Friday, October 30, 2009

What kind of bull is this?

The 12 month moving average has been a pretty good tool for spotting bull and bear markets. However there are two types of bulls, cyclical and secular.

The first two charts appear to be cyclical bulls. The S&P is most definitely a cyclical bull within a secular bear. The CRB is debatable at this point. Generally speaking the only asset class that can even be vaguely considered to have improving fundamentals would be commodities. However the demand side of the equation is now impaired for most commodities.

Certainly many commodities can rise based on nothing more than currency debasement. We are certainly seeing that right now in the energy markets. But on the whole a true secular bull market needs to be firing on all cylinders and that means not only a currency component but also a supply and demand imbalance. The ongoing global recession has taken away the demand side of the equation.

This last chart is most definitely a secular bull market and one that's starting to catch fire. The gold bull is firing on all cylinders. Not only do we have currency debasement but we are also seeing a tremendous supply and demand imbalance in the precious metals market as investors and many central banks scoop up the rare metal as protection against oncoming inflationary pressures. This at a time when almost every gold mine is struggling to keep up production.

C wave intact

I've been pointing out ad nauseum how strong this leg of the gold bull has been. So far we've seen the strongest A wave advance of the entire secular bull, the weakest B wave decline of the entire bull market. We seen countless head fakes by gold, all of them have resolved bullishly.

During the recent correction selling pressure took down everything (this tends to happen at intermediate cycle lows). However gold held up remarkably well only dropping a measly $55.

As a matter of fact all gold did was test the recent breakout level of $1034. Gold did the same thing during the last major C wave advance. Once that test was completed the C wave took off to huge new highs.

As soon as gold breaks through the recent highs at $1070 we should be heading into the most lucrative part of this C wave advance.

A period that no one can afford to lose their position in.

As I've stressed many times in the past trading a C wave advance isn't a very profitable strategy. Once gold moves into one of these stages you simply have to close your eyes and hang on.

Thursday, October 29, 2009

Runaway move still intact

These runaway moves are characterized by mild corrections that all tend to fall within a similar range. During the move out of the March low every correction except July has been contained within a band of 25 to 60 S&P points.

The latest also has fallen in that range. Until we see something change and a much more significant correction the move is intact.

As a mater of fact the case can be made that we just put in a major intermediate low and much higher prices are in our future. (I did make that case in tonight's report)

So far this liquidity fueled rally is unfolding very similar to the last liquidity fueled rally out of the March 03 bottom.

Tuesday, October 27, 2009

Intermediate top? Maybe!

So are we putting in a longer term top here or not?

Let me just say, we should be! However!

Most intermediate term declines tend to last roughly 1 1/2 to 3 months. That would take this decline down into the middle of Dec.

After Thanksgiving we are going to enter the Christmas shopping season. The Fed has willingly sacrificed the dollar in the ill advised attempt to create asset inflation to foster the illusion that the economy is mending.

I have to wonder if Ben will be willing to watch the market fade into the Christmas shopping season. My guess is he will crank up the printing presses again before that's allowed to happen.

We saw that very thing happen in July (we even had a confirmed 1-2-3 reversal). The market was rolling over on it's way down to test or break the March lows. The intermediate cycle was still very young and should have run another 4-6 weeks. Ben however decided that destroying the dollar was preferable to the continued decay in asset markets. Enter quantitative easing and an explosion of the money supply.

The intermediate cycle was aborted and the market exploded higher and has been rising ever since.

At this point shorts need to be careful. There's no telling when Ben is going to start throwing oceans of liquidity at the market again. That could very well abort another intermediate decline.

Sunday, October 25, 2009

9 years and counting

I’ve been saying for many years now that we have been and still are stuck in a secular bear market since March of 2000. I know there are quite a few people who consider that the new highs made by the Dow, and nominal new highs in the S&P, constitute a continuation of the secular bull market that began in 1974 (some would argue `82).

However if you price stocks in a stable currency or inflation adjusted it’s readily apparent that the secular bull topped in 2000.

We saw a similar occurrence during the `66-`82 bear when the Dow made a nominal new high in `73. That still didn’t change the fact that the bear started in `66 in inflation adjusted terms.

