Sunday, August 31, 2008

Sign of a longer term top

I always like to keep track of the long term charts as a way to follow the true direction of a market. There's too much noise in the daily charts to really get a good idea of the big picture. Today I'm looking at the monthly charts of gold and silver. There are a couple of problems here. First both gold and silver have broken through their 12 month averages, something that hasn't happened other than briefly and by only minor amounts during this entire bull market. Silver especially is showing a very clear change of character with a major breakdown below the 12 month moving average.
Another warning that the 9 year cycle in gold has probably topped is the quarterly swing high in gold. The odds are starting to swing heavily that gold has topped out for now and will be working it's way down to that 9 year cycle low in 09/10.
The next 9 year cycle is where the real fireworks in the precious metals should take place.

Thursday, August 28, 2008

One more leg down

During this phase of the bull market gold should move inversely to the dollar. Many point to gold's decoupling during 05 as proof that gold will rise despite a strengthening dollar. I think they are going to be wrong this time. First off gold was responding to hurricane Katrina and then the rally continued on the Fed flooding the world with liquidity to cushion the after effect of Katrina's devastation. Unless the Fed does something stupid like suddenly cutting rates again I don't see the dollar all of a sudden breaking down.

Looking at the dollar chart we can see an obvious change of character. Previously when ever the dollar became overbought it immediately sold off. This time the dollar got overbought and then just continued to stay overbought. At this point the dollar is in a high level consolidation. This is completely different action than we've seen in the past.

Notice in the first chart I've marked the weekly cycle lows. These cycles average 18 weeks in duration. The low 2 weeks ago was three weeks early. We should ideally get one more leg down before this cycle bottoms. Of course it is possible that the cycle bottomed early but with the dollar consolidating as it is I wouldn't be surprised if the dollar pushes through the 78 level before seeing a more significant correction.

Also gold is following oil at the moment. Oil is rising on the hurricane threat. Notice the stock market is no longer crashing on rising oil? It's probably a safe conclusion that the market is starting to discount this rise in oil as temporary since hurricane season will be mostly over within a month.

Tuesday, August 26, 2008


The Russell has been the strongest index during this rally so far. Notice it just bounced off resistance at the 75 week moving average similar to the S&P during the Mar. to May rally.
The S&P so far has not been able to regain the 200 week moving average. This has been a very weak rally up till now. Most of it predicated on the assumption that falling oil will some how prevent the economy from falling into recession. I think that is going to be a false assumption. Falling oil just means the one sector that was still working in the economy is now probably rolling over along with everything else.

Monday, August 25, 2008

Have bonds got it wrong?

Amazingly enough the 10 year note is yielding 3.8% while inflation is running at 5.6%. Why in the world would the bond vigilantes allow a negative yield? The commodity bulls have been pointing to the negative yield as an excuse for why commodities in general and gold specifically should be moving higher. Generally speaking bond traders are probably the most sophisticated investors in the market. Now either these investors are completely off base or bond traders are sensing deflation in our future.

Somehow I doubt the bond market is wrong. If that's the case then the collapse in commodities makes perfect sense.

Friday, August 22, 2008


I'm curious as to where readers of the SMT live. If you feel inclined leave an anonymous post with the city and country you reside in.

Thursday, August 21, 2008

The odds are starting to skew toward a left translated 4 year cycle

I've mentioned in past updates and posts here on the blog that left translated 4 year cycles tend to be very bearish periods. The 2000-2002 bear was a left translated cycle.

I tend to believe that we saw the last 4 year cycle low in Jan./Mar. We then saw the rally out of that low into the May highs. The decline from that rally made a lower low. That started to suggest that the possibility for a left translated cycle now existed. Now we have the Dow Jones World index breaking down to new lows. That makes the case even stronger for a left translated cycle.

Here's the unpleasant part. Only the 1930 cycle topped out as quickly as this cycle if in fact it has topped. We all know what followed after the June 1930 high. The world sank into the Great Depression. Now I don't know if we are heading into a depression or not. I do think we are probably heading into one very nasty recession. China, you know the great global growth story, land of perpetual double digit growth, is now contemplating a stimulus package. What does that say about the global economy?

