoint, the “purpose” of these rallies is to convince investors that stocks have turned the corner and are in a sustainable rebound. Short-squeeze spikes are a routine feature of bear markets, and they recur until an exhaustion spike going in the other direction destroys the last vestige of hopefulness.

But because short-interest numbers are about to decrease in the aggregate, it is predictable that, henceforth, short-covering will have less and less power in bull markets and bear markets. In the coming bear market (which my technical runes suggest may already have begun), we are likely to see downtrends that are more relentless than in the past, and sucker rallies that are not quite powerful or persuasive enough to keep hopeful losers in the game.

For now, though, as the big players attempt to shrink their short positions, their efforts will remain fully exposed and vulnerable to raids by the mob. The result will be wack-a-mole rallies in overly-shorted stocks for the foreseeable future. This will continue even as the stock market moves deeply into bear-market territory. However, the rallies will be isolated and add little boost to the broad averages. They may even act as a psychological depressant, a nagging reminder that global securities markets were never more than a giant casino game to begin with.

The live feed from Hanoi has been riveting. Trump and Kim appear to be getting along well.  The President pats his counterpart on the back, the dictator smiles. They share a laugh as they walk through a garden. Kim’s haircut looks oddly flattering. Everything seems to be going so nicely that one could almost forget that he has at times acted like a madman. As for Trump, he is his usual self, but with the abrasiveness held in check.

Besides giving hope to the world that peace and prosperity could break out on the Korean Peninsula, Trump has effortlessly upstaged the Democrats during what was to have been their hour of redemption. They are tuned not to the summit, but to their own witch-hunt bent, obsessively bent on proving Trump colluded with Russia to steal the election. Not only did Thursday’s grilling of former Trump lawyer Michael Cohen produce no evidence of this, it may have iced Mueller’s probe.

What We Know for Sure…

One thing even Trump’s detractors would have to concede is that whatever happens in Vietnam, and whatever the President says while he’s there, it won’t be scripted. We can be certain he will speak his mind, as he always does, and that he will not claim a deal has been made unless this is so. We also know that unlike his predecessors, Trump will not promise North Korea a wad of cash.  Another thing we know, something that no other U.S. President before him has been able to convey, is that Kim the Madman is in fact a rational actor. If it were otherwise, Trump would not be meeting with him.

If a deal does result and North Korea agrees to de-nuclearize, we will see black smoke billowing from the ears of Congressional Democrats, the Norwegian Nobel Committee, and from a great many who wish the President the worst. In a more honorable society, harikari would be demanded of Pelosi and a few others. This would not only be unbeatable kabuki for five billion TV viewers, it would also set a noble example for some of Capitol Hill’s newest lawmakers.

In yesterday’s commentary I underestimated the threat posed by the conviction of two close former associates of Trump. With Michael Cohen and Paul Manafort going down in flames on the same day, it looked like a wet dream-scenario for the tens of millions of Americans who not only wish Trump ill, but who have been praying for his impeachment since Election Day. Trump-haters may get their wish if Democrats take control of the House in November, since that would likely be their first order of business. They would be impelled not only by their acute dislike of Trump, but by the urgent need to push him out of office before he gets a chance to replace Ruth Bader Ginsburg, the Supreme Court’s most likely next retiree, with a conservative jurist. Between now and mid-term elections in November, Trump will be under great pressure to explain himself each day as he is barraged with questions from the press and his many detractors on Capitol Hill.  This cannot but weigh on the bull market, even one seemingly as inured to bad news as this one. If Trump is hounded out of office, it will be as bad for investors as the post-election rally was good for them.

Index futures have plunged in after-hours trading, presumably on news that Trump’s former campaign manager, Paul Manafort, has been convicted of fraud. Does Wall Street actually care about this?  Not one bit. So why are stocks falling?  Simply because the traders who ‘work’ the news each night think it will trigger widows and pensioners into dumping their shares at fire-sale prices. However, I am advising Rick’s Picks subscribers who held short positions in the E-Mini S&Ps from today’s high to cover most of it before DaBoyz run up the shares they are at this moment stealing from the gullible and the unwary. Their phony, fright-wig tactics remind me of Oscar Wilde’s crack that “One would have to have a heart of stone to read the death of little Nell without dissolving into tears…of laughter.’  And so it goes with those who evidently believe that Manafort’s conviction will hold back a bull market that is manipulated 100% of the time by shysters, carny men and lunatics. _______ UPDATE (12:30 a.m.): I now see that a news story out just after I published the comments above — Cohen Cops a Plea — was the ostensible reason for the stock market’s dive. My comments still apply, however, since only the half of America suffering from Trump Derangement Syndrome could possibly believe that Trump’s ex-lawyer’s admission of guilt in the bimbo-payoff scandal will topple the President.