This bear is now 9 years old. History has shown that a secular bear market tends to last about 1/3 the duration of the preceding bull market. Using that criteria and the valuations at the March `09 bottom we should see at least one more leg down before this secular bear expires, possibly as the market drops into the 2012 four year cycle low. Actually if the market runs the full four year duration we should bottom in 2013. However since the last cycle ran very long it wouldn’t be unusual to see the next cycle contract a bit. However this bear may be an exception as the powers that be are doing everything in their power to prolong this, similar to how Japan prolonged their secular bear, which is now in its 19th year.

Usually secular bear markets tend to unfold in three phases. Now whether this bear is going to bottom with the third phase down or not is again going to be determined by whether or not our elected officials come to their senses and put an end to the destructive policies we’ve been following for the last 9 years.

If not then we may very well follow the Japanese model of multiple bear legs drawn out over a couple of decades.

Either way at a true secular bear market bottom we should see the P/E and dividend yield at roughly the same level and P/E’s will be in the single digits. So far neither the low in Oct. `02 or March `09 have approached anything even remotely resembling a true secular bear market bottom.

The catalyst for the first phase of the secular bear was the implosion of the tech bubble. That collapse set the stage for the Fed to take over and lay the groundwork for the next phase of the bear. Their response to the bursting of tech was to slash interest rates to multidecade lows and flood the world with paper money. Truly we bought one hell of a party with all that liquidity but I’m sure we all know that the harder you party the bigger the hangover.

The catalyst for the second phase of the bear originated in the credit markets with the collapse of the housing and credit bubbles the Fed had created. The hangover began in `07 with the implosion of subprime which we now know only started the snowball rolling down the hill. This hangover was destined to be infinitely worse than the hangover from the tech bubble bursting.

The herculean efforts by the Fed to halt the secular bear market not only didn’t halt the bear, they angered him. The bear retaliated with the worst recession since the Great Depression.

I suspect the catalyst for the third phase of the bear is going to originate in the currency markets. Every central bank in the world is now swept up in the fantasy that they can get something for nothing by simply running the printing presses. By creating trillions and trillions of bank notes and forcing this liquidity into asset markets central banks have created the illusion that all is well again. However all is not well. Conditions in the real economy are not improving. On the contrary they are getting worse. All the liquidity the Fed has been creating is causing inflation to heat up in the commodity markets and most specifically in the energy markets again. The one thing we don’t need in a high unemployment/depressed economic environment is spiking energy costs. But that is exactly what the Fed is doing.

This liquidity the Fed is forcing into the banking system has two potential outlets. First, banks could take the liquidity and make loans. However, as we are in a global recession, one has to wonder how many people actually want to borrow in this environment? How many borrowers are even credit worthy? How many businesses need to expand? The answer to all of those questions is… not many. So I think it’s safe to say most banks are a bit nervous when it comes to expanding credit. It's probably a safe bet that credit will continue to contract.

But the banks still need to earn something from all this free money so what’s the next logical thing to do? Why pump that money into asset markets of course. Obviously that’s exactly what they’ve been doing as evidenced by the explosive rally in the stock and commodity markets.

There seems to be quite the contingent of voices out there that believe there is no way to achieve inflation during a deflationary credit contraction. I would argue quite the opposite. In an environment where all currencies are fiat and not backed by gold, any determined government can create asset inflation. Well any government can create inflation as long as they don't care about future consequences and lack even a modicum of common sense. Of course when have politicians ever had any common sense. In general politicians have a keen understanding of how to push the problem down the road just long enough to get re-elected. Genenerally speaking that's usually not good for the long term health of the country though.

We don’t need borrowing or credit expansion for inflation to heat up. Taken to extreme, governments could simply drop money from helicopters as the saying goes. I would point out that’s exactly what the US did last year with the tax rebates. This money had nothing to do with credit expansion and it certainly did spike the price of gasoline. In my book that was a clear example of government creating inflation without having to expand credit.

