A different ballgame

I'm starting to hear talk in the media that the recession is probably nearing an end. If this was a normal recession I might tend to agree as most recessions only last 9 months to a year. I know this is going to be used as the excuse for why the market is going to rally. I'm pretty sure the rally will have everything to do with relieving oversold conditions and nothing to do with an improving economy.

I also know a great many investors are now positioning for a 70's style stagflation or hyper inflation based on the incredible amounts of paper currency being printed by the central banks of the world. I suspect most of these investors are expecting a return to that kind of investing climate. I was expecting that myself until recently.

I don't think we are moving towards that kind of scenario anymore, at least not for a while. I think what we are seeing unfold is something none of us has ever seen before. A whole different ballgame. Consequently I doubt that very few investors are going to be prepared to survive what's coming much less make money.

I'll start off by saying that I don't think this is a "normal" recession. Definitely not a mild recession like Abbey Joseph Cohen and many in the media want us to believe. No this is something much more dangerous. What we are heading into is a massive purging of all the excess debt built up over many years.

For all practical purposes our economy for the last few years has been built on a foundation of debt instead of real productivity. What does it say to you that 70% of GDP is consumer spending? A good portion of that spending was coming from inflating housing prices or credit cards.

As this debt bubble implodes the powers that be, who also have never seen this before, are taking the exact wrong course of action to try and "fix" the problem. I've got news for them, there is no way to fix this. It certainly can't be fixed by continuing to add more debt. Unfortunately that's exactly what is happening. Every week we get another billion dollar bailout. All of these bailouts are only adding more and more debt that will need to be either repaid or defaulted on. I'm pretty confident the ultimate path for a big part will be default.

So the more the governments of the world try to use the remedy that worked for the last 30 years the bigger the problem actually gets. It's exactly because we did go down the debt expansion road for so many years that we are in the mess we're in.

This is why on average the world experiences a depression every 70 years. The new generation never experienced the ravages of an imploding debt bubble so we take the good times as a sign of never ending happiness. Believe me an expanding debt bubble can be very pleasurable. I can say that quite a few people have been living high on the hog for a long time based purely on nothing more than ever larger debt. Unfortunately I'm afraid that almost no one foresaw the ultimate outcome of this false prosperity.

That outcome isn't going to be pretty and it certainly doesn't lead to a "typical" or even mild recession. What it does lead to are hard times the like of which probably none of us have ever experienced.

So when I hear the talking heads on CNBC calling for a mild recession and the end of the bear market I have serious doubts. Very serious doubts!

Dollar topping

I've been noting for a while that the strength in the dollar has been putting pressure on the markets along with commodities. I've also pointed out in the past that parabolic move are prone to collapse. I think it's safe to say we've seen a parabolic move in the dollar.

We are also moving close to the timing band for the 19 week cycle low in the dollar. Now that we have a swing high in place I think the odds are good the dollar has topped and will be heading lower for the next 5-7 weeks into that cycle low.

I expect this will take the pressure off the markets giving us the counter trend rally we've been looking for that should separate the first and second phase of the bear market.

The next phase will probably be accompanied by a much more orderly rise in the dollar.

Here's where I've been the last several days. Hanging out in the dirt of Utah's Canyonlands. I'm the scruffy one in the middle holding the vicious killer dog.

12 month moving average

I think we are probably within days to at most a week to 10 days of putting in a bottom. Granted I don't think this will be the final bear market low. That won't come for at least another couple of years.

As of today we are now on day 36 of the current trading cycle. The average duration is between 29-43 days so this decline is getting long in the tooth. Especially since the last cycle ran long at 45 days. Usually a long cycle is followed by a short cycle.

Either way we should be close to a bottom. A test of the 02 lows would seem to be in the cards at the very least. However that's not what I'm interested in. No I'm interested in the bounce out of this bottom. I suspect the rally is going to be amazing to say the least. I fully expect the market to test the 12 month moving average. That could mean a rally back to the 1200 level in very short order.

