Watching Coal

I'm currently watching the coal stocks as a sign for when energy is going to succumb to the bite of the bear. Once the coal index breaks the trend line then I suspect the party will be over in the energy sector.

At the recent high the coal index was 76% above the 200 DMA. It's pretty rare that an index can push more than 60% above the 200 DMA. In 2000 the Nasdaq only managed to move 57% above the 200 DMA. That was during the greatest bubble in history. Just goes to show you how incredibly stretched the move in the coal stocks has become. These kind of moves occur when dumb retail money finally moves into the sector.

As most of you know I've pointed out many times in the past that a spike of 100% or more in oil prices within a years time has led to a recession 100% of the time.

Let me also point out that the recession has crushed demand and led to falling oil prices 100% of the time. This never fails and I guarantee it's not going to fail this time either. This is not going to be the one time in history where "it's different this time".

I know the energy bulls will point out that the fundamentals are supporting this parabolic rise in oil. While I am in the peak oil camp I also know that there are two components to a supply and demand imbalance.

As long as the world is growing then yes we are using more oil than the world can produce. What the bulls want to ignore is a worsening global recession. Almost every stock market in the world is telling us this is a fact.

Unless someone can explain to me how failing economies can somehow continue to increase energy demand then I'm going to have to be in the camp that thinks that the parabolic spike in energy prices is going to end like all parabolic spikes end...in collapse.

Keep in mind that parabolic moves are a sign of irrational human emotions. Fundamentals just don't ever change rapidly enough to justify vertical moves barring a war in the Middle East. The last time I checked there weren't any new wars brewing. Now if I saw a US military build up on the Iran border like we saw in 02 in Iraq then I might change my mind about oils sustainability.

Until that time I think I'll separate myself from the herd piling into the energy stocks.

Here's one of the few truths that you can take to the bank. "When everybody's thinking the same thing then no one is thinking"

COT surprise

There are some very interesting developments in the COT report this week. I'll go over all this in the weekend report which should be out tomorrow sometime.

Short, intermediate and long term outlook

In tonight's update I'm going to go over where I think we are headed in all three time frames.

I'm also going to take a look at the energy and precious metals sectors.

Credit cards the next shoe to drop

Today American Express revealed that they had underestimated the rate of credit card delinquencies. I suspect this will be the next shoe to drop as embattled consumers start to default on their credit card payments.

From the look of the AXP chart I'd say it has already started. A break below the $40 support would not be good for the consumer outlook. I think it's safe to say that Discover is having trouble with defaults and delinquencies also.

Folks I think we have tough times ahead. I also think the current four year cycle has already topped out. If the market manages to trade below the Jan & Mar. lows before this 22 week cycle bottoms then we can add in not only a failed seasonal cycle but one that is left translated. The average decline for a failed seasonal cycle is -30+%.

This is not a pretty picture brewing here

There goes the Nasdaq

The Nasdaq and the NDX have now followed the rest of the market into a down trend on the point and figure charts.

The Transports, Russell and Midcaps as of today all completed 1-2-3 reversals.

I'm still half heartedly expecting a bounce soon as this 22 week cycle bottoms sometime in the coming week or weeks. However events are coming into play that may not be pretty for the markets. I'll elaborate in tonights update.

Financials

I would have posted this to the blog except I can only include 5 charts. So I'm going to offer one more time a free update. This isn't the weekend report just my thoughts on the financial sector.

Send request to gsavage4997@cox.net

After browsing the update how many still don't want to own gold and silver?

weekend report

The weekend report won't be free this week, sorry, but it is going to be interesting. I'll have a lot to say on the market, energy and metals this week.

It's time to buy gold

Gold finally broke through the down trend today. It also appears the recent gold trading cycle bottomed on June 16th.

After the massive run we saw last year into Mar. this has been a very mild correction. That alone speaks for golds strength or should I say Bernankes penchant to print dollars. The A wave should now be starting. Remember A waves rarely make new highs so don't get discouraged if gold doesn't shoot straight up like it did last fall. As I said in today's update I expect the Fed to continue cutting as the market weakens. They just need to bring down the energy markets first. Perhaps this will happen naturally as the parabolic price structure finally collapses. If not then I expect we will see intervention in the oil markets. One way or another in an election year the powers that be are going to bring down oil prices. Of course this will just make the problem that much worse in the end but hey what's more important doing the right thing or getting re-elected?

June 18th update

Tonight I'm going to put on my contrarian hat and go over the "what if's". There are several areas that I think investors in general expect to happen in the coming weeks and months. What if what's expected to happen doesn't. I'm also pretty confident the retail investor is being handed the bag just like he was in 2000. Only this bag isn't on anyone's radar.