Despite the severe deflationary environment of the post bubble collapse, Japan was able to create asset inflation in certain markets. Specifically they managed to create multiple explosive rallies in the Nikkei. Each one ultimately failed because they weren’t driven by true economic expansion. They were driven by liquidity. We are now embarking on the same path. The Fed is trying to create the illusion of prosperity through nothing more than liquidity driven asset inflation. It’s going to look impressive in the short term but it’s destined to failure. As a matter of fact, if the Fed doesn’t come to its senses soon we are likely to open Pandora’s box and unleash a currency crisis on the world. I don’t think I have to tell you that would be much much worse than the credit market implosion we just went through. A credit market collapse could be temporarily halted with liquidity. You can’t stop a currency collapse by printing more dollars. There simply is no way out of a currency crisis that doesn’t involve tremendous pain. Unfortunately the Fed’s attempt to “fix” the credit markets is forcing us down the path that leads to currency problems.

Tuesday, October 20, 2009

The new leaders

It's pretty common in a new bull market to see dumb money run right back to the leading stocks of the last bull. We are seeing it now in AAPL, GOOG and XLE. Gadget makers, internet advertising and energy, the leading sectors and stocks of the `02-`07 bull market.

I'm confident in saying they are not going to be the leading stocks or sectors of this bull market. The fundamentals of this bull are completely different than the `02-`07 period. During that period we had a housing & credit bubble and rapid expansion in emerging markets. That translated into massive demand for energy and base metals. Easy credit meant everyone was free to load up on any and every toy imaginable, from Hummers to Ipods.

That's not the case anymore. The world is going to be stuck in an on again off again recession or depression for many years to come. This bull market is going to be built on monetary expansion. That my friends is the domain of precious metals.

Look at the weekly volume in AAPL, GOOG and XLE. Every single one of them is showing half the volume that they enjoyed when they were in true bull markets, when the fundamentals supported their business models. That's not the case anymore and smart money knows it.

What we are seeing is nothing more than retail buyers flocking back to the old sectors. I see the same thing in the housing market. Dumb money is trying to pick a bottom because they assume that if they can catch the bottom housing is going to take off soon and they will get rich.

I've got news for them. Bubbles don't re-inflate. Housing isn't ever coming back again, not in the next 20-30 years anyway. Just look at tech. Once the bubble burst in 2000 the Nasdaq hasn't even come close to the old highs and it's not going to for many years to come.

How about the Nikkei? Their bubble burst in 1990. The Nikkei is still down 70+% from the old highs and it's been 19 years.

Folks new bull markets are built on new fundamentals and this one is no exception.

Now take a look at the volume in the miners ETF (GDX). There is your leading sector for this bull market. This is where the smart money is going.

Now that being said I believe we are due for an intermediate pull back in all markets including precious metals so if one hasn't got in yet perhaps a little patience is warranted. I would look for a bottom sometime in mid Nov. or if gold can retrace back to $1000.

Monday, October 19, 2009

Tip of the day

How many people would like to improve their trading accuracy? Dumb question right? Of course everyone would like to improve their accuracy.Well I'm going to give you a very simple strategy to do just that.

Let's take a guess and say the average career of any trader is probably 30-40 years. If you could improve your overall performance by a mere 10-15% over that period of time how much money do you think that would end up being? My guess is it would be a small fortune.

So how does one go about implementing this strategy you ask?

It's simple, never trade against the larger cyclical or secular trend.

It's as simple as that. As long as you always trade in the direction of the major trend the odds are high that most trades, even if your timing is off, will eventually be rescued by the secular trend.

On the other hand when you trade against the market and miss the timing the secular trend will often exacerbate your timing mistake. You can't count on any bailouts if you are going to fight the market.

So in a bull market (an upward sloping 200 DMA) the correct strategy is either long or cash. Shorting bull markets is a risky strategy and one that is probably going to win less than 50% of the time.

In bear markets (a downward sloping 200 DMA) the safest strategy is in cash. However bear markets operate a bit different than bull markets. They tend to get very oversold and buying into these panic lows can produce some of the largest and quickest gains on the long side. It seems strange that the biggest gains come in bear markets but that's how bear markets work.

Despite that, one still needs to have an exit plan if going long in a bear market because the secular trend is down. Selling tops is still the correct strategy.

Simply not trading against the major trend will probably be the difference of averaging a 60-65% win rate vs less than 50% for those that heed the siren call of the counter trend trade.

