NEW SMT ADDRESS

I'm starting to get a ton of spam on the blog lately so I've decided to try moving the blog to a new address. The new address will be easier to remember anyway :) www.smartmoneytracker.blogspot.com

THE STRONG BROTHERS ARE LEADING THE CHARGE

During the 01-08 stage of the commodity bull platinum was the strong brother of the precious metal complex. Where he led the rest of the complex followed.

Well platinum is at it again, only this time he's got help. Palladium is also leading the charge higher. Both metals have eclipsed their December highs. As a matter of fact both metals have been so strong that the 50 day moving average never even turned down during the recent correction.

We still need to see gold rally above $1161 to break the pattern of lower lows and lower highs but the action in platinum and palladium is suggesting this C-wave still has further to go.

I suspect how the dollar reacts to the employment figures tomorrow will probably give us a big clue as to the next move in gold. Ironically I suspect a poor jobs number is going to be more bullish for the markets as it will probably depress the dollar.  Perhaps even completing a weekly swing high which is one of our requirements for a continuation of the C-wave.

4 DAY RULE

Yesterdays rally completed a 4 day rule possible trend change. (4 days in a row counter to the trend after a long intermediate move often signals a trend change.)

We also have the same signal in the miners which in my opinion is more important as the miners have been the laggards in this sector. We need to see the miners leading this rally. 

If the trend break can hold into the close that will be another big step in the right direction towards confirming a continuation of the C-wave.

THE FOUR KEYS

I'm still sitting on the fence as to whether gold is stuck in a D-wave decline or whether this has been a very tricky midpoint consolidation. I will say the recent strength despite a strong dollar is very encouraging.

There are four important requirements that have to happen before we can say with a high degree of confidence that the C-wave is still in play.

The single most important is the dollar. We simply must see the intermediate dollar cycle top. No C-wave has been able to fight a rising dollar. The dollar is getting late enough in the intermediate cycle that it could put in a top at any time.

The next requirement is for gold to put in a right translated daily cycle. If this remains a D-wave then all daily cycles should be left translated. If gold can eclipse $1131 this week then we will have a right translated cycle and that shouldn't happen in a D-wave decline.

The next hurdle is the $1161 level has to be surpassed. Gold has to break the pattern of lower highs and lower lows. It will do that if gold can top $1161. That will also eliminate the December trough as the intermediate cycle low and move the phasing to February. That is very important as it will mean gold is on week 4 of the cycle instead of week 10. That would give gold 6 more weeks for the second leg to progress.

And finally we need the miners to start participating. If the HUI can cut through the 420 resistance level that will be a big step in the right direction. If miners can break out to new highs along with gold all resistance in the gold market will be out of the way and the path will be clear for the second leg of the C-wave to rack up another monster move.

DOLLAR KEY

A while back I asked the question "Can the markets and the dollar rise together?" They certainly weren't able to do it during the last cyclical bull and they haven't been able to do it so far during this one.

In the next chart you can see that just as soon as the dollar bottomed gold's C-wave ended. The stock market managed to drift a bit higher due to seasonality and momentum, although I will add that the last little spurt higher in December and January occurred as the dollar was correcting into a daily cycle low.

The fate of the markets now rests with the dollar. If Ben can get the dollar headed back down assets will head back up. If not we are going to continue to flounder around until the full forces of the secular bear grab hold of the market again and suck it back down.

The problem is that public opinion has turned against stimulus and printing at the moment. So it's going to be hard to rationalize more printing. (I will add that the government has figured out they can still sneak in more stimulus as long as they don't call it stimulus. Now it's a jobs bill.) If however things start to weaken appreciably public opinion will quickly shift back to "do whatever it takes to fix the problem".

Sooner or later that is going to happen. Of course if we want to see another leg up in the C-wave we need it to happen quickly. Actually because we are running out of positive seasonality (no C-wave has topped later than early May) we probably need to see the dollar top next week.

