Do me a favor and click on the first chart. Now go to the other side of the room and see if you can tell which way this chart is going. To my view it's trending up. Now do the same thing for the last chart. It appears at least to me to be trending down. Now you can try to pick tops and bottoms all you want. As a matter of fact I used to try in my younger years :) .....it cost me money. I don't play that fools game anymore. If the larger trend is up then I invest from the long side. If it's down then I invest from the short side. The gains on the long side will always have the potential to be greater than the short side so if I have a choice I will tend to look for bull markets. Notice the huge consolidation in gold over the last year and a half. Consolidations tend to result in rallies of a similar magnitude. The bigger the consolidation often the bigger the rally. I don't know about you but I don't see anything in either of those first two charts that makes me want to try and pick a top.
#1 long term tenet. "Given the choice between inflation and deflation the Fed will inflate."
I've said all along that the Fed would choose inflation over any kind of deflation especially during an election year. Today the Fed made that more clear than ever. After cutting 75 basis points just 7 days ago they tacked on another 50 today. The inflation genie is now about 90% out of the bottle. As expected we are heading down the exact same path as in the 70's. Make no mistake soaring inflation is in our future. Many think that because we aren't seeing double digit inflation right now that it won't happen this time. That this time is different. Hmm... didn't investors think that it was different this time in 2000. Didn't home owners think it was different this time in 05. Commodity prices especially gold is warning the folly of this misplaced hope. I've got news for you. It's never different. Human nature never changes....never!
In a previous post I pointed out that gold had broken out to new all time highs. I also quoted historic averages that once a commodity breaks out to new all time highs the average gain has been 180%. Tonight I'm going to show you what has transpired already in oil and what could be unfolding in the precious metals markets right now.
The first chart is a long term view of oil. Notice that once the all time highs of $40 were broken oil only dipped back below that level once and then only very briefly. After that it tested the $40 breakout once never to be seen again. At $100 oil has tacked on 150% above the old highs.
Moving to the next chart we see that gold has now also broken to new highs. It has also tested the breakout level. While anything is possible there is a strong probability that we will never see $850 again for years to come. Now is not the time to lose your position in gold. If we get lucky and it does pull back then buy more. I'm not very confident that we are going to get that option though. I'm definitely not willing to lose my position on the hopes that it will pullback below the breakout level. Even if it did how would you know when to buy? I dare say most people let their emotions control them when an asset is going down and is on sell they are to afraid to buy.
If gold was to only match oil and move up 150% that would give us a gold price of $2125. However I think it will move up much further than oil will because it's much easier for the public to buy into the gold market. When the public finally catches on and they will catch on eventually they are going to push gold prices into the stratosphere. A buy and hold strategy will guarantee you will capture all those gains. Trying to trade the PM bull will most likely guarantee you will miss most of those gains. If you want to become rich from this bull market then you have to be willing to do what it takes to ride this bull.
I see a lot of investors wondering if they should get ready to short the market. While I think that the bear most definitely isn't done yet I have no desire to concentrate on shorting stocks right now. Why you ask? Just look what's unfolding right before our eyes. One of the great bull markets of all time is going on. The potential profits from this bull are going to make any gains achieved on the short side look puny.
I think we all realize we are in the grip of the bear at this point. Even Kudlow is starting to come to grips with the notion that we are going to experience a recession. What I don't see yet is despair. I see too many analysts trying to pick the bottom or the old "invest for the long term" crap being bandied about. We had a semi panic day on Tuesday but the Fed jumped in and saved the day. Actually they just made it worse. They are now guaranteeing that inflation is going to be spiking at the same time we are heading into an economic recession. What a wonderful combination! I'll be watching the COT's as usual for signs that the big money is buying. That will be our cue that it's time to jump back in the pool. In the meantime we need to be making plans for what we want to be buying when that bottom arrives. Well let's step back and look at what's going on. The Fed is now in panic mode just like I said they would be. The economy is slipping into recession and the politicians are freaking out. Incredible pressure is being brought on Ben to do something dammit. Well the only thing Ben can do is the wrong thing. Of course that doesn't matter to the politicians as long as it looks like something is being done. We need to be ready to take advantage of the Fed's actions. What's the one sector that is defying the bear? Precious metals of course. Gold and silver. Heck the precious metals are just about the only thing that's up so far this year. Now if they can hold up and actually rally while the rest of the market is failing can you imagine whats going to happen when this market bottoms and turns up?