Our friend Chuck Cohen, a gold timer with a proven gift for knowing when to bet against the crowd, phoned the other day with urgent advice. Almost no one sees it coming, he said, but bullion is getting ready to explode. “It’s time to jump in head-first!”  Chuck has been wrong before, and we’d all but tuned him out for the last eight months or so, since his bullish drumbeat went against the asphyxiating weight of bullion charts that have shouted “lower” since last October.  Now, he says, the winning bet is to be short stocks and long gold and silver. Will he be right? From a technical standpoint, it’s still too early to tell. To be sure, some key vehicles, including gold futures and the Gold Bug’s Index (HUI), have turned higher from levels that coincide with Hidden Pivot correction targets of our own. But the bounce so far, especially in Comex quotes, seems tentative at best. Moreover, this is occurring at a time when  the juggernaut of deflation is threatening to overwhelm the central banks’ desperate efforts to thwart the collapse of a quadrillion dollar financial-asset bubble. [continue reading…]

Did yesterday’s savaging of gold and silver leave you feeling glum?  Click here for something that will cheer you from our friend Chuck Cohen, a New York-based financial consultant. Chuck is about to roll out a new line of services, but if you’d like to tune regularly to his wise thoughts on the precious metals world and the markets now, drop him an e-mail at this address:  ikiecohen@msn.com.  Note: If you had trouble opening the link above, try this one. Chrome, Firefox and Explorer are all so busy these days beating each other’s brains in that they all stink. I’ve end-run their stupid little game with a text version of Chuck’s essay that should open in any browser.  There is also a link posted in the chat room that works to open the original Microcrap Word version.

[Mining stocks got you down? Do you shake your fist at the sky whenever a $100 rally in gold causes nary a ripple in exploration shares?  If so, get ready for a major mood change, because precious-metal stocks that have languished for years are about to blast off. That’s the prediction of our savvy friend Chuck Cohen, a NYC-based financial consultant who specializes in mining issues.  He spells out the reasons for his strong optimism below.  RA]

I am as frustrated as the rest of the gold true believers, because so many of us have focused on the smaller exploration shares. In fact, I guess by now that many of you have either pared down your holdings or even completely jettisoned these “losers.” I see several reasons or theories why they have behaved so poorly since 2005 in spite of gold’s spectacular rise. And because I believe in studying technicals visually, I am posting four charts from ancient history to help you get a longer-term perspective. I hope this proves both instructive and encouraging to you, because it has been very exasperating and even discouraging to many of us.

Theory number one: The stocks will never move because the gold cycle is almost cooked. At least, that is what so many quotable market experts have postulated.. Never mind that they have never put one penny in this sector — these gold mavens are as certain now as they were when gold was selling for $250. Instead, be safe, and buy bonds for that 3% certainty. I totally dismiss this theory, since there has probably never been a market that has been up 11 straight years and not had some kind of speculative climax. [continue reading…]

Since today’s guest commentary from Chuck Cohen talks about an impending boom in junior mining stocks, it might be a good time to look at the chart of Premium Exploration, an Idaho firm whose gold mine I visited in the summer of 2010. Everything about the company impressed me at the time, but Premium’s considerable strengths, including excellent management and promising core samples, have evidently been lost on investors since at least last April, when the stock peaked around 81 cents a share. It has fallen by 75% since, and, to speak bluntly, there is nothing especially encouraging in the technical picture at the moment.  Under the circumstances, you could say that Premium is a good company whose stock has been unjustly pounded nearly to death — and therefore an excellent mine canary to tell us when the junior explorers are really and truly ready to move.

In Premium’s case, it would take a pop above 0.3245, the second of two peaks whose breach to the upside would create a bullish impulse leg of  daily chart degree.  Accordingly, I’ve set a screen alert and will signal you in turn when there are signs of life. More immediately, with the recent breach of a minor midpoint support at 0.2673, the nearest logical place for a bullish turn would be from its ‘D’ sibling, 0.2143.  Failing that, the next technically logical stop on the way down would be at 0.1991, the Hidden Pivot midpoint of the larger pattern.  Stay tuned, since I’ll be monitoring this stock’s vital signs very closely.  Want to learn how to nail swing highs and lows precisely, and to manage trade risk yourself? Click here for information about the upcoming Hidden Pivot Webinar on November 16-17 and a $50 discount.