I'm going to say if we don't put in a weekly swing high on the dollar chart next week then we can probably kiss any more thoughts of a C-wave continuation good bye.

At that point we will just have to twiddle our thumbs for another month or two as we wait for the A-wave to begin.

Maybe this will help understand why I did what I did.

If you understand how the 4 wave structure in gold works you will understand why I want to take some profits out of the C-wave. If I hold on to a winner it will just get dragged down by the extended corrective process after the C-wave tops and will turn into a loser and then it will be dead money for many months as the next C-wave builds a base.

If I have some dry powder then I can put that powder to work in the A-wave advance, which while it won't make new highs could still be good for a 40-50% gain in a stock like SLW as long as I get in close to the bottom of the A-wave, which isn't too hard to do if one watches the COT report. That's a much better use of my capital than just watching one of my winners bump around for months.

LINES IN THE SAND

If gold is now stuck in a D-wave decline all daily cycles should be left translated. By that I mean if a cycle averages 20-25 days trough to trough any cycle that tops in 10-12 days or less would be a left translated cycle.

Gold is now sitting on the fense. At the moment the cycle appears to be left translated with the top occuring on day 10.

It that top holds we should expect gold to drop below $1044 at the next cycle low.

If however gold can move above $1131 in the next few days we will have a right translated cycle in play. That should not happen in a D-wave decline. The play then would be to get aggressively long at the bottom of the next daily cycle low.

CYCLICAL BULL VS. SECULAR BULL

The reason I don't want to mess with the stock market at this time is because it is in a secular bear market. Any rallies are always going to eventually be doomed to failure in this environment. Now that doesn't mean the cyclical bull is finished. I doubt it is. What it does mean is that one can't make a timing mistake and expect to be rescued by the secular trend.

For instance; from 1982 till 2000 the stock market was in a secular bull market. The fundamental driver for that bull was the personal computer and the internet. Those were world changing new technologies. Millions and millions of jobs were created during this period.

There were certainly nasty corrections during the secular bull, 1987 was an example. But the secular trend was up. So as long as one was willing to hold on to ones position any entry would eventually end up being a winning trade. Like I've said before the only way to lose money in a secular bull market is to buy high and sell low. (I seem to be having trouble getting that point across lately). In a secular bull market there's nothing wrong with buying high as long as you sell higher. That means sometimes you have to be patient and let your positions work. Sometimes you have to endure drawdowns.

Ultimately though as long as you don't sell for a loss then every position will end up a winner (I'm talking index ETF's not individual companies)

The problem with the stock market since 2000 is there is no longer a fundamental driver to produce a secular bull. Now all we are getting are phoney bull markets built on money printing. Those are not the kind of fundamentals that can support a sustainable bull market. So what happens? Eventually the false fundamentals fail and the market collapses.

The Fed is now at it again trying to build another bull market on a fundamental base of nothing more than trillions of dollars of liquidity. It didn't succeed when Greenspan tried it and it's not going to succeed for Bernanke.

Until we get the next fundamental driver (personal computer, internet 1982-2000: electronics 45-66: automobile 20-29: trains in the late 1800's) we are not going to have another secular bull market for stocks.

There is a secular bull market that does florish on a fundamental base of money printing though. That secular bull would be commodities in general and precious metals specifically.

Gold is in a secular bull market. That means several things. First off we can expect this bull to continue until the fundamental driver is taken away. That means the presses have to be turned off. Second, any entry will ultimately turn out to be a winning position as long as one is willing to hold on till the bull corrects any timing mistakes.

The one area where investors can rely on the buy and hold strategy at this time is in the precious metals markets and will be for quite some time yet.

GOLD'S A-B-C-D WAVE STRUCTURE

THE BULL IS STILL ALIVE

I believe the secular gold bull is still intact. As long as I believe that to be a fact then I have to ask what's the point in selling losing positions and locking in a loss?

If I had sold my losers in April they would never have had a chance to become profitable. The same for July, Sept. and Oct.