Lowry's selling pressure has continued to hit multi year highs as the market has rallied. Big money is selling into this rally just like they sold into the May rally.

I suspect the rest of the global markets are going to follow the world index down and break to new lows strengthening the case for a very bearish next couple of years.

Tuesday, August 19, 2008

It's time to bounce

I think commodities are probably ready for a counter trend bounce. I'm using oil as an example because the parabolic move is more evident. The weekly oscillators are now oversold. This is the level were I think we can expect a rally. Bullish sentiment doesn't evaporate quickly, especially after the kind of run we just experienced. The commodity bulls are now thinking they have the buying opportunity of a lifetime. I believe they are going to be disappointed as I think this rally is eventually going to fail and roll over again.

That's not to say I won't take a trade here to catch the bounce, I am. I will not however expect that it's party time again and that oil is now going to $200. The world is facing deflation. If the stock market does roll over here it puts this 4 year cycle in jeopardy of repeating the 1930 cycle. That was also a very left translated cycle. In that scenario everything is going to get sucked down by the bear.

So for now I do think commodities are going to rally but I won't count on it being anything other than a counter trend rally as Mr. Market does his best to take the most money from the most usual.

Sunday, August 17, 2008

10 rules

Investing legend Bob Farrell's 10 rules to investing.

1. Markets tend to return to the mean over time

2. Excesses in one direction will lead to an opposite excess in the other direction

3. There are no new eras -- excesses are never permanent.
Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots. As the fever builds, a chorus of "this time it's different" will be heard, even if those exact words are never used. And of course, it -- Human Nature -- never is different.

4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
Regardless of how hot a sector is, don't expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction -- eventually.

5. The public buys the most at the top and the least at the bottom

6. Fear and greed are stronger than long-term resolve

7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names

8. Bear markets have three stages -- sharp down, reflexive rebound and a drawn-out fundamental downtrend

9. When all the experts and forecasts agree -- something else is going to happen
As Stovall, the S&P investment strategist, puts it: "If everybody's optimistic, who is left to buy? If everybody's pessimistic, who's left to sell?"

10. Bull markets are more fun than bear markets.

Pretty damn good common sense rules in my opinion.

Saturday, August 16, 2008


We all have our beliefs or bias as to what we think is or should happen. For the most part our beliefs are influenced by recent history. As humans we are programed by our emotions to look at the past and expect the future to look the same. Unfortunately the world doesn't actually work that way. The world is constantly changing. Always will be. Sure there will be periods of time where trends will develop. They may last for long periods of time. What I can guarantee you is that change is inevitable. Nothing lasts forever. Markets don't go straight up or straight down.

The simple fact is that change is going to happen and it's probably the single most dangerous concept that investors tend to ignore. (Well beside position sizing) Once we get locked into a belief and especially once we put money behind that belief it becomes very tough for us to break that bias. We start to rationalize why we are right even if change is blatantly obvious.

Take a look at the three charts and you tell me if something has changed.

If there is anything that has amazed me over the last year that I've been writing this blog it's how strong investor biases can be. During the first part of 07 I was bullish. The only readers of the blog were bullish investors and of course the occasional bear telling me all the reasons why I was wrong. Of course the one reason that was telling me that I was right was that I was making money. The bears could not fall back on that rational. Once I recognized the start of the bear market readers and subscribers spiked. Obviously there were a lot of investors out there who were bearish.

Like any normal human we like to see confirmation that our view is correct. If someone else has your same view then it reinforces your belief that you are on the right side of the market. All of a sudden I was reinforcing the bearish belief. Viola, a whole new set of readers.

Now when you think about it this is ridiculous behaviour. Since no one can actually see the future none of us really has any idea of what's in store for tomorrow. Searching for someone to validate your position is really quite stupid. That being said we still all do it. I'm just as guilty as the next person.

Now I've turned bearish on commodities I expect that I will lose a segment of my readers and subscribers as I'm no longer reinforcing the bullish case. I've already seen quite a few oil bulls drop off the subscriber list. It was obvious that these investors were interested in getting confirmation of their bias. Once I didn't give it to them anymore they decided to look elsewhere. It didn't matter that I was correct and could have saved them losses by getting them out of oil when it became apparent that something was changing. They were unable to break their bias.

