China opportunity

China is one of the few places I'm seeing significant potential on the long side at the moment. While commodities are obviously still in a secular bull market almost all of them have gotten extended above their moving averages and need to correct or at least trade sideways for a while. Add in the fact that the dollar may be setting up for a major rally and I don't see huge upside potential there yet.

The US markets seem to be mired in a trading range. Even if they did break out I don't see the stock market surging to huge new highs anytime soon. For that to happen the Fed would have to flood the world with more liquidity. That strategy has already ignited inflation. No I just don't see huge upside in the US markets at this time.

I've said before that bear markets create opportunity. One of the worst has been in the Shanghai stock exchange. The SSEC lost over 50% of of it's value during the recent 4 year cycle low. In my opinion that created one heck of an opportunity for those willing to see it.

I don't believe for one minute that China is in a bubble. China is expanding rapidly. For a communist country China has some of the best capitalists in the world. This growth is not going to go away. I'll tell you what else I like about China. The central bank is tightening interest rates trying to control inflation. That's a plus. While the US is busy squandering billions to police the world, ostensibly from weapons of mass destruction, China is busy buying the natural resources they need. It's much cheaper to just buy what you need than to try and take it by force.

The Shanghai index is one of the few markets that look primed for major moves up along with India and a few other emerging markets. Until the commodity markets are done correcting I think this is probably one of the markets with the most potential on the long side.

2nd counter trend rally

I think it may be time for the 2nd counter trend rally in the dollar. The first rally came after 3 years of decline. The current decline lasted almost 2 1/2 years. I was expecting new lows in the neighborhood of 15% below the 04 bottom. The dollar dropped 12.5% below the previous low. That's probably close enough. The last bounce took the dollar above the 40 week moving average and tacked on 15%. If this shapes up to be another counter trend move, 15% would take the dollar back up to resistance in the 80 range.

During the last counter trend move the stock market was range bound for the most part of 05. In a secular bear market stocks are going to need bigger and bigger infusions of liquidity to maintain the upward trend. If the Fed is going to try to drain liquidity from the markets I would expect more of the same sideways trading. This may accomplish the goal of bringing down commodity prices temporarily. However once they start inflating again commodities are going to bounce right back.

In good company

Jim Rogers is the kind of company I like to have in my investments. He's also buying China.

Gold's monthly chart

Unless something drastic happens in the next week gold is going to complete a monthly swing high. Every other correction during Gold's bull market has seen one of these monthly swing highs. Also notice that gold has corrected back to the 12 month moving average on every correction. Depending on how long this correction lasts that could come in at anywhere from $790 to $850.

So is the bull market over? Doubtful. Once we finish this move and the commercials cover their shorts I will be looking to get back in at much lower prices for the next leg up. I don't know whether that will be in a couple days, a couple of months or next year. Will I sell my core position? What are you crazy? Where would I be if gold decides to end the correction tomorrow and I had no position?

At some point in this bull market there will likely be a down year. Maybe it will be this year I don't know. This is just how bull markets work. They make it as hard as possible to stay onboard.

I do think the COT report should get us back in pretty close to the bottom so I'll just bide my time until I get the green light.

Global warming???

As anyone can tell you the use of fossil fuels and the rise in CO2 emissions is the main cause of global warming...or is it? The truth that none of the environmental groups want you to know is that there is no actual scientific evidence of global warming. That's not to say it isn't happening just that there is no hard proof. As a matter of fact nothing is happening today that hasn't happened many times in the past. The Earth just naturally goes through periods of rising and falling temperatures.

Several years ago NASA launched a series of weather satellites that have been taking very accurate measurements. NASA recently released that data and it actually showed global temperatures stopped increasing in 1998. The big warming that everyone has been worried about since the 70's is a whopping .7 degrees. Actually since 2002 temperatures have been trending downward by .4 degrees. This despite CO2 levels that are still increasing. Here is the in depth story if you want to read the whole thing.

I'm going to guess that funding for the environmental groups is probably better if they conveniently leave out the truth about global warming.

Supply and Demand

Like I've said before this commodity bull is ultimately driven by supply and demand. Monetary inflation is making the problem worse but the underlying cause is simply too little supply and too much demand. Throw in some ignorant political tinkering like using food for inefficient fuels and you have the makings of food shortages.

The market is a discounting mechanism?

