Runaway moves

The stock market is and has been in a runaway move since March with one brief pause in June and early July.

The last time we saw this kind of action was as the market came out of the 06 bottom. At the time there was great fear that the economy was slipping into recession. The Fed's response was to destroy the dollar by creating billions and billions of them at will.

That frantic printing spree spawned the runaway move in stocks from the summer of 06 till the China led crash in Feb. of 07. After that the inflationary effects of this monetary policy strictly limited further upside for the market, with the S&P only tacking on 100 more points before finally rolling over into the bear market.

You can see the Fed is at it again. Look at the last chart of the dollar since March. Ben is on a determined path to destroy the currency. So far his efforts have produced another runaway move in stocks. The only question is how long can it last before inflation cripples us again. I suspect not too much longer as we've already seen oil spike over 100%. (Always a economic killer).

Generally speaking when one of these runaway moves gets started one wants to take note of the average size of the corrections. Once any correction exceeds that average size by roughly 20% then the odds swing heavily in favor of that correction being something different, possibly the start of an intermediate trend change.

The reason I mentioned this isn't as a timing mechanism for trading stocks but because I think there's a good chance we could see one of these runaway moves in gold once the $1000 mark is taken out for good.

If we see a powerful surge higher in gold during the next few weeks one might want to consider the possibility of another runaway move and not sell too early. You definitely don't want to sell based on overbought levels or divergences. Notice how the large momentum divergences in 06 and recently have been worthless tools for timing this move.

Fighting the trend

I think it must be human nature to fight the market. By that I mean play the low percentage bet or buck the odds (in this case I'm talking about trying to pick a top).

Now if you are in a casino you will get rewarded if the long shot hits with a sizable return on your original bet (not sizable enough for you to make money over the long haul though. Hey they don't build those casinos by letting gamblers win.) Not so in the stock market. The only reward for fighting the odds is usually to contribute money to smarter more seasoned traders.

Lets take a look at what's involved when you choose to fight the odds investing. Investors trying to pick the top are fighting not only the short term and intermediate term trend but possibly now the cyclical trend. Every time frame is against you. That means the odds are heavily skewed against you correctly spotting a top. Insistence on this strategy is most likely going to result in multiple loses. Sadly that's not a very good way to make money in the stock market. If one is taking big positions these multiple losses can do severe damage to ones account.

The safer course of action would be to either get aligned long with the trend of the market or just get out. Unfortunately traders seem to have this almost uncontrollable need to pick a top. Perhaps it's for boasting rights if they ever do get lucky enough to spot one. I really have no idea what the fascination is with spotting tops.

It seems like almost everyone is trying to pick a top right now whether it be in the stock market or the gold market.

For gold the secular bull market is not in question. It has been rising for 9 years. That means the odds favor that long is the correct position.

The stock market is a little more questionable. It is definitely in a secular bear market and has been since 2000, but the cyclical trend may have turned up. For stocks the short and intermediate trend is still unquestionably up, the only question is whether or not the cyclical trend has also turned. Since the 200 DMA is now sloping up and the 50 DMA has crossed above the 200 I'm going to assume that it has. That means there are only two correct positions, either long or out.

However since there is no question about the secular trend in gold I would think that would be a safer bet than trying to guess at the stock market.

Ask a five year old!

I had a spirited discussion with a trader today who assured me that gold would soon crash along with the stock market any time now.

Now I don't know about the stock market. We surely haven't entered a new secular bull market, so at some point yes we are going to be making a trip back down to new lows. I'm kind of leaning towards this being a cyclical bull market within a much larger secular bear market but it could just be history's biggest and baddest bear market rally (actually a cyclical bull market is just a really big bear market rally).

But I am under no delusions as to whether gold is in a bull market or not.

Just to make this simple, enlarge the chart and then go stand on the other side of the room and decide whether you think gold is going up or down.

If you don't trust your judgement or perhaps your eyesight is bad (don't get me started on that one, damn I hate getting old!) ask any five year old for their opinion.