The only difference between now and then is the time I think it's going to take for my positions to become profitable.

Since I think gold has now entered a D-wave I may not get the quick rebound on underwater positions that I got over the last year but that doesn't mean I need to throw out a winning hand. It just means these particular positions are going to need more time to work before they move into the green. I'm willing to give them all the time they need.

I'm not overlooking the fact that a D-wave is followed by an A-wave that should at least test the $1161 pivot. I'm also not overlooking the fact that the last three A-waves produced HUI gains of 18%, 37% and 116% gain in 1 month, 1 month and 3 1/2 months respectively.

As miners are still incrediably cheap we should see the HUI come close if not better the highs at the next A-wave top. Especially if oil continues to hold below $100. At the least they should test the 475 pivot that they were at during gold's last move back up to $1161.

C-WAVE OR D-WAVE

I've been racking my brain tonight trying to decide if gold is still in a C-wave or whether a D-wave has managed to sneak right past me without me ever noticing.

On one hand the C-wave never really generated the kind of excessive speculation we normally see at C-wave tops. The silver gold ratio never spiked, miners never even got to normal valuations much less expensive, which is what would be expected as gold fever hits hard at C-wave tops.

The massive year and a half consolidation only spawned a meager 190 point new high? That doesn't sound like a C-wave top to me. We had the most powerful A-wave, along with the weakest B-wave of the entire bull market so far and all it could gain was 190 points above the old highs? Hard to believe.

Trillions and trillions of dollar printed and thrown at the market and all we got was 190 points? Again hard to believe.

We even have a broken trend line.

Despite a very strong dollar gold is still holding well above the lows.

Everything seems to be saying this is still a C-wave...except the miners.

The HUI should have broken through the 420 resistance like a hot knife through butter. It should be breaking the down trend.

It hasn't done either. Instead it immediately turned tail as soon as it got short term overbought and has now closed back below the 200 DMA.

We have two lines in the sand. If gold can break the pattern of lower lows and lower highs by moving above $1161 then the odds are the C-wave is still intact. If however it moves back below the Feb. low we are almost positively caught in a D-wave.

Which ever way gold breaks out of the box should tell us were we stand. I will say that if this is a D-wave we should be getting close to the bottom. I would expect a test of the 65 week moving average and the $1000 mark will probably be about it before the next A-wave gets underway.

Remember the A-wave should test but probably not exceed the highs.

So at the moment we just have to wait and see which line gets broken first.

PROFIT TAKING CORRECTION IS FINISHED

Since November I've been looking for a profit taking correction of 10-14%. The recent pullback managed 9.2%. Not quite the 10% I was looking for but considering the trillions of dollars sloshing around the world that's probably all we are going to get.

All in all I think the odds are very high that the correction has run it's course and we are now beginning the third leg up in this cyclical bull market.

I've mentioned before that the initial thrust out of an intermediate cycle low tends to be very powerful. The average gain is between 6-10% in the first 8-13 days before any kind of meaningful pullback can be expected.

We seem to be right on track as we've rallied 6.5% trough to peak so far.

There is so much liquidity in the market that neither the March bottom nor the July intermediate correction were tested. I don't have a lot of confidence that we are going to test the Feb. 5th low either.

Now I don't know if we are going to rally 17% like we did out of the July bottom but I will say the dollar is way overdue to move down into the daily cycle low and probably begin the move into the intermediate low also.

When the dollar starts down it's going to be like putting afterburners on the markets.

At this time all the signs are in that we are in the initial thrust out of a major yearly cycle low. Holding shorts in that kind of environment is terribly risky. One certainly doesn't have to be long (although this is when the biggest gains come the quickest) if they don't trust the move, but you certainly don't want to get kicked in the teeth standing in front of the bull.

This is one of those times when the best option for bears is to do nothing and just sit in cash.

WHICH SIDE OF THE ESCALATOR ARE YOU GOING TO CHOOSE?