I've never really understood this one. I hear the pundits blindly repeating this one all the time. But let's think about it. Did the market discount the end of the recession in 01? Did the market discount this recession? Can someone explain to me how anyone can see into the future and have any idea how this is going to turn out. The fact is that no one knows how it's going to turn out and just because you add up all the investors in the world still in no way suggests that this collective mind can see the future. I'm sorry folks that's just not possible with today's technology.

So why does a bear market normally bottom half way through a recession (not withstanding the fact that the last bear market didn't bottom until a year after the recession ended)? The market doesn't discount anything. What the market does do is respond to liquidity. Obviously as soon as it's apparent that we are in a recession the Fed opens the money spigots. Low and behold the market starts to rally. Everyone immediately points out that the market is now discounting the end of the recession. And in a secular bull market the flood of liquidity does work it's magic and a few months later the economy is back on track.

The problems start to develop when you are no longer in a secular bull market. When stocks are in a secular bear market and commodities, because of supply and demand fundamentals are in a secular bull market the equation changes. Now when the Fed opens the flood gates it doesn't have the same effect. A large percentage of this liquidity flows into the undervalued commodity sector. The end result is an increase in commodity prices above and beyond the supply and demand fundamentals otherwise know as inflation. Rising inflation puts a squeeze on the economy limiting economic expansion thus making the recession worse not better.

Take a look at what has transpired so far. Since the Fed has opened the money spigots wide using every tool at their disposal and a few new ones the market has rallied 9%. Oil on the other hand has rallied 37%. This is of course the one commodity that puts the most pressure on economic expansion. Food is also rising at a similar rate. So the two sources of energy, oil for economic growth and food for human growth are rocketing skyward. Now despite the governments phony core inflation rate I suspect we all must eat and use oil. If these costs are escalating we aren't going to have as much to spend on those core rate computers or core rate rent now are we?

If the consumer is not only getting pushed down by falling real estate values, crushing debt and rising unemployment but now everything he needs to live is spiraling upward it's going to become tougher to frequently the local AAPL store or Cheesecake factory on a regular basis. Since our economy is more than 70% consumer spending it doesn't seem logical to continue to hammer away at that 70% with rising inflation if you want the economy to mend now does it?

I think the economy is going to have trouble pulling out of this recession easily like it did the last time or during the preceding 28 years simply because increasing the money supply is not going to have the same effect it did during the secular bull market. As I've said before the fun part of the monetary expansion is probably over. Now we are going to have to pay the price for continuing to expand the money supply in an environment where it will not cure what ails us. In this environment it is only making matters worse.

So what if the market moves back to new highs if oil goes to $150 and unemployment is moving towards double digits. By the way the job creation numbers were helped along tremendously by the birth death model the last several months. Does anyone really believe the country is creating lots of new businesses as we enter a recession? I suspect the true jobs numbers are in the -150,000 to -200,000 range.

The market is now in a race between massive liquidity injections and soaring energy and food costs. In the end inflation is going to win this battle it's just a matter of how long it takes to bring down the house of cards the Fed is building. The frightening thing is that the higher they build the house the bigger the collapse is going to be. If they don't come to their senses soon they risk the onset of a hyper inflationary depression down the road.

Overbought, up against resistance in a down trending market

I have a feeling the market may be setting up for another test of the lows soon. Notice in Feb. the S&P pushed back up to the consolidation zone of the T1 move and backed off. The Nasdaq however didn't even come close to testing the midway consolidation. Now it's a different story. Both indexes are pushing up into this resistance level. Now on top of that both indexes are about as overbought as they have gotten short term during this entire decline. Add in the fact that the selling into strength as of the close friday was the highest ever seen in the SPY ETF and I think we have the setup for another test of the Mar. lows. At the very least the NDX needs to fill at least a couple of the gaps. Notice the low volume on the recent moves in the cubes. In the past the odds have not been good when the cubes have gapped up by large amounts on low volume. I think we need to see some kind of test on the NDX if this rally is going to be sustainable. I will be watching the money flows buying into weakness as a signal to cover shorts. At the moment I'm still of the opinion that we have seen the 4 year cycle low but that may change if the market violates the Mar. lows by any significant amount.

BTW you can find the technical rules on the lower right side of the home page.

Debasing the dollar

This post is for all the bears out there (and I know there are a lot of you). Many of you are wondering if all of a sudden the collapse of the housing market is finished, if the banks are all of a sudden out of hot water, etc. I'll be the first to sound off with a resounding NO. No way in hell are we even close to being out of this mess. We had the largest real estate and credit bubble the world has ever seen. That doesn't get cleaned up in 6 months. No this will be a multi year process. It's been 8 years since the tech bubble burst. Thousands of companies have gone out of business and we still aren't even close to making new highs yet in the Nasdaq.

