Looking for a bargain?

We all like to buy when something is on sale right? The common sense answer is of course we do. If you go to the store to buy a pair of jeans and one store is having a sale, half off, I think it's safe to say you're going to make your purchase at the store having the sale. The problem is that when it comes to investing common sense gets tossed right out the window. When investing we are drawn to the most expensive "jeans". Hell if they raise the price overnight on us that just makes us want those "jeans" even more. Take a look at those first two charts oil & copper. Pretty representative of what's been going on in energy and base metals during this bull market. Both are showing gains in the 700% range. Now take a look at Gold. A measly 200%. How about silver 250%. Copper and oil look much more appealing don't they?

Of course that doesn't make any sense.

We're looking at two commodities that are on sale and not at half price but more like 1/3 price. Now let's take a little closer look at silver because at first glance it looks like silver is slightly more expensive than gold. The problem is that sometimes looks can be deceiving. The historic ratio of gold to silver is roughly 15 to 1. That means 1 oz. of gold should only buy 15 oz. of silver. So what does 1 oz. of gold buy at the moment you ask? 20 oz. of silver? 30 oz. of silver? 30 oz. would be twice what the historic norm is which would suggest that silver should be trading at $27.00 not $13.50. However 1 0z. of gold will buy a little more than 30 oz. of silver. How about 55 oz. of silver! At the moment gold will buy almost 4 times as much silver as it historically has throughout history. That means with gold at $750 an oz. silver should be priced somewhere around $45-$55. That would suggest this pair of "jeans" is on sale at 50-75% off. Personally I do love a good bargain and if the market is stupid enough to give me that kind of bargain I have no qualms about taking advantage of it :)

Chinese Bubble

It seems that most investors think that China is in a bubble and it's ready to pop soon. Maybe it is and then again maybe it's not. First off notice from Mid 01 till 05 the Chinese market went through a devastating bear market . The SSEC lost more than half it's value. From that point the market has blasted off to a little over 400% gain. Impressive to say the least. But not all that unusual. Many secular bull markets can tack on 2000% before they're done. Look at the Nasdaq from 1980 to 2000. It gained 2000%. Granted the Chinese market has made those gains rather rapidly. I frequently hear about Chinese public piling into the markets as a sign of the end. However it usually takes about a year and a half of this kind of public participation before the market tops. Keep in mind the total population of China. The number of retail investors is still rather small compared to that huge population. I think I would hold out the possibility that China is exploding economically and there may be considerable upside yet before the inevitable correction comes. Of course it will come. When it does it's going to be one heck of a buying opportunity.

When contrary opinion doesn't work

I'm starting to hear much ado about how there is too much bullish sentiment. This may or may not be true. At the end of a long bull market everybody is going to be bullish. The markets will have conditioned us to be bullish. Buying the dips will have been the motus operandi for years and human nature being what it is we will assume that strategy will now work into infinity. The thing is at the end of a huge bull market contrary opinion won't work. Everybody will be piling in. Occasionally a few will get scared and sell only to see the market rocket upward. They will then be forced to chase as they can't stand to miss out on any gains. The market will just keep rising no matter how lopsided the sentiment gets. Near as I can figure when we start to see this happen. When the public starts to catch on we've got about a year to a year and a half for it to suck in every last one of the sheep. During this time it's best to ignore all the contrary opinion polls. They're just not going to work as the markets get lost in an orgy of speculation and euphoria. Are we starting to enter this phase of the bull? I don't know but I do trust that the smart money is going to know when the end is coming and get me off the train in time. Just like they did in 2000.

Could the Transports be getting into gear?

It now appears that the transports are ready to breakout of the triangle on the flat side as tech rule #6 (Triangles of either slope may mean either accumulation or distribution depending on other considerations although triangles are usually broken on the flat side) would suggest is the greater possibility. While the transports haven't broken below the Aug. 16th lows they have been lagging. A break below the Aug. 16th low would have been a Dow Theory nonconfirmation and a possible warning sign. It is now starting to appear that possibility is becoming more and more remote.

Double dip correction

I checked recent history to see how many times the markets went through a 10% correction, rallied back to test the highs and then fell into another 10% or worse correction. This is the only one I could find in the last 27 years. Needless to say the odds are not good for the markets making a double top and then dropping below the Aug. lows.

Final bull legs

I've posted this before but it's probably worth repeating. Final legs up in bull markets average 34% trough to peak in roughly 6 months. I've also noted that once the public starts to pile into an asset you can look for a parabolic move that lasts roughly 1 to 1 1/2 years. The Nasdaq bubble fit that criteria pretty closely. It lasted almost 1 1/2 years exactly. The real estate boom also lasted about a year and a half once the public caught on to a "sure thing". Notwithstanding last weeks COT, which may have been an aberration, the commercials are and have been at historic long positions. If we are entering this kind of period and you start hearing your neighbor and coworkers brag about how much they are making in the market keep in mind that at this stage of the game this is not a contrary signal. Far from it this means it is the time to be greedy as hell for about a year. Once that year is done then get rid of that greed at all costs and get the hell out.

COT short signals

I'm going to show you COT sell/short signals in the gold market for the duration of this secular bull. Take note here as this is important. The commercials are much better at spotting value than they are timing tops. I've got news for you it's pretty much the same in every futures contract including the S&P's. Spotting tops is virtually impossible and the commercial traders aren't really any better at it than you and me. When I get a short signal I'm very hesitant about shorting and if I do it is in very small amounts. It is much safer to just go to cash and wait for the next long signal. We've got a short signal in gold right now but as we can see the history hasn't been great for calling tops. Even if we do get a pullback it's very unlikely to amount to much or last very long. So I won't be shorting or selling any of my PM. I may take a little off the table on my PM stocks because there is some pretty strong odds of some kind of pullback this month but I would never think of selling any of my physical gold or silver which is where most of my capital is anyway.