A bull market is like a rapidly rising escalator. Now one can certainly run down the up escalator but it's not the most efficient way to travel (invest).

The same can be said for a bear market. Why would anyone want to run up the down escalator?

Doesn't make a lot of sense does it. Any intelligent person would just step on and go for the ride. But this is exactly what most retail investors do. They repeatedly try to short bull markets or go long in bear markets.

And for whatever insane reason they seek out contrary opinions to support their position.

Folks in a bull market you don't listen to the likes of Mish, Karl Denniger or Xtrends. Doing so will destroy your account. And I don't say that because I think what they say is untrue. Many of the things they talk about are absolutely true. The problem is that we are in a cyclical bull market, the escalator is running uphill, so negative fundamentals don't matter.

You pay attention to permabears when we are in a bear market. In a bull market you take advise from perma bulls.

The escalator is running uphill. Now is not the time to try and get to the bottom. It's time to relax and take the ride to the top.

MUCH ADO ABOUT NOTHING

Last night it was the news that the IMF was going to sell 191 tonnes of gold. Tonight it's the 25 basis point rate hike in the discount rate.

I'm going to let you in on a secret. Neither one of those things is going to materially affect the stock market or the gold market.

As a matter of fact over 75% of the time the market ends up higher by the third day after an initial hike in the discount rate. The Chicken Little's of the world see the sky falling but the reality is this has been a positive for markets almost 8 times out of 10.

Folks I'm going to let you in on a secret. The damage has already been done. The trillions of dollars the Fed has pumped into the market is not going to be withdrawn by a mere 25 basis point hike in the discount rate. By the way the discount rate is the rate the Fed charges banks to borrow. Very few banks even bother to borrow from the discount window. For all intents the rate hike today was basically the same as the Fed jawboning. All bark and no bite.

If the Fed really wanted to withdraw liquidity they would have to go on a massive treasury selling spree.  The problem is this would crash the bond market, spike rates, and drastically raise the cost of servicing our massive debt mountain. If the Fed were to do that, just the interest payments on our debt would soon sink the country. Not to mention it would still take months and months if not years to reverse the liquidity mess they created.

They didn't cram 12 trillion dollars into the market in one day and they certainly won't be able to withdraw it in a day.

The truth is there is no easy way out of this mess the Fed has gotten us into. I can tell you that human nature being what it is, I'm confident we will continue to kick the can down the road for as long as possible. So I wouldn't count on the Fed withdrawing liquidity anytime soon.

The reality is that the market is bouncing out of an intermediate and probably a yearly cycle low. Those kind of major cycle lows tend to produce the most powerful rallies. The average initial thrust out of an intermediate cycle low has been between 6% and 10% in 8 to 13 days. And that is just the initial thrust.

So far the market is behaving exactly as expected.

Don't forget we still don't have anything that looks like a daily cycle bottom on the dollar yet. This is what the markets have done in the face of a strong dollar. When the dollar decides to move into the daily cycle low we could literally see all markets explode higher still.

It's going to take a lot more than a mere 25 point hike, in a virtually meaningless interest rate, to derail the kind of powerful rally that happens out of a yearly cycle low.

WEAK EURO DOESN'T EQUAL STRONG DOLLAR

The Fed has printed literally trillions of dollars in an ill fated attempt to jump start the economy. Folks it's not fundamentally possible to have a strong dollar with that kind supply.

If one looks at a chart it does appear that the dollar is rallying. But is it really, or is the Euro just falling?

When measured against a stable source of value the dollar is actually losing value rapidly.

Just since the Feb. 5th bottom oil has rallied 12%, gold 8% and copper 17% despite the illusionary strength in the dollar.

Far from being strong, the dollar just happens to be a slightly better choice than the Euro right now.

Consider that the sentiment on the dollar has now reached extreme bullish levels and the Euro bearish extremes. Plus the dollar is moving deep into the intermediate cycle and at jeopardy of an intermediate trend change at any time.

Once the dollar cycle tops commodities are set up to explode higher.