I see quite a few analysts including Cramer beating the table on energy. I do think energy is going to perform well during the next bull but it's not going to be the leader anymore. Energy was the leader during the first phase of the commodity bull. We are now into the second phase. It's time for the laggards to catch up. Liquidity is going to flow into the undervalued sectors. That would be precious metals and agriculture. We are going to get the buying opportunity of a lifetime soon and you know what? Most investors are going to miss it. Not because they are afraid the bear isn't finished. No they are going to miss it because they will think that gold is too expensive or it's too overbought. Many will rationalize that they will be able to get in at a later date at better prices. I've got news for you in a raging bull market (make no mistake that is what's happening in the precious metals sector) the bull makes it very hard for investors to get back in if they lose their position. Anybody here lose their position in the Nasdaq in 99? This bull will end up going much farther than almost anyone can imagine including me.
I've said this before but I think it's time to point it out again because I see many investors wavering here. WD Gann pointed out that the longer it takes for a commodity to breakout to new highs the greater the rally tends to be. Take a look at that chart folks. That's a 27 year consolidation. Let me repeat myself: 27 YEAR CONSOLIDATION!!!!! Now let me point out again that the average rally after a break to new highs is roughly 180%. I'm going to put this as gently as I can. You have to be an IDIOT to lose your position now. The dumbest thing anyone can do at this point is to try and time these short term swings in the gold market. This is the time when gold can and will start moving $20, $30 maybe even $50 at a time. If you're not in you risk missing the move. So what if gold pulls back here? It just did pullback $40 bucks. How many were able to time the exact bottom of the correction? I dare say none of you did. I'm also going to say this as gently as I can. Take your damn position and quit worrying about these swings. After all it is a bull market.
I think everyone by now knows what I think. Sure there's inflation. Anybody who actually has to live in the real world can tell you there is inflation. All commodities are rising. Most importantly IMO gold is rising. There is no shortage of gold. All the gold ever mined is still around. So we can't blame rising gold prices on a shortage of gold. Inflation is simply too much money. When governments try to get something for nothing by printing paper currency it eventually flows into hard assets. Populations will eventually figure out that their money is decreasing in value either consciously or unconsciously and they will fore go saving because they realize prices will be higher if they wait. Now the government will quote some crazy statistics about how computers are cheaper because they are faster or rent is cheaper so housing hasn't gone up or how hamburger is no longer as expensive as prime rib used to be as evidence that there is no inflation. Does anyone really believe this stuff?
With the big rate cut a couple of days ago and more apparently on the way it appears the Fed has put the Kibosh on the dollars attempt to climb out of the cellar. There's a blizzard coming. A blizzard of money. Got Gold?
The Yen has now rallied to the 95 level which was about where I expected it could get to before a pullback. If the Yen pulls back it will take a tremendous amount of pressure off the carry trade and the general market. However don't be fooled even though the rally today was impressive we are still in a bear market and the longer term trend for the Yen is still up. As long as this continues the 1.2 trillion dollars in carry trades are going to continue to unwind on rallies. Once the Yen consolidates and then starts another leg up I would look for the bear to return and probably in an even fouler mood. Unless the BOJ decides to reverse policy and devalue their currency this will continue. Expect to see oil strengthen if the Yen pulls back for any appreciable time also.
We are getting an almost picture perfect tech rule #1 move (the technical rules are on the lower right hand side of the home page). First leg down, consolidation, 2nd leg down of roughly equal magnitude. The next significant move should be a bounce back up to the consolidation area. At this point I no longer want to press the short side. I'll elaborate in tonight's update.
I think its safe to say that we are in a bear market and that the stock market is discounting a recession. The first chart is the last time a right translated cycle discounted a recession. The 90 recession started in July 1990. The market didn't predict this recession it reacted to it. Also notice the similar waterfall decline that we are now experiencing. This happens as the market is forced to accept the fact that the economy is already in a recession. This is what happens when the Fed tinkers with the markets by flooding the system with liquidity. The market is buoyed till it is no longer possible to remain in denial. Then everyone runs for the door at once. Take note that we just saw a short consolidation in the S&P. The 1990 drop had two of these weak consolidations and 5 waves down. Obviously there's no way to tell how far the market will drop this time. I will point out that in 1990 the market was in a secular bull market and this time we are in a secular bear market. The next two charts show the VIX during the last two 4 year lows. Both spiked to the 45 level. As of Friday the Vix was at 28. I see where some investors seem to believe that the inverse funds (QID, SDS) are now being used to hedge and that is why the VIX isn't spiking yet. I'm not sure that is the answer for the simple reason that the VIX spiked in Aug. and Nov. The inverse funds have been available for the last year and a half. It doesn't seem reasonable that investors just now discovered these funds during the last month. No I think we will most likely see the Vix spike to "normal" 4 year cycle low levels before this is over.
