Going down

The dollar broke to new lows this afternoon. As soon as it did the commodity complex exploded.

I'll have more to say on the ramifications in the weekend report.

Bottom or pause before another leg down?

Yesterday the dollar put in a slight 2b reversal. If the low holds then the dollar has built a nice base to rally from. A move above the June high will probably signal the end to the bear market rally in stocks.

A break below the June low and we're back on the path to hyperinflation and a possible cyurrency crisis somewhere down the road.

Following in Japan's footsteps

In 1990 the Japanese real estate and stock market bubble burst. History as shown time and time again that the cure when this kind of excess comes apart is to get out of the way and let the market cleanse the system. However Japan in it's infinite wisdom decided that history was wrong in their case (just like Roosevelt decided to ignore history and now Obama is going to ignore history). Let me show you what happened to Japan as a result of their attempt to sidestep the natural economic laws.

Japan is now in it's 19th year of a secular bear market. Only briefly during this period have they been able to crawl out of recession and then it's been fleeting. Keep in mind that this occurred during the greatest bull market in history.

The rest of the world joined Japan in a secular bear as the market topped in 2000. However Greenspan decided he was not going to allow that to happen and proceeded to print dollars, billions and billions of dollars. That massive debasement of the worlds reserve currency rescued the stock market and the world economy for 5 years. Unfortunately, as I'm fond of saying, there is no free lunch in this world and you can see the ultimate result of Greenspan's efforts in the second chart.

All that money printing didn't stop the secular bear, it just created a credit bubble that when it popped caused economic damage on a scale multiples greater than the bursting of the tech bubble. Now Bernanke is going to up the ante. Instead of printing billions, Bernanke has decided that the cure is to print trillions of dollars. Anyone want to guess what the end result of this insane strategy will be?

Ultimately I expect we are going to see a collapse that will probably make last October and November look like child's play. When it comes I doubt any amount of money printing, stimulus or accounting gimmickry will stop it. I'm afraid it could start with a currency crisis somewhere in the world, maybe even the US dollar. Bernanke if your listening you can't fix a collapsing currency by printing money.

The only thing that will stop a collapsing currency is to raise rates sky high and drain liquidity from the market. Of course the end result of that is deflation and depression. Bernanke is ultimately forcing the US and most likely the rest of the world, straight into the lions den.

The only way to protect ones self from this madness is by owning real stuff, commodities. By trading your increasingly "worth less" dollars for oil, wheat, cotton, etc. you protect your purchasing power.

Of course it's much easier to buy and store gold or silver than a barrel of oil :)

Stealth bull

Everyone is concentrating on the stock market right now. Goldman's call for 1150 today sent the market soaring. Of course anytime Goldman comes out with any kind of public prediction it's almost always because they want to unload their shares.

Not that I'm all that interested in trading the market but if I was long, that call from Goldman today would make me very nervous.

In the meantime gold continues to creep higher. That's exactly what we want to see. The longer gold can stay under the radar the better. As long as everyone is focused on the stock market gold will be able to break out above $1000 and that's when the real fireworks should start.

Internet problems

I'm having internet problems tonight in UT. No report today. I'll try to resolve the problem tomorrow.

Time to sell again?

With the S&P trading right at the June highs and the dollar testing the June lows the bears probably have a low risk entry here on the short side. One could place fairly tight stops at this point.

Lowry's buying pressure never did confirm this rally. It never picked up as the market rocketed off the 869 low. This rally was built on a decline in selling pressure only. That's not how bull markets should behave.

The selling on strength numbers are also suggesting some big money left the market today.

Now maybe this is another head fake and maybe it isn't. I will point out that every intermediate rally except one since the summer of 05 has seen one or more of these large selling on strength days.

I'll also note that the bear will make it as hard as possible for shorts to make any money. How tough will it be to take a short position if the market gaps higher tomorrow? I will point out that often the hard trade is the correct one. So if it's almost impossible to pull the trigger in the morning then you will likely be making the correct play.