Wednesday, October 14, 2009

Fantasy or Reality

I'm going to let you in on a big secret. Contrary to what many bloggers and retail traders would have you believe, investing/trading is probably the single toughest business in the world. Let's face it you are competing against the smartest, best capitalized, most knowledable people on the planet.

What do we have to work with? Mostly just some charts and hopefully a little common sense.

What do they have at their disposal? Almost unlimited capital, massive research departments, inside information, teams of lobbists, and direct lines to the treasury and the Fed :)

Can anyone really expect to compete sucessfully against those kind of odds? It's like sending Tiny Tim out to block Lawrence Taylor.

So when you see these fantastic claims of extreme accuracy ask yourself does this seem too good to be true?

The truth is almost no one is going to be right much more than 60% of the time over any significant period of time.

Now you can use a mechanical system and boost those returns. The Bollinger band crash trade for example has about 90-95% accuracy. But here's the thing. A system with a very high degree of accuracy tends to produce small gains and very large losses. So the expectancy isn't all that great.

The other way around and you get a system that doesn't win all that often but scores huge when it does win. The downside is you have to endure many small losses waiting for that big win.

The irony is that usually more money is made with the second type of system. However human nature isn't programmed to accept a lot of negative feedback so we tend to gravitate towards the systems that win more often even though our total return is typically smaller.

This is why bloggers and money managers will try to impress you with how accurate they've been.

In my opinion I would be more interested in what kind of positive expectancy they've achieved and over how long of a period. Let's just say I'm much more impressed with someone who can boast a 55% track record, whos gains on average are twice as big as their losses and has maintained this consistently over the last 10 years. That my friends is someone who knows what the hell they are doing.

When I see someone bragging about how he's right 90% of the time and he's made gigantic gains in a very short period of time all while the market has moved very little, I turn around and walk in the other direction.

A very high win rates means one of two things. Our guru just got on a hot streak (they never last) or he's using a system similar to the Bollinger band crash trade that has many small profits and a few huge losses. All in all an acceptable system but not one that's destined to make you rich.

If he's boasting huge gains in a very short time span then I also know he's using massive leverage. When I see that I don't walk in the other direction, I run as fast as my feet will carry me.

So one can choose to live in a fantasy world if they want. Personally I've found it's more profitable to accept reality and make money the old fashioned way. "Just earn it"

Tuesday, October 13, 2009

76 is gone, where now?

I've been expecting the dollar to break through the major support level at 76. The reason being that we still have 1-3 weeks before the current daily cycle is due to bottom.

Now this daily cycle when it bottoms should also coincide with a major weekly cycle bottom. Generally speaking when we get a major weekly cycle bottom in anything, whether it be the dollar, stocks, bonds or gold it almost always generates an extreme amount of fear.

I doubt the coming weekly cycle bottom in the dollar is going to be any different. At the moment there are still too many people trying to pick the bottom. Most of them are basing their bottom calls on the momentum divergence in MACD.

As I've said many times in the past it's probably pretty tough to make any lasting money trading divergences. If a divergence lasts long enough it's no longer a divergence. How can one know ahead of time whether the divergence is going to extend till it disappears or not?

Take a look back at the dollar as it dropped out of the last 4 year cycle top in `06. There were multiple divergences for months and months. As it turned out none of them signalled anything other than short term bounces and the dollar continued to decline into the next four year cycle low in March of `08.

The upshot is that we can probably expect the dollar decline to get intense the next couple of weeks as it moves into a major low. I expect no one will be trying to pick a bottom at that time. Far from it, almost everyone will be expecting the dollar to collapse. That's the kind of sentiment we need to see to put in a more lasting bottom.

Granted I'm not talking about a true bottom, that's not due till at least 2012 and maybe much later if the Fed doesn't come to it's senses. No I just mean a significant bounce to relieve what should by that time be extremely stretched conditions both technically and sentiment wise.

This can either unfold as a strong explosive rally or an extended sideways period to allow the 200 DMA to catch up so-to-speak.

Anyway you can imagine the move in commodities in general and gold in particular if the dollar even just tests 74.

Who knows where gold could be if we see 72?

Monday, October 12, 2009

Silver is too cheap for this to be a top

As I expected we are starting to see the top pickers coming out of the woodwork as gold's C wave has broken out of the year and a half consolidation.