I imagine almost everyone will take that as a sign that the worst is over. However I really doubt that will be the case. We aren't dealing with a "normal" bear market. What we are seeing is the credit cycle coming full circle since the last bottom in the 1932 depression. This is commonly known as Kondratieff winter. This is the period where excess debt gets purged from the system.

Since we just saw the largest credit bubble in history I don't expect that we will accomplish this purging in only a year. It took several years back in the 30's and that was a much smaller bubble. Once the coming rally runs it's course I fully expect the market to roll over into the second bear phase. This phase will last much longer and probably result in much more damage than what we've just seen.

Possible 1-2-3 reversal developing

The market is working on a 1-2-3 reversal. If it can close above Mondays high it will complete the trend change. At that point the odds would favor that the path of least resistance has changed to up.

Todays rally in the face of short term overbought levels is another sign that the bottom for the year may be in. I'll have more in tonights update.

New charts

New charts are now posted to the Public Chartlist.

Midpoint consolidation ?

We are seeing things that by all rights we should never see. First off we are getting a waterfall decline after the market had already fallen over 20%. Waterfall declines almost always come at the beginning of declines. Typically as a bull market dies or at the end of a very right translated four year cycle. We do see bear markets produce from time to time a 20 under the 200 scenario. Rarely do they move down with the viciousness that we've just witnessed though and they tend to bounce back quickly.

I've noted in the past that waterfall declines often have a midpoint consolidation before the final leg down. So far we've not seen anything that resembles a midpoint consolidation.

I certainly hope I'm wrong, but what if we are forming that midpoint consolidation right now? If we are and it breaks down it would suggest a final low in the 450-500 range for the S&P.

I think at this point we should probably just watch the credit markets and forget about the stock market. Until the credit markets show significant signs of recovery it's going to be tough to put together a lasting rally.

So far they have not responded to anything the powers that be have tried.

We are going to need to see the dollar break also. A rising dollar is telling us deflation is still in control.

New Bull market or Bear market rally?

It certainly looks like the oversold rally we've been looking for is now underway. The question now is whether this is a bear market rally that will eventually roll over or is this the start of a new bull market.

I suspect this is probably not the start of a new bull market and here's why.
First off bull markets don't start with 900 point rallies.

Second, we still have what so far appears to be a very left translated 4 year cycle. This is still suggesting that we will see one of the worst stock market declines in history after this rally runs its course.

The extreme nature of the recent crash suggests that the coming rally should be a doosie. I fully expect to recover the 200 DMA. I also expect this rally to last 3-5 months. So I have no doubt that we will at some point see investors become extremely complacent again. That's the point at which the bear will come back.

Third, as of Friday, Lowry's selling pressure was at multi year highs. Never in the 75 year history of Lowry's service has the market made a final bear market low sooner than one month after selling pressure has started to decline. As I noted, as of one day ago selling pressure was increasing. I suspect we will now see selling pressure decrease a bit but I really doubt buying pressure is going to increase much. Smart institutional money will likely use this rally to unload more stock just like they've done on every other rally so far in this bear market.

If this is the rally that separates the first and second phase of the bear market and I think it probably is, then the real damage will be done when this rally finally rolls over. The next phase of the bear market will probably take the market down to levels that no one can conceive at this point.

The powers that be may have temporarily saved the financial system but they can not turn the global recession around in it's tracks. Once the euphoria of this rally wears off the markets are still going to have to deal with declining earnings. As long as earnings are dropping P/E ratios will be rising. Contrary to what many in the media have been saying the market still wasn't cheap even at 840. Trailing P/E's were still running at around 13 which is only slightly below average. Of course if 3rd quarter earnings decline that P/E ratio will be higher.

New chart

I've added a new chart to the Public Chartlist. If you don't mind click on the Vote link at the bottom of the page. I'd like to move back up the list :)

Stock Market Bear/Gold Bull?

Here's something to think about. What if the market tests the 02 lows this month? Maybe even by next week the way this market is going. The S&P has already sliced through every conceivable support level. We are only about 150 points away. What if that's it for the bear?