One word of caution, the SOS numbers aren't always perfect timing tools as they are often early.

Jury is still out

At this point I think the dollar is the key. If the current daily cycle breaks down and moves below the June lows then the odds favor inflation. If the dollar can hold above the June lows then deflation is probably still in control.

Since the fundamentals for the stock market have not improved and the bear still hasn't taken the market to absurd valuations yet, any positive action in the stock market will be based on whether the Fed is successful in breaking the dollar.

As long as the dollar remains below the important 80 level I don't want to be short anything. However I'm really not interested in investing in sectors with impaired fundamentals and that surely includes everything from banks to energy and tech. None of these sectors are going to flourish in a declining global economy

The one sector I continue to like is precious metals. This sector does have improving fundamentals and if the Fed is successful in debasing the currency so much the better.

So far the 5 month consolidation appears to be wearing out most of the bulls, which is exactly what we need to happen for gold to break through the $1000 mark.

The blame game

Now that we are firmly entrenched in what I believe will be the next Great Depression we are starting to see the inevitable blame game as everyone wants to shift the blame for whats happening to the global economy onto some third party. I've been guilty to some extent myself by blaming the Fed.

While Greenspan and Bernanke certainly share a good bit of the load for the troubles we are in it's hardly their fault alone.

The real blame should fall squarely on human nature.

On average the world goes through a depression about every 70-80 years. Why you ask? Because about every 70 years we create a credit bubble.

Let's face it we all want more than we have. All humans are greedy, that's just human nature. Greed isn't reserved for just Wall Street bankers. Were home owners, who lied about their income so they could buy a bigger house than they could actually afford, any less greedy than a banker at Bear Stearns? Was anyone who used their house like an ATM so they could buy a new hummer and big screen TV every year any less greedy than Bernie Madoff? Granted you didn't take advantage of anyone and you certainly didn't destroy someones future. However we are all one piece in the big picture so in that context yes you did your part to create the mess we're in, even though it might not have been as big a part as Madoff's)

How about all the traders out there right now, are you not motivated by greed? Does anyone not believe for a second that every single one of us started trading because it seemed like an easy way to make money and get rich?

How about all of you who are right now leveraging up either in mining stocks or shorts in an attempt to "get rich quick". Can any of you honestly look in the mirror and not have to admit that you are just as greedy as the next person.

So when I hear this crap about how it was the greedy bankers that got us into this mess I say BS! It was human nature nothing more.

Human nature had simply run it's course from the last cycle, which bottomed as the depression ended and WWII started.

The excess debt had been purged from the system and the global economy was set to rise anew.

It took about 80 years but eventually almost everyone from that generation passed away clearing the way for humanity to make the same mistake again. The laws that were put in places in the 30's to avoid just this kind of thing from happening again were repealed, paving the way for the next period of great excess in human history.

We certainly wasted no time reaching those lofty heights of stupidity either. First it was the tech bubble. Stocks trading at P/E's in the hundreds. Many stocks had never even earned a dime and had no real possibility of ever making any profit. Any one with a lick of common sense could have seen that one coming from a mile away. However all the commonsense in the world isn't going to stop greed from telling you, "everyone else is getting rich, I want mine".

When that bubble popped in stepped Greenspan with an even bigger round of easy money and lo and behold the rise of the housing bubble. Investors had apparently learned nothing from the tech bubble. They immediately piled into the real estate market. Again anyone with a lick of commonsense saw this one coming. But if there is anything we humans can depend on it's a lack of commonsense when we think we've discovered a sure thing.

Of course right along with the real estate bubble the credit bubble was expanding to dimensions the world had never seen before. Again not wanting to get left behind the banks started leveraging up to unheard of levels.

Now we've reached the end of an unsustainable expansion in credit. The house of cards is crashing down. And it has to implode in order for a new beginning to start.