I think we are at a very critical level right now. The market is screaming for Bernanke to cut big. The problem is there is a 1.2 trillion dollar sword hanging over the market in the form of the carry trade. A big cut now might crash the dollar and spike the Yen. This could cause an avalanche of carry trades to unwind all at once. Let's just say I wouldn't want to be Bernanke right now.
Most importantly how do we spot the bottom? As you can see it would have been fairly difficult to spot the bottom in 1990 in real time with just TA. Personally I will be not only looking at the technicals but also watching the COT reports for signs the big money is buying.
It's time to look at the most important chart in the world again. That's right the Dow:gold ratio. We see the 16 level has fallen and we are now down in the 13 range. That means that it takes 13 oz. of gold to buy one share of the Dow. In 2000 it took 42 oz. of gold to buy one share of the Dow. Anyone who thinks that we have been in a bull market for paper assets since 2002 is fooling themselves. We are and continue to be in a secular bear market for paper and a secular bull market for hard assets. Historically this trend will not change until the Dow and gold are selling close to parity. Gold just broke out to new highs. The average gain for a commodity after it breaks out to new all time highs is roughly 180%. That puts gold in the $2500 range. It won't get there over night and there will be scary shakeouts but I have no doubt that it will get there. As a matter of fact I suspect it will double that. At some point in the future we will most likely see gold and the Dow trading in the $5000 range. There are going to be millionaires made in the coming years for the investors that can ride this bull. Those that get repeatedly bucked off are going to miss the boat. Saddle up cowboys and cowgirls and prepare to hold on tight because you ain't seen nothing yet.
This wicked sell off has been mirrored by the explosive gain in the Yen. The last peak to peak rally tallied up 5%. This rally is only up 1%. I think there's still more to go yet before the Yen pulls back. That pullback will most likely correspond to another bear market rally. I doubt this bear market will halt until the Fed convinces the BOJ to devalue their currency and support the dollar again. Back in July the BOJ changed policy to a strong Yen in an attempt to control spiking inflation. That has had a negative effect on both the Nikkei and the rest of the global markets. Have no fear though at some point public outcry will force the BOJ to reverse policy back to inflation from their current sensible one to protect their currency. Sadly if they could resist this demand to inflate they would emerge from the recession much stronger. Instead they will end up prolonging the pain and making it much worse in the long run.
Years ending in 6 and 7 have tended to be topping years in the market. 7 of the largest 15 declines in market history topped in years ending in 6 or 7. The long term trend is clearly broken. Markets can easily drop 30-40% when discounting a recession. A 30% decline would take the S&P back to the 04 lows. Considering that the market really didn't appreciate that much in inflation adjusted terms and a 30% decline would clearly suggest that we are in fact in a long term secular bear market. So far this is playing out almost exactly like the 66-82 bear market. We should now have several years of sharp moves up and down as the Fed continues to try and inflate away all the troubles but in fact just pushes inflation higher and higher. The 70's stagflation scenario is playing out right on cue. Does anyone remember where the money was made in the 66-82 bear market? That's right commodities. Specifically gold and silver should outperform as they have underperformed during the first phase of the bull.
here is the link to the CNBC interview with Vic Sperandeo. He see's things pretty much the same way I do.
BTW while I'm thinking about it. How would you like to buy a house at 1980 prices? How about a car? Gallon of gasoline? College tuition? Doctor bills? How about a gallon of milk or carton of eggs? Guess what you can buy for almost the same price as in 1980. Yep Gold. I'd say Gold is ridiculously cheap wouldn't you? Is it any wonder that gold just keeps surging upward day after day?
We all know that gold is rising in US dollars no doubt about that. Take a look at the above charts and you will see Gold is rising in Euros, Yen, Pound Sterling and Canadian dollars. I rail at the Fed for printing too much money but they are hardly the only ones. Every country is running the printing presses like there's no tomorrow. This is a global effort by every central bank around the world to keep the bear at bay. They have managed to stretch this bull market till it has become the second longest in history. This concerted effort to print away all our troubles will ultimately fail. Always has, always will. All the central banks are going to accomplish in the long term is to put the global economy into a nasty inflationary spiral. Whether this ends up as a global recession or depression will be determined by how quickly the CB's realize that hard times are inevitable and all they can do is soften the blow by trying to control inflation.