What if the onslaught of paper money from the central banks around the world finally takes effect and we start to hyperinflate? That would mean a meteoric rise in stocks and more importantly commodities. Look at the chart of the 70's. Those rallies went up just as fast as they came down.

Now look at the charts of miners and energy companies. Both are holding up much better than the general markets. The miners more so than the energy stocks. Remember I've said in the past that the precious metals should out perform during the second (or third) leg of the secular bull market for commodities. Could the miners be setting up to lead the next bull?

In my previous post I noted that the dollar has likely made about all the gains we can expect from this counter trend rally unless it no longer is in a secular bear market. The powers that be are doing everything in their power to devalue the currency. Every central bank in the world is now on this path.

I want to point out a couple of of things on the gold chart. First off notice that Gold broke out above the 1980 highs back in the spring of this year. It then retraced 38% of the entire bull market. In the process it moved back below the $850 breakout level. Needles to say this scared the crap out of every gold bug in the world. I dare say very few have been able to hold on through this.

Now gold has broken through the $850 resistance level again. Tested that support, actually breaking back below it for two days, only to rocket higher again. The easy answer is that gold is a safe haven and everyone is flocking to it while the market crashes. I have to wonder if the easy answer is the correct one.

What if the powerful rise in gold has almost nothing to do with the stock market woes. What if gold is starting to discount the coming hyperinflationary future. Remember gold exploded higher by $88 dollars in one day. I'll tell you that from talking to my gold sources you just can't buy gold right now, everyone is sold out and silver, forget about it. You will wait for weeks to get silver. What little gold the dealers have is gone in seconds. Someone is buying all this gold and silver.

I've shown the Gold:XAU chart before. Unfortunately I can only get five charts on blogger so you will have to trust me on this one. The ratio of gold to the XAU is at extremes never seen in history. The miners are practically being given away. The start of the bull market in 2001 also saw the Gold:XAU ratio get stretched to historic extremes. Let me ask a question. How do bear markets end? They end of course in black pessimism. I think I can safely say that we have seen black pessimism in the precious metals sector, especially miners.

Do we remember how human nature operates? That's correct we go to extremes. We saw oil crushed to extreme lows in 06/07. What followed was what can only be called an amazing parabolic moon shot that ended with oil at $147. Now the miners have gotten crushed to the point where no one believes anymore. Hell, I've still got doubts myself. Not about the secular bull market mind you but on the timing of the next bull phase. What if my timing is off though? What if we are now seeing the beginnings of the third and final phase of the bull market in gold?

If so this is what's going to happen. The bull will recover quickly from a nasty decline. Check.

Fundamentals will support a renewed rally that very few will believe in as it gets underway. Check.

As gold breaks out to new highs smart money and nimble traders will jump on board. Somebody is buying a lot of gold. Tentative check.

At some point the general public will take notice. Once that happens we will have about 1 to 1 1/2 years of parabolic gains to look forward to.

The bull will end in a bubble completely unsupported by fundamentals. There will be a massive oversupply of gold but price will just continue to rocket upward. Everyone of your neighbors will be buying gold. The Dow:gold ratio will be at or near 1:1. That my friends will be the signal to sell your gold.

Could we be starting the third phase of the bull now?

What say ye?

Is the dollar rally over?

I'm starting to think we may have seen the top of the dollar rally. This was always a counter trend rally in an ongoing secular bear market. I thought it would probably last at least a year like it did in 05. However the dollar has now met all the requirements to put in a top. It's now overbought on the weekly chart. The magnitude of the rally is similar to the last rally. More importantly the dollar is now facing major resistance in the form of the declining 200 week moving average.

On a cycle basis the dollar is now on week 12 of the current 19 week cycle. We should have anywhere from 5 to 9 weeks to the timing band for the coming low due in Nov. or Dec. Unless we see surprising strength today or tomorrow the dollar is going to end the week with a solid black candle. That's often a sign of a top after a long intermediate move. Perhaps the strength in the mining stocks yesterday is a signal that the dollar is ready to resume it's bear market. That should be a big plus for gold and miners and I suspect it will be a short term positive for the general market.

