Sunday, November 22, 2009


One of the most dependable strategies in the investing business is that all markets eventually regress to the mean.

In the case of bear markets invariably the bigger the bear the larger the bull that follows.

There have been 7 bear markets in history similar to what we just went through. The greatest bear of course was the 29-32 bear. During that period the stock market lost 89% of it's value. The recent bear was the second most destructive bear in history with a peak to trough decline of 58%. Overall, 7 bears with declines of 46% or more and all 7 of those spawned powerful bull markets.

As can be expected the 32 bear spawned a first and second leg up that tacked on 177%. That market was of course in a class all its own. The other six bull markets managed two leg gains of between 51% and 73%.

Our current rally as of Monday's high had gained 68%. That ranks it third overall compared to the other seven bull markets born in the depths of the seven most destructive bears in history.

Needless to say we are in overbought territory.

All seven of those historic bulls suffered a secondary correction after the second leg topped out, of between 10-14%.

We are probably due for that secondary correction anytime now. And that includes gold for many of the same reasons which I've gone over in the nightly reports.

You can see from the chart that gold is now stretched further above the 10 month Bollinger band than any other time during the bull market. That in itself isn't a great reason to ease up on the accelerator.

There are however several other reasons I think that gold will probably correct along with the stock market in the weeks ahead. None of them really having to do with overbought conditions though. Taken together they suggest now probably isn't the best time to step on the gas. It might be better to tap the brakes a bit right here.

Now keep in mind tapping the brakes doesn't mean pull off the road, just take it down to second or third gear for a bit.

There's going to be a time to hit the nitrous again, just not 19 weeks into an intermediate term rally. Which by the way ties the longest intermediate rally of the entire bull market.