So far we haven't even seen one of the big home builders go out of business, although I suspect we will.

So far we've only seen one big bank go down (well it would of except the Fed bailed out BSC)

No this has several years yet to play out. It all depends on if the Fed let's the market do it's job and clean out the excesses or if they continue to try and prop things up as to how long this will last.

So if this still has years to go how come the market is rallying like it has already discounted the worst? I think it's for the same reason the last bear market ended. The Fed is again flooding the world with liquidity. Notice in 2001-03 how much the dollar declined. It took that kind of debasement of our currency to halt the bear market. It took a continued debasement to sustain the rally until 07. The reason it worked is because commodity prices at that time where just entering into a long term bull market and were still very depressed.

Now the Fed is applying the same cure to the present ills. However the environment is hardly the same as it was in 01. Commodity prices are now skyrocketing from 7 years of monetary inflation along with the problem of good ole supply and demand. So for the Fed to try and halt this bear in the same fashion as it did in 01 they will be throwing gasoline on the fire of commodity prices. Doesn't make sense does it but I think they are doing that very thing.

Look at the first chart of the dollar. Every time in the past that the dollar has gotten stretched 8-10% below the 200 DMA it has either bounced or traded sideways back to the 20 week moving average before resuming the primary downward trend. However now look at the last chart. After having gotten stretched almost 10% below the 200 DMA the dollar has now closed below the recent low without ever having come close to bouncing back up to the 20 WMA. If this continues and we see another leg down it will be unprecedented. It will also be a sign that Bernanke and co. have pulled out all the stops in an attempt to halt the bear market and have decided to sacrifice our currency to that end.

So while I think the fundamentals for the bear market are hardly over I also think the Fed is going to print however many dollars it takes to keep this market levitated for as long as possible.

How long this continues is just a matter of how long the economy can hold together with inflation spiralling out of control.

Follow the money

I'm putting up the chart of the CRB again, this time with an S&P overlay. Since Oct. the general stock market has been in a bear market and during this time the Fed has been furiously slashing rates and pumping liquidity into the system. So over all what has been the effect?

Well they've managed to stem the decline in the stock market but in the meantime commodities have been in anything but a bear market. As a matter of fact it looks like commodities have been on a diet of nitro the last 5 months. All bull markets have corrections. It's just natural because all bull markets get ahead of themselves from time to time. That's just human nature at work. So we got a correction in the commodity markets recently. Of course all the doubting Thomas's of the world immediately came out to let us know the commodity bubble was finished.

So what really happened? We got 4 down days. That's right 4. Somehow 4 down days equates into the end of a 7 year bull market. A bull market which BTW is now only about 1% from making new highs. You want to know why the commodity markets are resisting any decline? Because commodities are still not expensive. The fundamentals still haven't changed.

You want to know why stocks aren't rocketing to the moon after this decline? Because stocks are expensive. At 20 times trailing earnings stocks are at levels that have capped many bull markets. Never in history have stocks shown great long term returns or even good long term returns at these valuations. Now when stocks get cheap and by cheap I mean P/E's in the single digits, then I will be selling my commodities as fast as I can to buy stocks. Probably biotechs as I think that will be the next major growth area like the Internet was in the 90's.

Is the commodity bull finished?

I've been told in no uncertain terms recently and over the last 3-4 years that commodities have topped out every time we get a correction. That commodities are in a bubble. That commodities will now enter a long term bear market. Etc. etc. etc.

Let's take a look at commodities shall we?

In the first chart we see that the CRB has now completed a 1-2-3 reversal. We also see the commodity index that is 2.8% below all time highs. Can someone tell me how this implies that the commodity bull market is finished? I'm not saying the correction can't continue. I just don't see how anyone can infer at this time that the commodity bull market is finished.

Now lets look at the second chart. We see the fifth year correction in 06 which is typical of secular bull markets. We also see a recovery and breakout to new highs. Note the size of the consolidation. I've pointed out before the correlation between the the size of the consolidation and the length and magnitude of the following rally. So far this rally is rather small considering the size of the consolidation. This would suggest that this rally isn't done yet.