Of course if one thinks that the FED printing dollars by the truckload to bail out the financial system is somehow a positive for the dollar then maybe the secular bear market is over.

Hyperinflation vs. Deflation

The battle between deflation and hyperinflation continues. The big reversal in the 10 year yield along with gold closing back above the 200 DMA would have to be a check mark in the hyperinflation column.

Central banks around the world have now turned the printing presses on full blast. I expect the world to run out of trees within the month. Will it be enough to halt the deflation monster? That's the million ...trillions of dollars question isn't it?

20 under the 200

Today we saw one of those rare long side setups that only happen in bear markets. What I'm talking about is a 20% under the 200 DMA buy signal. All markets regress to the mean whether they be bull or bear it doesn't matter. This leg down has gotten too stretched. It needs to regress to the mean soon before the next leg down can unfold.

At the low point today the S&P was a little over 24% below the 200 DMA. Did we see an important intermediate low today? It's certainly possible. If not I think we are getting very close. I'll have more details and statistics in tonights update.

New charts

I've posted new charts to the PublicChartlist

New Charts

New charts are now up on the PubliChartlist .

Dollar rally

I'll be the first one to admit to being surprised by the strength of the dollar rally. At first it looked like the dollar was going to "crawl" along the 50 DMA and breakdown. Well obviously that didn't happen. What has unfolded is a picture perfect T1 pattern. After testing the consolidation zone the dollar is now in the process of the next leg up which should take it to new highs.

If this pressures gold enough to force it back below $850 then I would have to say that the recent rally was nothing more than a powerful bear market rally in an ongoing cyclical bear market.

I will note that every commodity other than gold is obviously in a cyclical bear market. It might be asking a lot for gold to resist the downward pull of the rest of the commodity markets.

If the cyclical bear market continues in gold then it will be safer to trade gold from the short side as the larger trend will be down for the time being.

Now is not the time to try and pick a bottom in the miners. The cycle low isn't due for gold until at least next week and possibly not until Oct. 20th. Let's see where gold goes to at that low before we try to be a hero and load up on mining stocks.

gold: the pros and cons

Today I'm going to reprint part of last nights update.

The question is whether gold's recent explosive move was the start of another leg up in an ongoing secular bull market or a counter trend rally in a cyclical bear market.

Here are the Positives:

Gold has rallied strongly back above the 75 week moving average.
The COT recently gave us an extreme bullish reading.
Physical gold and silver are in short supply.
The Gold:XAU ratio is at levels that have signalled good buying points for miners in the past.

Now the negatives:
Gold is still clearly making lower lows and lower highs.
The 50 DMA has plunged below the 200 DMA unlike any other time during the secular bull market.
The dollar rallied strongly yesterday possibly changing the 19 week cycle low to come in at a much higher level than I previously thought. I also thought the dollar would test the 200 DMA before moving higher. Now it looks like it wants to break out to new highs.
Gold tested and was rejected by the 62% retracement level.
The current trading cycle is only 13 days old. Most trading cycles last 18 to 28 days. With yesterdays decline gold is already close to testing the major support level of $850. If this level fails there will probably be heavy liquidation in the gold market. Gold needs to hold above this level and it needs to do it for the next 5 to 15 days.
The XAU rallied 36% from bottom to top, so the gold:XAU signal could already be considered to have worked, so to speak. Now the XAU and HUI are both trading back below the 200 week moving average.
Gold and the XAU have both broken back below the 10 day moving average. The miners are threatening to break below the 20 DMA.
Most of the gold stocks fit all the requirements for selling short according to William O'Neil .
Finally Platinum which has led the precious metal bull both up and down broke through the 06 lows yesterday.

There you have it. The pros and cons for precious metals. Everyone can make their own decision as to how they think this will play out.