THREE'S A CHARM

Today I'm going to forward a theory of where I think we may be headed based in part on what happened under similar fundamental conditions in Japan during the `90's.

I've been saying since November we should expect a profit taking event of around 10% that would ultimately separate the second leg of this cyclical bull from a potential third.

While the recent correction didn't quite reach the 10% level I was looking for, I think at -9.2% it was close enough considering the trillions of dollars the Fed has thrown at the markets.

Under similar conditions in `04 with Greenspan madly pumping liquidity the market only managed an 8.8% correction.

So all in all I think we probably now have our corrective move in place. I'm not ruling out a test of the recent low before heading higher, but I will point out that there is so much liquidity sloshing around the world that neither the March bottom nor the July intermediate low was tested. So I don't think I would bet heavily on a retest of the 1044 bottom.

Typically the largest gains in bull markets come at the beginning and end of the bull. Which makes sense as smart money will recognize and jump into the move early as they know that's when the largest percentage gains occur the fastest.

At the end of the bull we finally reach a state of complacency that  retail investors finally becomes convinced that good times are here to stay. This is the period where smart money unloads to frantic retail buying.

I think we may be approaching an interesting point in this cyclical bull. First off let me show you what happened to the Nikkei during similar fundamental conditions in the `90's.

Notice how every cyclical bull had at least 3 legs. Also notice how every cyclical bull exploded higher in about 1 year before rolling over again as the secular bear fundamentals eventually pulled the Nikkei back down.

I doubt anyone could look at a 10 year chart of the S&P and not come to the conclusion that we are and have been in a secular bear market since 2000. That means this is probably just another cyclical bull within the context of a secular bear market.

So just like the Nikkei this bull is going to come to an end as the bearish fundamentals will eventually overbalance all the Fed's liquidity just like they did repeatedly in Japan.

What I'm wondering is if this cyclical bull will, like the Nikkei, compress the rest of the bull move into a final third leg.

  

The 1450 target is just a guess, but if the market surges higher we could see the third leg match the point gains of the first leg before finally rolling over into the third phase of the secular bear market.

Either way, if the Nikkei is any indication, we should have at least one more leg up before this bull expires.

I STILL LIKE THOSE APPLES

The challenge now is that a longer term view will reveal the true relationship between interest rates and gold.

You can see from the following chart that gold topped about a year before interest rates entered a multi decade bear market. Gold also began a long term secular bull market 7 years before interest rates bottomed.

One can plainly see that each asset class marches to its own fundamental driver. If the last cycle is any indication we shouldn't expect a top in gold until interest rates near the end of the secular bull cycle. Since these cycles tend to run for many years and this one appears to be just starting we could see gold rising for a long time yet using this criteria.

The truth is that the secular bull will run until it becomes extremely overvalued. At that point liquidity will start to leak out of the commodity markets, specifically gold, and find its way into undervalued assets.

This will happen when we reach a Dow:gold ratio of 1:1 or close to 1. At that time we will see a buying panic as the public becomes convinced that gold is a "sure thing". Just like they were convinced that tech was a no brainer and just like they believed that real estate never goes down.

Trust me we will see the same mentality in the commodity markets. You want to know how I know? Because human nature never changes. When something goes up long enough and far enough the masses will pile in, they always do. It's how all major secular bull markets end.

When that starts to happen smart money, money driven by logic instead of emotion, will start to sell gold and go looking for undervalued assets. By that time it will be stocks. Stocks will be so beaten up by then that no one will want to own them. We will see the Dow trading at single digit P/E's. Dividend yields will be between 6 and 10%.

At that point smart money will recognize true value in good companies that are being given away for pennies on the dollar.

Let's face it no matter how much we want to believe otherwise gold only has value because we say it does. If all the gold in the world were to disappear tomorrow it would only cause a minor blip on the global economy.

