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.