I suspect I will now lose readers who continue to hold on to the bullish case for gold. Again it doesn't matter that I've been warning for several weeks that the bells and whistles were going off in the precious metals sector. It doesn't matter that I was right and if one had been able to set aside their bias for a minute and look at what was unfolding they could have saved themselves losses. None of that matters really. What we want is confirmation that we are right and that it's OK to continue to lose money because the market is going to turn and go our way soon.

I strongly suggest that we try to think outside the box and not let our beliefs control our actions especially if the market is telling you something different. Remember you can argue with the market all you want but you will never win that argument.

Friday, August 15, 2008

The dollar premium is coming out of commodities

The Fed cut rates aggressively at the end of Jan. and commodities took off. Now the dollar has retraced almost all of that drop. The upshot is that almost all commodities are rapidly shedding their dollar premium. The only one still well above the late Jan. level is oil.

Now I don't know about anyone else but I have yet to see a gas station run out of gas. There's been no 70's style gas lines in Vegas. If we don't have a shortage it's kind of hard to explain the huge move up in the price of energy other than it was just a response to monetary devaluation.

I suspect oil will also shed all of the dollar premium before this decline is over.

Thursday, August 14, 2008

Gold's failure

First off I'll repeat that the secular bull market in gold is hardly over.

I'll sell my core position when I see a Dow:gold ratio of close to 1:1 and not until. However it certainly looks like gold has entered a cyclical bear market along with just about every other asset class.

If the gold bull was going to continue this year we probably should not have seen gold trade back below the $850 breakout. Also notice the failure of the recent consolidation. In 07 a similar consolidation led to gold's amazing run over $1000.
Until I see the commercials become extremely bullish on gold I don't want to try and catch this falling knife.

Once this cyclical bear is over though the long term fundamentals will still be in place. Social security, medicare, budget deficits and war expenses. The only way the US can possible hope to pay theses debts is through monetary inflation. Long term tenets #1 & 2 are still valid just on hold for a while

Tuesday, August 12, 2008

Commodities are now in a cyclical bear market

About a month ago oil pushed up into the largest parabola of the entire bull market. At the time many commodity bulls were finding an unending list of fundamental reasons for why the price was going to continue up for the foreseeable future. This is what happens at the top of parabolic spikes.

Let me first say that we aren't even close to the ultimate top of the commodity bull. We are however entering a global recession. As such I wouldn't expect rising commodity prices for the next couple of years. Once we get through this recession though the commodity bull will resume.

However at some point years into the future we will see the final top in commodities and it will end in another one of these parabolic spikes. At that point the bulls will need to have the discipline to exit when things look the brightest. If they don't they will run the risk of giving back many years of gains very quickly. So far I see very little ability to do this by most of the bulls.

I suggest we start practicing now before that final top comes.

Now we should see a bounce soon in oil, probably at the $110 level. Gold is also showing a long tail down. Which is a signal of a very oversold market. I expect gold to bounce along with oil. I would suggest using that bounce to exit any remaining long positions. The longer term trend is now broken in commodities. At this point I would have to say that commodities have now joined the rest of the market and are in bear mode. If that's the case rallies should be sold instead of buying the dips.

Saturday, August 9, 2008

weekend report

I'm going to make the weekend report free again this week. Send a request to If you made a request and didn't recieve the report check your spam filters. Sometimes I've found the emails get flagged as spam.

Friday, August 8, 2008

Buying opportunity

The trading cycle averages 28 to 43 days in length. Normally we see a half cycle low somewhere around day 18/19. Yesterday was day 17. I still think this rally has more to go. Mostly because I don't think oil is done going down yet. This pullback is most likely the half cycle low and probably a buying opportunity. In an uptrending market two days down in a row greatly increases the odds of the next day being positive. If I remember correctly 3 down days in a row has odds over 90% of being positive the next day.