There are multiple signs to look for at C wave tops but one that is pretty dependable is a spike down in the number of oz. of silver it takes to buy one oz. of gold.

As we enter the last couple of months of a C wave rise hot money starts to flow into the more speculative silver market. This is one of the signs that a C wave is nearing an end.

The crash last year depressed the price of silver way beyond what anyone would consider fair value. That mispricing is in the process of correcting. I wouldn't be at all surprised to see the gold:silver ratio spike below 40 when the current C wave tops.

Needless to say this C wave has a long way to go if the currnet gold:silver ratio is any indication.

Friday, October 9, 2009

Gold:oil ratio

One of the ultimate truths is that liquidity eventually flows into undervalued assets. This is the reason the commodity bull market began in the first place.

In `99 and 2000 paper assets reached ridiculously extreme overvaluation compared to commodities. At that point a great secular change took place. Liquidity started to leak out of stocks and other paper assets and into severely depressed commodities.

That leak rarely ever unfolds in an even distribution between all commodities. Some outperform during the first phase and some under perform based on the current fundamentals at the time.

During this particular commodity bull the first phase was led by energy and base metals. The fundamentals were supporting these sectors as growth in emerging markets and generally strong economic growth world wide put heavy demand on energy markets that because of the preceding 20 year bear market were just not prepared to meet this increased demand.

Naturally prices rose.

Now we have completely different fundamentals driving the second phase of this commodity bull. Unfortunately oil is price sensitive. By that I mean that high prices lead to demand destruction. They also lead to economic destruction which only intensifies demand destruction.

I've noted many times in the past that every time oil has spiked 100% or more in less than a year it has led to a recession. That move to $147 last year was no exception.

This year we've already seen oil spike from $35 to over $70. I suspect this is already eating away at any economic recovery especially since we really haven't recovered.

Countries with high unemployment and depressed economic activity are really in no position to handle surging energy prices.

High oil prices are oils own worst enemy. I suspect oil is going to be on a rollercoaster for many years as its constantly cycled up and down by the forces of easy money and demand destruction.

Gold on the other hand is the perfect commodity to benefit from the current fundamentals. Gold and especially silver are not price sensitive. High prices do not cause demand destruction (well to some extent it does in the jewelry market). The reason is that these two metals have a monetary component. Through out most of history gold and silver have been considered money.

Who in their right mind is going to complain if their money increases in value? That just means they have more purchasing power. That's not a reason to sell, that's a reason to buy.

This stage of the commodity bull is going to be led by precious metals and probably later by agriculture (maybe a third phase).

I expect the gold:oil ratio to remain above the 14ish level for this phase of the commodity bull.

Wednesday, October 7, 2009


Not that I'm at all interested in trading or investing in the stock market but I thought it might be interesting to compare the recent cyclical bull with the last one.

Both bulls are and were fundamentally based on the same thing...massive liquidity creation.

Both bulls started with a powerful initial thrust out of the bottom.

Both then consolidated for a couple of months before reigniting the rally.

In 03 we got 3 tests of the 50 DMA as market participants weren't really sure this was the real thing and refused to push new highs very far before taking profits back to the 50 again.

Finally the market became comfortable with the idea of a new bull and euphoria set in. At that point we got the final burst to big new highs into early 04.

This bull has now tested the 50 DMA just like 03. The question is will we crawl cautiously upward for a few months like we did in 03 or does the market already "believe" and we are on the verge of another big push higher?

Of course there's always the possibility that this cyclical bull will be short lived and we are ready to roll over and resume the secular bear. I have my doubts on that one as I think any significant weakness is going to be met by Ben and his printing press.

I really don't expect Ben to reverse this policy until it's too late and the inflation demon is already out of the bag. When it comes down to it, inflation is the final control on central bankers penchant for uncontrollable printing.

As I always say there is no free lunch. I'm afraid this lunch that we are enjoying right now is going to taste mighty sour when we get the final bill.

Sample reports

For anyone who would like to sample past SMT updates I've unlocked several past reports on the premium site.

Tuesday, October 6, 2009

Waiting for the pullback

With gold knocking on the door of all time new highs it's about time to start hearing the "waiting for a pullback to buy" crowd.

