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.

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.

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.

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.

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.

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.