I noted this to subscribers the other day. Unless something drastic happens before the end of the day this weekly chart looks like the BKX may be ready for the counter trend rally similar to what housing did in 06. peak to trough the banks have moved down 35%. Intraday Wed. the BKX was 26.3% below the 200 DMA. That's about as stretched as it's ever gotten. If the banks rally here for a bit it will take quite a bit of pressure off the general market. I don't think for a minute this will be the end of the troubles for the banks but things can only get so stretched before snapping back to the mean.
The market has rallied off the Mar. support and it followed through today. Yawn! So what. I'm going to show you what's really important today. First off scroll right and read the four rules. Ben just confirmed rule #1 today. Was there ever any doubt? Today Silver finally got in gear, gold surged and the HUI broke out to new highs. The XAU was just a whisper away from breaking to new highs. Intraday it did trade above the old high. Did the market put in a meaningful bottom today? Who cares? The miners and silver are now confirming the break to new highs by gold and platinum. Game on.
The Banks have seen severe selling the last couple of weeks. Since nothing goes straight down there's a good chance they are ready to bounce. I'm wondering if they may rally back to resistance. If they do it will take some pressure off the general market. I'll also be watching the Yen. It dropped today at roughly the same time the market rallied. The Yen got quite oversold recently and a pullback would be normal before the rally resumes.
I know most investors dismissed the Dow Theory sell signal when the market didn't follow through and bounced last month. Today the markets confirmed that sell signal again. Remember the average decline from the point where the signal was given is between 20 to 30%. Of the 30 Dow Theory sell signals in the last 110 years only three have resulted in no or minimal declines in the market. It's pretty hard to argue with an indicator that has been correct 90% of the time. Oh and by the way the COT has shown massive liquidation of longs over the last 3 months. The signs have been there it just depends on if you want to pay attention to them.
I noted in the daily updates last week that sentiment has been sharply split between the bulls and bears with very few neutral players. The Investors Intelligence survey as opposed to the AAII survey showed the same thing. Namely one survey showing extreme optimism and one extreme pessimism. Note the Ticker Sense poll this week. This was manifested in the triangle consolidation that formed in the S&P. When this kind of extreme polarization in sentiment is finally resolved what normally happens is a big move in the direction of the winning side as the losers have to capitulate. So far this is exactly what's happening as the S&P as accelerated to the downside after the break.
There seems to be a growing sentiment that we can't be entering a recession because it is just to publicised and that's not how recessions happen. I've got a few comments on the subject (as usual). First off I think the market started to discount the recession back in July and Aug. Back before anyone was considering a recession. However the Fed flooded the system with liquidity and postponed the market decline that would have predicted rough times ahead. At this point sure everyone is predicting recession because we are already in it. All the Fed has done is worsen the situation by adding a heap of inflation to go along with the recession.
I keep seeing on CNBC analyst after analyst touting tech as a safe haven to hide from the credit crunch. Maybe these commentators think we can't calculate a %. I've got news for everyone tech is going to get beaten like a red headed step child if we continue down into the 4 year cycle low. Tech is already leading the market down. The S&P is currently down a little over 10% from the Oct. peak. The NDX is down over 12%. The S&P is still holding above the Nov. lows. Tech closed below the Nov. lows today. The S&P was down 2.4% today the NDX was down 4.3%. Yeah tech is the place to hide only if you want to get your head handed to you. If we go into a recession does anyone think that consumers are going to be spending food and gas money on AAPL trinkets? I seriously doubt it. Does anyone think that there's going to be a surge in new computer or software sales if the consumer can't make his mortgage & car payment? How about business upgrading to all the newest IT technology if sales are falling off a cliff. Hardly! Notice the Dow made new all time highs during this bull market (granted not inflation adjusted new highs). Even the S&P made a nominal new high. Tech didn't even come close. Where do they find these analysts? Even worse, who in the world believes this crap?
Actually its a tale of one tired bull and one raging bull. Bull markets typically end with a bang. By bang I mean with high volume and high volatility. Take a look at the first chart and you'll see what I'm talking about. For all the wild swings back and forth the past year we have basically gone nowhere since last Feb. Also take a look at the big surge in volume since this summer. I believe that we started down into the 4 year cycle low back in July but the Fed put that move on hold by flooding the system with liquidity. However all that liquidity didn't really do anything for the markets as we can see. The market has simply gyrated back and forth as the liquidity leaked out of the paper markets and into the commodity markets.