C wave breakouts get overbought and most of the time they stay overbought for considerable periods. Those that couldn't buy the breakout in 07 because they occurred at overbought levels never got a pullback to get in.

Anyone fretting about short term draw downs ended up chasing gold higher.

If you're so worried about a short term draw down you can't pull the trigger you might consider at least buying a core position so you don't get completely left behind in case this C wave unfolds like most C waves do.

Soon after the breakout we will start to see the overbought top pickers trying to short gold. Chasers, top pickers and doubters are the fuel that C waves run on.

Sunday, October 4, 2009

Autumn C waves

Autumn is a good time for gold. Every single C wave since 03 has started in mid to late summer and peaked between December and late spring.

I'm amazed that we can still see so much bearish sentiment on gold despite such a bullish chart. It seems like everyone is expecting gold to fall, some modestly to the $900 range and quite a few expecting sub $700.

All while gold has stealthily put in the strongest A wave advance of the entire bull market.

All while gold has gone thru the weakest B wave decline of the entire bull market.

All while gold consolidated in a huge triangle that recently broke out on heavy volume.

All while gold has closed three out of the last 4 weeks above $1000.

And finally, the bearish sentiment flourishes while the Dow:gold ratio has broken down out of the recent crawling pattern and is rapidly accelerating to the downside.

As far as I can see this C wave has done absolutely nothing wrong and is set up to breakout during the same time that every C wave has broken out.

I guess until it hits you over the head most people just can't see the big picture.

Friday, October 2, 2009

Did it break or didn't it?

Here's one of the reasons I don't put a tremendous amount of faith solely in charts. Granted they are useful no doubt about it. I definitely look at charts, no denying that. But let's face it, if one wants to adjust the x or y axis one can torture a chart into saying just about anything one wants.

Folks charts are just a historical record of what has happened in the market, nothing more. They don't have any mystical power to predict the future. The only reason charts work at all is because enough people do watch them and their trading behavior is governed by them. However if too many people start using them, just like any other tool, they become useless.

Most of you have probably noticed by now that quite often support and resistance levels get broken, only to then reverse. This is an example of a trading strategy that has gotten too popular. The top in 07 and bottom in 02 are clear examples of this.

The biggie for the last several years has been patterns. As most of you have probably noticed they are working less and less as too many people have started to trade them. The head & shoulders pattern back in July is an excellent example. That is one pattern that has had a very high success rate. It failed miserably.

Eventually anything that works too well will get discounted, no exceptions. One of my favorites, the COT reports has become for all intents and purposes useless.

So I have to ask, did we or did we not break the trend line?

Thursday, October 1, 2009

Dollar seasonal cycle

There's quite the debate going on as to whether the dollar is putting in a major bottom right here. It's the same ole' inflation/deflation debate.

To get some idea of what we might expect I'm going to take a look at the seasonal cycle for the dollar. Now keep in mind cycles aren't 100% anymore than any other tool we use but they can be used to get the odds on our side and that's the best any of us can do.

The seasonal cycle for the dollar lasts roughly 12 months. I've marked the last confirmed seasonal cycle low on the chart back in March 08.

The question now becomes whether we saw the 09 seasonal cycle low in March, June or is the dollar trying to put in that bottom right now?

March would fit the average timing band being almost exactly 12 months from the last seasonal and 4 year cycle low by the way. That was a major cycle low and gave us the best odds for a serious rally, just like in 05.

Until we break the 08 lows this 4 year cycle still has a chance, however I think we are already seeing a failed seasonal cycle.

I think the dollar is way to far outside the "normal" timing band for it to be putting in the seasonal bottom right now. I'm leaning heavily towards June being that bottom.

The fact that the current weekly and probably the seasonal cycle has already rolled over to new lows is skewing the odds very heavily towards the secular bearish trend back in force after the year long rally. A failed seasonal cycle is also highly suggestive that this four year cycle is also going to fail and move below the March 08 low.

Now the dollar may and probably is trying to put in a weekly cycle low. However the timing is still a bit short of normal so I tend to think we have at least one more daily cycle down into that low which should bottom sometime in late Oct. or early Nov.

Now of course there is still the possibility of a stretched weekly cycle too. That could mean the dollar has two more daily cycles before bottoming and we won't see that low until early spring.