Wednesday, August 6, 2008

Investing vs. trading

Yesterday I posted the virtues of risk management and compounding. For traders that is the safest way to amass and keep long term gains in the market. It's how a trader can grow his capital over time. I showed what the power of compounding over a modest 20 year period would do for an original $100,000 nest egg.

There is another way to get rich. That is to get in a secular bull market early and hold on. This is how many billionaires are created. Warren Buffett bought the bottom of the bear market in 74 and held on. Jim Rogers and T. Boone Pickens spotted the bottom of the commodity cycle and both have made fortunes.

Many in the media are trying to call the current rise in commodities a bubble. Ridiculous. You need oversupply and massive public participation for a bubble to form. Commodities are simply deflating because of demand destruction brought on by the global recession. Once the recession ends demand will return and commodities will turn around and move higher. They will continue this trend until enough supply is brought on line to swamp demand.

We are going to get another great buying opportunity sometime in the future probably at the bottom of the current recession, when things look bleakest, to get back on the commodity bull. Those that can buy and hold will make tremendous returns probably far in excess of what is possible compounding over a 20 year period. They will do it in a much shorter period of time also.

Tuesday, August 5, 2008

The Key to Making Money in the Market

Today I'm going to let you in on a secret, the holy grail of investing if you will. The key to making and holding on to long term gains in the market has nothing to do with how much you make on your winning positions. Never has never will. The key to making money is in how much you lose when you miss.

As anyone who's read the comments on the blog or any blog for that matter knows there is a never ending line of people who claim to make outrageous gains in the market or they claim to never or rarely ever miss a call.

I can tell you when I see these amazing claims I just have to shake my head. Anyone who claims to make 100% in the market is also going to be the one who loses 100% in the market. If there is anything that history has shown it's that no one and I mean no one can produce much more than 20% annually over any significant period of time. Buffett is one of the best and his 30 year average annual return is in the neighborhood of 25%.

What most investors don't realize is that you can get filthy rich in 15 -20 years by compounding 20% a year. Hell you can get rich by compounding 12-15% a year. All you need is a little patience and good risk management skills to assure your future.

After 20 years compounding at 15% a year you would turn $100,000 into $1,636629.
That same $100,000 compounded at 20% would have you retiring with $9,584,383.

The only way to achieve these kind of long term results by trading is to control risk.
Investing on the other hand is a different ball game. Maybe I'll do a post on that one tomorrow.

Unfortunately most investors can't be satisfied with 10-20% so they take on too much leverage trying to make outlandish gains. Sooner or later this leverage always comes back to bite you in the ass. The bottom line is by trying to maximize your gains you end up guaranteeing your failure.

This is probably the hardest thing for novice investors to accept. We all start investing because we see it as an easy way to get rich. I mean seriously how hard is it to click a mouse? The answer of course is it's about the hardest damn thing in the world to do successfully. In this business you are competing against the smartest people in the world. Does anyone really think it's going to be easy to part them from their money?

My advice to any beginning investor is to keep your positions tiny for the first 5 years. Concentrate on not losing money and forget about trying to make any. That part will take care of itself in time as long as you don't lose your wad. The smartest thing you can do as a beginning investor is make it as hard as possible for the pros to get your money.

Monday, August 4, 2008

XAU character change

The behavior of the mining stocks has been pretty consistent throughout this bull market. Every new upleg has resulted in a higher consolidation zone. Today we may being seeing a significant character change in the mining stocks. Unless the XAU can regain the $160 level quickly we will have a breakdown of the consolidation zone that hasn't happened at any other time during the PM bull. Considering that gold is quite a bit above the recent lows of $850 it would seem that the miners are saying gold is going lower.

I still think commodities are trying to tell us that the world is slipping into a serious recession.

Friday, August 1, 2008

Bear market COT's

One of the things that characterized the last bear market was a persistently net short COT in the S&P futures. The commercials have been net short for three weeks now. I'm starting to think we are going to see the same action this time.

We also likely have a very left translated 4 year cycle. The last cycle that topped out in such a short time span was the 1930 cycle. The following two years took the market down into the most vicious bear market in US history.

Granted I doubt we are going into the depths of a deflationary depression like we saw in the 30's. But a 4 year cycle that tops out this quickly is anything but good.