In the bottom chart we can see one of the beneficiaries of this liquidity pump. This my friends will ultimately be the end result of trying to print our way out of trouble. Always has been always will be. Just keep the four rules on the home page firmly in mind for the next 10 years or so and you will have a successful game plan to invest with.
We are now getting warning signs. The S&P has broken the lower trendline and the Dow has completed the trend reversal by closing below the Dec. lows. The weekly chart also doesn't look good as the 65 WMA has been breached again. All that being said I think we could see a bounce here as most of the short term levels are pretty oversold and there was some pretty heavy buying into weakness of the SPY ETF at the close. One more violent bounce to scare out the weak shorts before we start down in earnest might be in order. Especially since tomorrow is one of the most historically positive days of the year. If the Yen is weak tomorrow we could see that bounce.
Here are some stats to consider when you hear the pundits tout tech as the safe haven.
45 of the 100 NDX stocks have 200 DMA that are already declining (they are in intermediate to long term down trends). 56 of the 100 NDX stocks are below the 200 DMA. 68 of the 100 NDX stocks have a declining 50 DMA (short to intermediate term down trends). 67 of the 100 NDX stocks are below the 50 DMA. and last but not least 50 of the 100 NDX stocks have 50 DMA that have crossed under the 200 DMA. Of the 33 stocks above the 50 DMA only 14 of them are what I would consider strongly above (making new highs) and 5 of those 33 stocks above the 50 are still below the 200 DMA. This doesn't paint a pretty picture for tech being a safe haven for investors with only 14 stocks in strong technical positions.
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T1. A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move. Generally, when the second move from the sideways range has run its course, a counter move approaching the sideways range may be expected. T2. Reversal or resistance to a move is likely to be encountered: - 0n reaching levels at which in the past, the commodity has fluctuated for a considerable length of time within a narrow range - On approaching highs or lows T3. Watch for good buying or selling opportunities when trend lines are approached, especially on medium or dull volume. Be sure such a line has not been hugged or hit too frequently. T4. Watch for "crawling along" or repeated bumping of minor or major trend lines and prepare to see such trend lines broken. T5. Breaking of minor trend lines counter to the major trend gives most other important position taking signals. Positions can be taken or reversed on stop at such places. T6. Triangles of ether slope may mean either accumulation or distribution depending on other considerations although triangles are usually broken on the flat side. T7. Watch for volume climax, especially after a long move. T8. Don't count on gaps being closed unless you can distinguish between breakaway gaps, normal gaps and exhaustion gaps. T9. During a move, take or increase positions in the direction of the move at the market the morning following any one-day reversal, however slight the reversal may be, especially if volume declines on the reversal.
General Trading rules
G1. Beware of acting immediately on a widespread public opinion. Even if correct, it will usually delay the move. G2. From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases. G3. Limit losses and ride profits, irrespective of all other rules. G4. Light commitments are advisable when market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting and concentration on these moves will prevent unprofitable whip-sawing. G5. Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal. G6. Judicious use of stop orders is a valuable aid to profitable trading. Stops may be used to protect profits, to limit losses, and from certain formations such as triangular foci to take positions. Stop orders are apt to be more valuable and less treacherous if used in proper relation the the chart formation. G7. In a market in which upswings are likely to equal or exceed downswings, heavier position should be taken for the upswings for percentage reasons - a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100% G8. In taking a position, price orders are allowable. In closing a position, use market orders." G9. Buy strong-acting, strong-background commodities and sell weak ones, subject to all other rules. G10. Moves in which rails lead or participate strongly are usually more worth following than moves in which rails lag. G11. A study of the capitalization of a company, the degree of activity of an issue, and whether an issue is a lethargic truck horse or a spirited race horse is fully as important as a study of statistical reports.
Investing in the financial markets can involve considerable risk. Past performance is not necessarily an indication of future performance. The information included in The Smart Money Tracker and The SMT subscribers daily updates is prepared for educational purposes and is not a solicitation, or an offer to buy or sell any security or use any particular system. Information is based on historical research using data believed to be reliable, but there is no guarantee as to its accuracy. G.D.S L.L.C., nor Gary Savage, do not represent themselves as acting in the position of an investment adviser or investment manager for funds that are not under their direct control and fiduciary responsibility. GDS L.L.C., Gary Savage, will not provide you with personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. From time to time, GDS L.L.C., Gary Savage, may hold positions in securities mentioned, but are under no obligation to hold such positions.