A financial blog on investing in stocks, commodities and the gold bull market.
Wednesday, April 2, 2008
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.
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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.