Now let's address the bubble sentiment. Again let me remind everyone that you just don't get a bubble until two things happen. First off the general public has to embrace the asset hook line and sinker. We saw this public participation in both the tech bubble and the real estate bubble. Thus they qualified as a bubble. We are not seeing any public participation in the commodity sector yet to any significant degree. The other condition for a bubble is massive oversupply. Again we saw oversupply in both the tech bubble with incredible numbers of nonprofitable companies going public on the hype of how many eyeballs they were attracting to their web sites and in the real estate bubble with massive overbuilding most of which was bought by speculators. Now that the speculators are now longer buying we see many many months of supply in the real estate sector.

We have no oversupply in the commodity sector yet. The world is currently struggling to meet demand even as it enters a recession. As a matter of fact we probably need a world wide recession for the oil markets to just barely keep up with demand.

Even though we've been in a secular bear market since 2000 there are still 40,000 funds that one can choose from to invest in stocks and bonds. Anyone want to take a guess how many natural resource funds are available now that commodities are supposedly in a bubble?

Less than 500.

Gold sentiment too bearish

Mark Hulbert says gold sentiment is too bearish. I mentioned before that I love it when the blog is filled with investors telling me that gold and silver are finished. That they are in a bubble. That adjusted for inflation they are a terrible investment. These comments are music to my ears. This is not how bull markets end. Bull markets end when everyone thinks gold will continue to rise forever. Just like real estate never goes down or tech has entered a new era where profits don't matter. All that matters is how many eyeballs look at your site. No my friends the bull market is quite intact and looking as healthy as ever if sentiment is any indication.

daily comment

Unfortunately I can't annotate charts on my friends computer. A couple of quick comments. The dollar appears to be on the verge of or is breaking down out of the triangle. The S&P broke below support today and the XAU has extended it's gains after completing the 1-2-3 reversal. How about oil? The COT has been suggesting this was coming.

Subscribers should understand all the above. Hopefully I'll be up and running again tomorrow afternoon.

Computer Problems

My computer crashed this morning and I can't get anyone out to fix it till tomorrow. I'm using a friends computer to post this. I don't have access to my e-mail so there will be no update tonight. If anything important happens I'll just post it on the blog.

QQQQ:Silver ratio

I'm responding to Tom's assertion that the Q's have been a better investment than silver. Since 02 silver has appreciated 4 times as much as than the NDX. Even if you pick the exact bottom in 02 silver has appreciated almost twice as much as the NDX. In 02 it took 10 oz. of silver to buy one share of the cubes. It now takes 2.5 oz. I don't know about anyone else but I think I'll keep holding my silver. Now you really don't want me to put up a chart starting in 2000 when the secular bear market started because it will be much worse. Likewise you don't want me to compare the Q's to oil or base metals as it will also be much worse. It's not what you know that hurts you. It's what you think you know that just ain't so.

I've added a long term chart starting at the end of the last commodity bull cycle. We can see that stocks clearly outperformed silver until 2000. At that point stocks became grossly overvalued and silver terribly undervalued. Now the trend has clearly changed in favor of silver. Does anyone see anything that would suggest that this trend has changed? Is silver grossly overvalued yet? I'll point out again that human emotions don't swing to the average. We always go to extremes. That's just how fear and greed work. It's never changed in all of recorded history as far as I know and I seriously doubt that it's changed now. As a matter of fact looking at the tech and real estate bubbles I would say it's operating as strong as ever. No this trend won't change until we've taken it to the bubble phase. That's still many years away yet.

What DOES the future hold?

Here are two of the last great bear markets. The first one is the US markets between 66 and 82. The next one is the Japanese Nikkei since 1990. You want to know what was similar about both of them? Yep the government tried to prop everything up. The natural forces of the market weren't allowed to play out. In Japans case the financial system was not allowed to cleanse itself. (sound familiar? Think BSC) The end result in Japans case is an ongoing 18 year bear market. The US fared a bit better but not much. When we got entangled in Vietnam the country started printing money to pay for that war. Alas human nature will never change. We will always try to get something for nothing. The final stage of a bubble is caused by investors desire to get rich without having to actually do anything. (all one has to do is by tech and retire or housing only appreciates).

In the 80's we got lucky with Volker. He was willing to take the necessary painful steps required to clean out the system so the economy could start fresh.