All those trillions of dollars of debt that have been built up over the last 80 years need to be purged from the system. Until this is allowed to complete we are going remain entrenched in tough times, times that will just continue to get worse.

Unfortunately Obama is trying to cure our debt problem with more debt. Instead of helping the problem he is making it bigger. Roosevelt tried the same approach during the last credit implosion and instead of solving the problem he extended it much longer than it needed to be. In 39 unemployment was still hovering around 20%.

Unless the powers that be come to their senses we are going to be mired in this mess for years to come

oil

As long as oil remains weak the stock market is going to struggle, as energy companies make up a big percentage of the S&P.

We have a couple of scenarios playing out at the moment. The first one is the test of the T1 pattern consolidation zone. Once the test is complete oil should move back up to new highs.

I'm a bit leary that this is how it's going to play out as there is no fundamental base for oil moving up with the global economy sinking deeper into the depression.

I think what we might be seeing is the left shoulder of a multi year bottoming process that should complete in late 2010 with a slightly higher low. From that point I'm guessing the deflationary forces will have run their course and we will enter the inflationary or more likely hyperinflationary end game.

It's time to hold on

Back on May 2nd I posted this chart of the S&P in the weekend report. At the time the market was still working it's way up to the final top of this counter trend rally. Many bears had tried repeatedly to short this move and gotten stopped out.

I thought at the time that we would probably see the topping process cause the bears just enough pain so that when we did get the final top the shorts would be so gun shy they would not only be unable to sell when they should but would probably be unable to hold their shorts very long. Certainly not for the full ride down into the weekly cycle bottom.

The chart shows my opinion of what most shorts would end up doing as the next leg down unfolds. I suspect most of the bears are going to make little to nothing or even lose money during this decline because they won't be able to hang on to their position. I also expect most of the bears will get comfortable on the short side right about the time we put in the low and then they will hang on too long to their positions as the next counter trend move gets underway and give back a big chunk of any profits they might make.

As I browse the Internet that's exactly what I'm seeing. The number of bears now expecting one more trip up to test the 956 high is large even though the current daily cycle has now failed. Not to mention many other signs that the decline has begun in earnest.

This is how bear markets work. They make it as hard as possible for the shorts to stay on board while at the same time almost impossible for the longs to get off.

The odds are very high that the intermediate trend has turned. That means bears should hold their positions and ignore the short term bounces. Bounces are for adding to shorts not for trying to catch short term long trades.

Remember, this is a secular bear market. That means that timing mistakes on the short side will eventually be corrected. Timing mistakes on the long side will be magnified.

Secular bull markets

Let me explain how secular bull markets work. They start from a fundamental supply and demand imbalance. As they start to rise only the true believers, really smart money or the lucky get on board. The rallies are slow and grinding. The corrections are swift and scary (I think that accurately describes what gold bugs are experiencing now).

Usually this first phase lasts up to five years long. At some point a secular bull market will undergo a massive correction that will serve to wipeout all the optimism that was built up during the first phase.

I think that correction occurred in 06. Notice how long it took to move to new highs after gold crashed from the 725 highs. Over a year and a half.

In the second phase institutional money will start to come in to the market. However in the second phase the corrections are much larger than the first phase, making it harder for riders to stay on board the bull. Most investors will still doubt the bull all the way through the second phase. Many will try to short him.

In the third phase the public will come in and the asset will become entirely detached from any fundamental underpinnings. Overbought levels will be meaningless. Excessive sentiment will be meaningless. The bull will ultimately move to levels that virtually no one will foresee and as such very few will be able to ride the bull to completion.

Now let me tell you exactly what's going to happen in the coming months and years. First off gold is going to do whatever it takes to wipeout as much bullish sentiment as possible so that when it does finally move above $1000 almost nobody will trust the move. Many will try to short the move because gold will most certainly be overbought at that point.