The full report will be available to subscribers later this evening.

weekly charts

I hope everyone that took advantage of this weeks offer of the weekend report enjoyed perusing my thoughts on the market. The response to the weekly report was surprising to say the least.

I want to start off with a very long term chart of the S&P. What I want to concentrate on is the 75 week moving average. During secular bull markets this average tends to act as impenetrable support. Take notice that during the entire secular bull market. This average only turned down briefly in 87 and very slightly in 90. It turned down and stayed down for over two years once the secular bear market started it turned in 2001. Now notice that the 75 week moving average has again turned down for only the 4th time in 28 years. Even more concerning is the fact that the market has penetrated the 200 week moving average. That has only happened one other time in the last 28 years. I don't think there is any doubt that we are in a long term secular bear market and that the bear is waking up again after a Fed liquidity induced hibernation of 5 years.

Now lets take a look at the weekly chart. As everyone knows by now I like the weekly charts as they eliminate the daily noise and give one a clearer picture of what's happening in the market.

Anyone who got this weeks report knows I think we are moving down into the coming 22 week cycle low soon. I've pointed out on the chart that almost all 22 week cycle lows don't end until the market gets oversold on a weekly basis. You can see the market isn't really close to being oversold yet. I also pointed out this week that we should expect the half trading cycle bounce and I think we are in it now or perhaps it is already rolling over. Once this bounce fails we should get another leg down into the final low. At this point I still expect the Mar. lows to hold. However if they don't then it is very possible that we have already put in the top for the next 4 year cycle. A top after only 5 months would be incredibly bearish for stocks.

Regardless even if this doesn't end up being the top I do think this cycle will be a left translated cycle. The 1998-2002 cycle was a left translated cycle. Left translated cycles are very bearish for the market. The worst declines in history have come from left translated cycles. The 32 cycle was left translated. So was 74. Obviously we'll just have to see how things play out but I really don't have a lot of optimism for the next 3 years.

Weekend report

The market is now entering a very dangerous period IMO. I'm going to make the weekend report available to anyone who wants it free of charge this one time. Minus the COT spreadsheets of course :) Just send a request to gsavage4997@cox.net . The report will be available Saturday evening

spike in oil = recession

I've shown in the past how a spike of 100% or more within a year has always caused a recession. This time obviously is no different. We can probably thank the Fed for our current situation. I argued months ago that the massive monetary inflation to save the banks and housing market would ultimately make matters worse and not cure any of the problems in the financial or housing sectors.

We are seeing that in fact that is exactly what is happening.

Now I'm going to dispel another myth that seems to be brewing. The more I listen to the media the more it appears that everyone is convinced that because of supply and demand fundamentals the price of oil is going to continue higher and higher.

Just like the theory that monetary inflation would fix the banks this theory is completely ridiculous. Just like a spike creates a recession the recession creates demand destruction. It does it every time and I guarantee it is going to do it this time too. When you take down the demand side of the equation until supply is adequate then price drops.

All this talk of skyrocketing prices for the foreseeable future is as usual complete crap. The parabolic nature of this rally suggests that when the market finally catches on to the fact that demand is collapsing the price of oil will fall rapidly.

10 stock market lessons

10 great common sense lessons from Bob Farrell. Pay particular attention to rules 1,2, 4 & 9. Read the whole story here.

Bernanke's legacy

In the next few weeks Fed president Bernanke will in my opinion determine how history remembers him. As the economy weakens we are going to see more banks poised on the edge of bankruptcy. Will he take the same path and pump liquidity in to save them or will he realize his mistake and let them fail? The decision to cut rates drastically to try and prevent the economy and specifically the financial sector from experiencing any pain during an election year will most likely go down in history as one of the biggest central bank blunders of all time.

Everyone seems to be denouncing the ECB for their stance on inflation but they are making the exact right choice to save their future. Bernake on the other hand seems to be locked into save the banks mode. If he doesn't stop and stop quick he risks putting the country into a hyperinflationary depression. I'm guessing in the next couple of weeks we are going to have another large financial institution teetering on the edge. If he doesn't let it go bankrupt but instead pumps up more and bigger TAF auctions, TOMO's TIO's, etc. then we are likely going to be in for some seriously bad times by next year.

We have tough times ahead anyway. That's the end result when a bubble pops. There's no way around it. The question is will the Fed do the right thing and let the bubble correct so we can have a future.