Real value is companies producing goods that the world must have to continue. At some point people will start to recognize that gold, a nonessential shiny metal, is being priced completely irrationally and that good companies with real profits making essential products for continued human existence are being given away. At that point the secular trends will flip and gold will re-enter another long term bear market and stocks a new secular bull.

Going back to the chart. Gold is still in a secular bull and that bull has nothing to do with interest rates and everything to do with human nature.

All in all, I still like those apples :-)

NOT QUITE THE APPLES HE WAS EXPECTING

A comment in the last post challenged me to put up a chart of gold compared to bond yields. I think the poster was somehow insinuating that rising rates are bad for gold. Let's put it to the test shall we?

I don't think any one can deny that gold is in a secular bull market..at least not with a straight face.

I now believe that interest rates are also now in a secular long term bull market. As you can see from the chart they have had no trouble rising together since the beginning of the year.

I kinda like those apples ;-)

THE BOND MARKET IS PRICING IN INFLATION

If we were really on the cusp of another deflationary event and the end of the cyclical bull like so many bears want to believe, we should already be seeing warning signs in the bond market.

At almost every major turning point in the stock market we have seen bonds lead the way. In `07 bonds topped out 4 months before the stock market. The same thing happened in 2000. Bond yields started to rise 3 months ahead of the March bottom in stocks last year.

Far from topping out, bond yields are still rising. As a matter of fact they are still holding above a sharply rising 200 DMA.

If this was going to be something more sinister than just an ordinary profit taking event in an ongoing cyclical bull, bond yields should have begun dropping several months ago.

I believe we saw the end of the secular bear market in bond yields last year when Bernanke assured us he would artificially hold rates down to stimulate the sagging real estate markets.

Realizing that the only way Bernanke could have any chance of accomplishing his goal was to print untold trillions of dollars out of thin air, the bond market responded by rapidly reversing Bernanke's manipulated move and rates have been rising ever since.

Since the beginning of `09 the bond market has been discounting the future and deflation is not what it's been discounting. 

IS IT REALLY WORTH THE RISK?

Deflationist can and have offered up countless reasons for their view. I suspect most are trying to rationalize a short position in the market. But I have to ask is it really worth the risk?

Let's face it if you managed to catch the exact top and covered at the exact bottom last Friday you would only have profited 9.2%. And realistically I doubt anyone has managed to catch more than 6-7% of the decline. In the last two weeks the HUI has tacked on 11.8%.

One is never going to get rich on the short side of the market. Especially not in a cyclical bull. (It is an excellent way to get poor though.)

Now we've got a multitude of factors starting to line up in favor of the correction either being over or very close to being over.

Sentiment has reached bearish extremes, some even worse than what we saw at the March `09 bottom.

The yearly cycle low for stocks is due anytime now (and looks like it may be in).

The market has rallied in the face of extremely bearish news this week. Never a good sign for shorts.

The dollar's intermediate cycle is due to top any time now. Sentiment on the dollar has reached bullish extremes last seen at the March `09 top. And commercial traders now have the most bearish position on the dollar in the last 9 years.

Commercial traders now have the most bullish position on stocks in the last 18 months.

The expected 10% decline separating the second leg of the bull from a probable third has more or less occurred.

The fundamental picture hasn't changed. The Fed has flooded the world with liquidity and despite tough talk, has made no attempt to withdraw any of it.

Finally we are starting to see institutions coming back into the market.

With all these factors lined up against the bears and with the relatively small gains possible on the short side compared to the long it's probably not the best of times to continue holding short positions.

Now of course if one doesn't believe in the bullish view they certainly don't have to go long but it would be much safer at this time to at least go to cash than to continue holding shorts. The odds are starting to pile up against the bears and it's probably just not worth the risk for a minimal gain even if the bear still has one last roar.

Heck even if we have somehow entered another cyclical bear (doubtful) all the factors I've outlined above should lead to a violent bear market rally.

The only two rational options right now are long or cash. Pressing shorts at this point is tantamount to gambling, and if one wants to gamble you can find 24 hour action at any casino. There's no need to wait for the stock market.