I've pointed out before that gold and especially silver are thin markets. That means they are volatile. So here's what invariably happens to shorts. Maybe they get lucky and catch a short term decline and they make a little money. The problem is that volatility. At any moment the buyers can come in and when they do the metals can move big and quick as shorts panic. The shorts profits can evaporate in the blink of an eye. Often they evaporate before the market even opens. One never even gets a chance to book their profits.

I can guarantee once gold goes above $1000 it won't be long before the shorts are trying to pick a top and nervous longs sell way to soon and then sit on the sidelines as the bull goes up and up and up. This is going to happen all the way up. The vast majority of investors are going to turn the opportunity of a lifetime into no profit. Those gullible enough to short gold will lose massive amounts of money as this bull progresses.

Shorting a secular bull market is like walking through a dynamite factory with an open flame. Sure you may get lucky once or twice but you still have a very short life expectancy.

Now look at that first chart. Gold never dropped below the 200 week moving average even during one of the worst market crashes in history. The 75 week moving average never even turned down. There is no other asset that one can make that same statement for. What earthly reason could one have for trying to sell short that kind of strength?

Now look at the other chart. The Dow:gold ratio has been moving steadily down since 01. Is there any logical reason to expect that this time the Dow gold ratio bottomed at a level almost 7 times higher than it has at any other time in history? I don't know of one, although I can think of several trillion reasons why it may bottom lower than any other time in history.

1-2-3 reversal in the Dow

On Thursday the Dow completed the 1-2-3 reversal that I pointed out on June 17th. The odds are now stacked against this rally continuing.

I also pointed out the 4 day rule trend reversal two weeks ago in the June 24th nightly update.

I think the cycle of negativity has started. With Thursday's decline we now most likely have all three time frames (secular, intermediate and short term) back in gear to the downside.

This is probably not a good time to try and take long side trades. Notice I said trades not investments. I will not touch my junior mining stocks. Like I said in one of the other posts; I'm trying very hard not to do something stupid anymore.

Why should one own gold?

The answer is to preserve your purchasing power. Everyone seems to be worried that during a deflationary period the price of gold will drop. First off let me explain something. Gold is money. Has been for the last 5000 years.

Let me also point out that during a deflationary period money becomes more valuable. During the last deflationary period of the Great Depression the only thing that went up was gold.

From September to March we just experienced a massive deflationary shock. So what happened to money during this period? For one the dollar exploded higher. For instance, you could buy a gallon of gasoline (at least here in Vegas) for about 1.6 dollars.

Now a gallon of gas is always going to be a gallon of gas, that didn't change. The only thing that changed was the value of our currency.

Last year it took 4.3 dollars to buy a gallon of gas and this winter it dropped to 1.6.
The value of the US dollar increased by almost 300% when expressed in purchasing power based on a gallon of gasoline.

In September before the deflation hit 1 oz. of gold would buy 300 gallons of gasoline. At the height of the deflationary panic gold bought over 1000 gallons of gasoline. A little more than 300% increase in the purchasing power against our measuring standard...a gallon of gasoline.

These three charts are going to look similar whether you measure purchasing power in a specific commodity, college tuition, housing or a loaf of bread.

Folks gold is money and in a deflationary environment money becomes more valuable. So when I see people freak out because gold drops a little bit I have to wonder what they are thinking. They haven't lost any purchasing power, as a matter of fact, they have made a tremendous gain. A gain that any one of us would be ecstatic about if one had the insight to see the real picture.

Now consider the mining stocks and how undervalued they are right now. You want to talk about a gain in purchasing power over the next couple of years? Don't even get me started.

And people wonder why I won't sell any of my mining stocks. Deflation? Bring it on I say, I'll be happy to gain another 300%.

The times may be changing

For the first time in four months the 20 DMA is rolling over. So far during this entire bear market every time the 20 has turned down it has led to at least a significant decline and in most instances a major leg down.

The fact that everyone seems to know that the day before the 4th of July holiday is almost always positive has me wondering if too many investors got long today looking for a "sure" thing.

I've got news for everyone, there is no sure thing when it comes to the stock market.