In order to do that Bernanke needs to start raising rates. He needs to raise them aggressively just like Volker did in the 80's. We need to strengthen the dollar. Just talking isn't going to do it anymore. We need action. Yes raising rates will make the recession worse. More people will go into foreclosure... a lot more. There's no way around that one. Sure that is going to deepen the recession, it's unavoidable.

Despite the Fed's efforts none of that can be avoided at this point whether they raise or lower rates. The only thing the Fed can do is stop inflation from getting anymore out of control. My suggestion is that the Fed concentrate on what they can fix and not on what they can't.

If I see the Fed raising rates then commodities will take a breather the recession will remain just a nasty recession. It won't be the end of the commodity bull by any means. That will only end when supply and demand move back in balance and that's still a ways into the future.

If however I see the Fed expanding the TAF auctions again or guaranteeing a buyout of another crippled bank, anything other than letting the financial system pay for their mistakes then I'm going to prepare for the worst. That means buying gold and silver aggressively.

The Fed's actions in the next few weeks are going to be critical to commodity prices and Bernanke's legacy.

We certainly do live in interesting times. I wish they were good interesting instead of bad interesting though.

Parabolic spike

The current sentiment seems to be that oil is a sure thing. Yesterday we saw oil surge almost $6. That was the largest one day rise in history if I'm not mistaken. If we look at a long term weekly chart it's easy to see the parabolic nature of this current rally. At the peak a couple of weeks ago oil was stretched 46% above the 50 WMA that has acted as support during the first phase of the bull. This is by far the most oil has risen above the mean during the entire bull market. We are starting to hear way to many calls for $200 oil.

Don't get me wrong I'm still a commodity bull but I'll be the first to admit that parabolic spikes don't end well. The effect of this spike has been to put the economy into a recession. Recessions cause demand to fall. Falling demand equals lower prices. I'll also note that this is an election year and everyone is screaming at the politicians to do something about oil prices. I have no doubt that the powers that be will do something. Whether it be raising margin limits or reweighting indexes, etc. This is going to end just like all parabolic spikes end, in a swift collapse. This is not a place where I want to chase oil stocks.

When this pulls back to the average then oil will be a strong buy again for the next leg up in the second phase of the bull. Of course at that point everyone will be telling you that oil was in a bubble and it has popped. Nothing will be further from the truth.

Where is the bottom?

There seems to be a preoccupation with trying to pick the bottom in the housing and financial sectors lately. I guess I can understand the reasoning since I don't really expect the market to enter into a significant new bull market until these two sectors especially the banks bottom.

Let's look at a broken sector and two previous bubbles to see if we can find any clues to what we should look for to spot the bottom.

The airline sector took a huge hit on 911 that continued as oil started to climb. The Fed is virtually crushing any hope for the recovery of this industry with their inflationary policies. It's been 7 years and no sign of a bottom yet.

Next we see the collapse of the tech bubble. It's been 5 years and still no sign of a major recovery to new highs.

The Nikkei bubble popped in 1990. it's now been 18 years and again because of the Japanese unwillingness to let segments of the financial system fail we see no sign of the Nikkei pulling out of the secular bear market.

Now look at the housing index. Only 2 1/2 years have passed. Inventory is still building. We have another wave of foreclosures yet to come this year. They haven't even started yet much less hit the banking system.

The BKX is down a little over a year. The Fed is following the same course as Japan and trying to prop up the financial system.

After looking at the other three charts does anyone really think that we are even remotely close to seeing the final bottom in these two sectors?

The Fed's inflation conundrum

Remember long term tenet #1? If given the choice between inflation and deflation the Fed will inflate.

The Fed is now between a rock and a hard place. The deflation in the real estate and credit bubbles requires inflation of the money supply or the masses are going to feel pain. Lot's of pain. This kind of pain isn't good during election years. The Fed has faithfully responded by following rule #1 to a tee. Keep in mind it's not really going to stop the deflation in either of those markets. It may prolong and probably intensify the pain but it's not going to stop the process from unwinding. Both bubbles will continue to deflate. As a matter of fact they are going to decline much more than is necessary. That's just how human nature works. They will likely drop to the same degree of undervaluation as they rose to overvaluation.

Real estate just went through the largest bubble in history. Much larger than the tech bubble. This doesn't bode well for the final bottom in the housing market. I seriously doubt this deflation will stop before housing loses at least 50% of it's value from the 05/06 highs. Does anyone seriously think the banks are going to bottom as long as this process continues?

So now we have the Fed desperately trying to stop deflation in the real estate and financial sectors but what they are actually doing is again creating a much much bigger problem. I think it's safe to say the the inflation genie is out of the bottle. Once he's out he's very tough to get back in.

