A financial blog on investing in stocks, commodities and the gold bull market.
Friday, March 28, 2008
A Bull and a Bear
So far the bull market in commodities and the bear market in stocks are doing exactly what they should be doing. By that I mean the bear is in the process of taking stock valuations down to extremely depressed levels and the bull market in commodities is in the process of taking commodity prices to levels of ridiculous overvaluation.
Notice the trailing PE has gone from 45 (I think that's pretty close) in 2000 to 29 at the bottom of the last 4 year cycle low. BTW 29 is still ridiculously expensive. 29 is higher than almost every other bull market topped out at. That alone made it clear that the bear was hardly over in 2002. Now today the S&P has despite rallying for 5 years dropped to 18 times trailing earnings. PE ratios are compressing despite record earnings. Still 18 is hardly undervalued. As a matter of fact it's a little on the high side of average. No the bear still has a lot more work to do yet. It won't happen overnight especially with the Fed willing to debase the currency to any extent to keep the bear at bay. Unfortunately all this is going to do is make the process all that much longer and more painful.
Now let's look at the Dow:Gold ratio. Here we see the bull in the process of doing what he does, namely taking commodities to extreme overvaluation. At the top in 2000 it took 42 oz. of gold to buy one share of the Dow. That ratio is now down to 13. Again hardly ridiculous overvaluation yet. Seeing as how the last two commodity bulls took the Dow ratio to 2.5:1 and 1:1 we still have a long way to go here also.
Now look at the last chart specifically from 66-82. The Dow went nowhere. However in valuation terms it dropped sharply. The trailing PE in 74 was around 7 if I'm not mistaken. Also notice that the stock market was unable to make significant new highs during this entire 16 year period. Now look again at the first chart. See any similarities? Keep in mind that in inflation adjusted terms the S&P was still very far below the 2000 peak at it's high in Oct. of last year.
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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.