If the consensus is up then one has no business selling gold and buying dips is the correct strategy.

Dow:gold ratio revisted

I've posted the Dow:gold ratio many times along with my feeling that we will eventually see this ratio drop to or near 1:1 just like it has during almost every commodity bull market.

I think there's a good chance that the Dow:gold ratio has completed the correction from March and is now about to begin the next leg down. So far the trend line has been broken and at the moment is forming a small bear flag.

Now I don't know if stocks are going down or if gold is just going to rise much faster. Either one of those scenarios would send the ratio lower. If I had to guess I would say gold is going higher while stocks stagnate or rise sluggishly.

One of the great investing truths is that liquidity will eventually find its way into undervalued assets. Over the last 6 months the stock market has risen by about 50% while gold traded sideways. I suspect it's now time for liquidity to drain out of the stock market and back into precious metals.

Once the ratio closes back below 8.5 I think we will have confirmation that the secular trend is back in force.

Watching the wrong number

Obviously $1000 is a big psychological number and most investors are concentrating on a breakout of that level as a sign the secular bull market is still intact. However $1000 isn't the important level. The important breakout has already occurred when gold took out the 1980 highs of $850.

W.D. Gann noted that the size of the consolidation often signals how large the ensuing rally will be once an asset breaks out of that consolidation.

The 28 year consolidation in gold is foretelling a bull market rally like no other that any of us have ever seen.

That's not surprising considering the monetary policies now being adopted by every central bank in the world in the attempt to halt the slide into a global depression.

I've posted the Dow:gold ratio many times on this blog along with my feeling that we will again see that ratio hit 1:1.

Actually I don't think we are going to see 1:1 this time. The size of gold's consolidation and the magnitude of central bank stupidity is suggesting that the Dow:gold ratio is probably going below 1. I wouldn't be at all surprised to see .5:1 before this is finished.

The one thing you can count on from a secular bull market, especially a gold bull, is that it is going to go much further than almost anyone expects.

Gold is good but silver is ... too cheap!

I know I've been talking mostly about gold but the real money is going to be made in silver.

The above chart is the ratio of gold to silver. During the crash last fall silver got simply destroyed. Unjustly so I might add. But then silver is a thin market so these kind of swings are to be expected.

Historically silver should trade at about a 20-30 to 1 ratio compared to gold. As of yesterday it still took over 60 oz. of silver to buy 1 oz. of gold. Just like mining stocks silver is stupid cheap.

Ultimately I expect we are going to see another 400-500% gain in gold before this bull market is finished. Silver on the other hand will probably double those gains or more as it works its way back down to a more "typical" valuation compared to its big brother gold.

Now remembering what I said about mining stocks being cheap, what does that say about silver miners?

A rational bull market?

I had a conversation today with an investor who informed me that gold simply couldn't rise in the face of a higher dollar because gold was priced in dollars.

For some reason this investor assumes that bull markets are rational. Rationally speaking a rising dollar should cap the price of gold since it takes fewer dollars to buy an oz.

However let me pose a question. Was it rational that oil continued to rally all the way to $147 a barrel last year despite a dollar that bottomed in March? Oil is priced in dollars after all.

How about the fact that oil continued to rise day after day even though the global economy was already obviously in recession and tankers were sitting in the gulf with no place to unload their oil. Was that rational?

Bull markets aren't rational folks. They are a product of 1. Supply and demand imbalances and 2. Human nature. At some point fundamentals leave off and human greed takes over. Otherwise known as higher prices beget higher prices.

I guarantee you that eventually the course of the dollar is going to become meaningless to gold (it may be already). Those insisting that gold prices be controlled by the dollar are going to get left behind in the dust.

Eventually gold is going to trade on its own supply and demand fundamentals and that will have nothing to do with the dollar. Then at some point further down the line gold is going to trade on nothing more than human greed.

I suggest one ignore the dollar and instead stay focused on gold.