Here's what is going to have to happen. First off enough time is going to have to pass for the supply and demand imbalances to be overcome in the commodity markets. Second the Fed is going to have to raise rates aggressively and create a severe recession or depression. How many think that the Fed will be willing to do that?

The easiest time to do it would be right now as it's just getting started. The problem is we are already in a recession. As I've said before the fun part of monetary inflation is now over. We are most likely going to be in a period of either very sluggish growth or recession for several years to come. How does the Fed do what they need to do in that kind of environment? I don't think they can and I don't think they will. The deficits in the US are so huge they will never be paid unless the currency is debased. Just another strike against the Fed tightening.

All this talk about the Fed tightening rates soon is ridiculous. It ain't going to happen. No the Fed is going to continue to inflate and we are going to continue to suffer the consequences of that inflation.

The only way to protect ones wealth during this period is to invest in commodities or be one heck of a market timer. Since probably less than 10% (I'm being generous) of investors are going to be able to time the markets successfully your best bet is to buy commodities.

All this talk of gold collapsing is just ignorant IMO. Keep your eye on the ball and you will come out of this period in fine shape.

I'm waiting for one of two things to happen before loading up on PM again. Either we move into the latter part of the summer or the market declines and I see the Fed panic again and turn up the money supply even more, which ever comes first.

CRB inflection point

I think commodities are now at an inflection point. I'll explain why. Let's start with the first chart.

What we are looking at is the first phase of the commodity bull market which ended in what I call the fifth year decline. Secular bull markets tend to all have this major counter trend correction around year five. Apparently it takes five years for enough people to get sucked in before a large correction wipes them all out and resets the bullish sentiment low enough for the next phase to begin. Black Monday in 1987 was just such a decline.

We've obviously started the second phase of the bull market. This phase often drags on for years. It lasted from 1987 to 98 for stocks. I doubt the commodity bull will be any different. During this time we will see many scary corrections. Every one of them will bring out the doubters. Every rally will bring out the calls of a bubble from the media. The swings will likely be larger in each direction during this period as more and more investors jump on the bull.

Each new leg up will draw in enough new investors to push commodities to new highs probably often stretching the averages quite far above the 200 DMA's. Each correction will fall hard as these stretched levels collapse under the forces of gravity.

During this time infrastructure will start to expand. It will take time. You just can't find a giant oil field and bring it into production quickly. It will take many years to bring this online. Probably 5-10.

Somewhere in the future we will see another correction that will be completely out of character to what has transpired during the second phase. Again the calls will surface about bubbles and commodity bull being finished, etc., etc. This time it will be close to being true. By then enough supply will likely have come on line to meet demand and quell prices. However that won't be the end of the bull.

That's not how human nature works. At the bottom of this correction a strong rally will take hold. By now the public will have watched for 10+ years as the commodity bull roared ahead. They will take this rally as a sign of a sure thing. You won't be hearing anything about bubbles at this point. The media will be full of stories about paradigm shifts and rising commodity prices for the foreseeable future. People will by buying gold and silver and hoarding food to protect against inflation.

The problem is that it actually will be a bubble at that point. Supply will now be more than enough to meet demand. The only thing pushing commodities higher at this point will be human greed and our inability to see change coming. We are forever stuck projecting the past into the future. People are doing it right now with the real estate market. Despite 2 years of losses they continue to try and call a bottom in housing. Don't even get me started on the financial sector. (One year does not a bottom make.) Investors are still trying to project the remembered gains in real estate into the future. I've got news for everyone there won't be a bottom in housing until everyone becomes convinced that real estate is the worst investment ever.

The final phase will last about 1 to 1 1/2 years as the general public piles into a "sure thing" Then and only then will we get the final blow off top in the commodity market. That's when we will likely see the Dow:gold ratio approach 1:1.

Now take a look at the second chart. The inflection point IMO is the $420 support level. The CRB has consolidated for a couple of months and broken above $420. It is now testing that breakout. If this breakout holds and commodities begin to move higher from here then we are all in for some serious inflation in the coming months and probably the next year.

The question comes down to will the Fed let the banks pay for their mistakes and start targeting inflation by raising rates or will they continue to throw money at the financial system and rescue their buddies at the rest of our expense.

The BKX is very close to breaking down to new lows at the moment. I'm going to say right now that it is important for the BKX to break down. We have to cleanse the system. The only way for this to happen is for the banks to suffer the consequences of their greed. As long as the Fed continues to prop up the financial system our future is not going to be very bright. Granted things are going to be in a shambles for a while as multiple banks go bankrupt. That is the price that has to be paid for the spectacular misallocations that were seen in recent years.

I will be watching the CRB and the BKX closely in the coming weeks.