Fast forward to today. So far I see no hint that Greenspan was or Bernanke is prepared to make the tough decisions necessary to cleanse the system of the excesses created in the last decade and to set the foundation for the next major bull market. As a matter of fact I see the exact same behavior that Japan has followed since 1990 and that the US followed in the 60's and 70's. Namely run the printing presses, try to inflate away debt and patch the problems.

Until the powers that be accept the fact that you can't get something for nothing I expect we will continue to be mired in a long term bear market similar to the last one with rising inflation and slow or stagnating growth.

In this type of investing climate you have two avenues to make money. You either have to be a great market timer or you have to stay invested in commodities.....The second one is easier.

P.S. I'm getting tons of e-mails questioning my call that the 4 year cycle low is in especially since I think we are still in a recession. I'll have my view of what is in store now that I think we've seen that low in tonight's update.

It's starting!!

Inflation is starting to take it's toll. Three airlines have now gone out of business in quick succession. ATA, aloha and now Skybus have filed for bankruptcy recently. One of the major causes in all three failures, high fuel prices. Who knew? Now we are seeing that many of the truckers around the country are contemplating striking in protest of high diesel costs. We've already seen the writers guild strike. Americans are having trouble paying the escalating costs of living. Does anyone realistically think this will be the end of this or is it more likely only the beginning? Since the Fed has shown no inclination to halt the cause of inflation, namely massive monetary expansion, then I'm guessing we're just entering the second inning. I fully expect congress to go down the price control avenue again. First it will be on oil pricing. I expect to hear rhetoric by this summer from politicians about how the evil oil companies are driving up the price of energy. In fact I'm already starting to hear this on some of the business channels. (funny how the media nevers talks about the evil government taxes on gasoline driving up prices.) Amazing since the XOM, CVX and COP of the world are only tiny players in the energy markets compared to the state owned companies. I wonder how the politicians plan on regulating Saudi Aramco. I fully expect legislation to prevent truckers from striking will come forward soon. For any of you who lived through the 70's does this sound familiar? While I expect the market has put in a bottom for a while probably at least till the elections, the Fed is laying the foundation for much more serious problems. Problems that can't be cured by flooding the world with money. In fact, problems that are caused by flooding the world with money. But hey when have politicians ever worried about the future?

The big picture

Often when the daily noise gets confusing it's helpful to step back and look at the long term perspective. In the first chart we see the S&P. Notice that during the entire bull market the corrections were fairly uniform. 7-10% was the norm for every correction on the way up. Once this bull market became mature any correction that exceeded that norm would likely be a sign that the bull was done. We saw that correction in Jan. once the S&P dropped over 13%. Looking at the long term view of the general stock market one has to say we are in a bear market until proven otherwise.


Now let's look at gold over the same period. So far all corrections have been uniform in the 10-15% range except the 06 correction. That waterfall decline had to potential to begin a bear market in gold as it exceeded the "normal" correction up to that point. However gold didn't respond like it was in a bear market. Instead of the trend reversing gold preceded to chop back and forth gradually working higher and in the process building a large base. Not typical bear market action. The end result, we experienced another runaway leg up in the precious metals this year. About what should be expected as gold is in a secular bull market. Since I've been along for almost this entire ride I can tell you that every single one of these corrections has been accompanied by the Chicken Little's of the world coming out and telling us how the dollar is starting a multi year bull market and how gold is in a bubble and the run is over.


Moving on the the next chart I'm going to show you why I think the run is still in the early stages. I've pointed out in previous posts that the size of the consolidation is often a good measure of how large the rally will be once a breakout occurs. I've noted the consolidations so far in this bull on the chart. For the most part the rallies have roughly equalled the consolidations. But let's ignore these for now and again look at the big picture. What we see is a huge almost mind boggling 20 year consolidation in the gold market. We also see that gold has just now broken out of that consolidation. I have no doubt that before this bull is done we will ultimately see a rally of similar magnitude as this huge consolidation. Gold when it's all said and done is going to go higher than any of us can possibly foresee. That being said I think silver will end up putting gold to shame simply because the fundamentals are much stronger and it will be more affordable for the public when we finally do enter the final blow off stage.


While I'm at it take a look at the S&P:CRB ratio. When the trend is up stocks are outperforming commodities and when its heading down the opposite holds true. Now I have to ask, since the stock market is quite likely in a bear market and commodities are still showing no signs of a top why would anyone want to take a chance investing in stocks? This trend is only 8 years old. The average commodity cycle is 15-22 years. Trying to call the end of the commodity cycle at this point would seem to be a rather dangerous proposition.