Let’s just say things are starting to get interesting. Cramer, CNBC and just about every analyst they trot on screen seem to think that the bear is dead, we’ve started a new bull market and the gold bull is finished. I’d say at this point most investors probably have that same view. Folks, I don’t believe that Bernanke can kill the bear by printing money. I’ll tell you what else I’m pretty sure of. You most certainly aren’t going to kill the gold bull by printing money. All that’s happening is the market has bounced out of the seasonal cycle low that I’ve been warning of for weeks and gold is putting in a B wave decline that I’ve also been warning of for weeks. Both are counter trend moves and both are going to eventually succumb to the secular trend once they’ve run their course. That means stocks are going to roll over and continue heading south and gold is going to bottom and head north. I’m going to start with the stock market. The negatives are starting to build up here. For one, the dollar is not cooperating.
If it closes higher on Monday it will complete the 1-2-3 reversal (see terminology page). Now a 1-2-3 reversal isn’t 100% accurate anymore than any other tool, but generally speaking I’m not willing to bet against it. If the dollar does complete the reversal then the odds start to skew toward the weekly cycle low already having been seen on March 19th. While anything is possible, I would be very surprised if the market could hold together at the same time the dollar is making new highs. So far all the Fed’s printing efforts are not having much success in devaluing the dollar. We are now in a deflationary environment unlike the 2001 to 2008 period where the Fed was able to devalue the currency at will. Bernanke is having a much harder time than Greenspan did at the beginning of the decade. Of course if they would let all these bankrupt banks and institutions fail they could halt the money drain immediately. Unfortunately that wouldn’t help the economy as the excess liquidity would just flow into commodities and cause runaway inflation (which is what is going to happen anyway, once we get past the deflationary period). I don’t believe for one second this crap about how the Fed will withdraw liquidity in time to prevent inflation. Bull S***, if the Fed withdraws liquidity its going to cause a recession just like it did when Volker clamped down on inflation from 1980-82. Isn’t the Fed printing right now to avoid feeling any pain? Are we really supposed to believe that when the time comes the Fed is going to cause intentional pain? I’ve got to think we have about as much chance of this happening as seeing pigs fly. So we have one big negative building on the dollar chart. We also have some short term negatives building in several breadth measurements.
The advance/decline lines are pushing into the danger zone on both the NYSE and the Nasdaq. On top of that, the percentage of stocks above their 50 day moving average is at the very top of it's range on the NYSE - 'and in the Nasdaq it's higher than any time in the last 5 years. I’m pretty confident that we aren’t in a new bull market and even if we were, it would not be led by tech. Along those lines, the percentage of total assets in the Rydex electronic fund, internet fund and retail fund, are now higher than they were at the '07 top. The technology sector as a whole is approaching levels last seen in May and Aug of last year, which wasn’t exactly a good time to buy tech. Investors are becoming too enamored with tech…again. Will they ever learn (sigh). This will probably be a good sector to short once this rally exhausts itself as I expect all this hot money will come pouring right back out of this sector once it again becomes apparent that tech isn’t depression proof. The next negative is the insider buying. Five weeks ago I noted that insiders were scooping up shares at almost record levels. That is usually a pretty good sign that a bottom is approaching. Well that enthusiasm has cooled, to put it mildly. As a matter of fact, its now back at the same level that marked the May 08 and the Jan. 09 tops. If the insiders aren’t buying anymore then I’m certainly not interested in loading up on stocks… especially tech stocks. Next let’s go back to that scatter chart (attached) of bear market rallies. This rally is now the third largest, percentage wise, in history. (I didn’t include the 50% rally out of the 29 crash on the chart). It’s also in the timing zone where most bear market rallies have topped. Whenever we approach extremes on anything I start to get a little jumpy. Let’s just say this is not making me feel exceptionally bullish when considered along with the other negatives. If this rally had unfolded much slower with more corrections to keep the sentiment depressed I would feel a lot better about future gains. In Thursday’s afternoon alert I said I wouldn’t be surprised if we saw more selling on strength and we did in fact get another 75 million of negative money flows out of the SPYDER’s. The combined total is now -150 million. I’m going to get real nervous if this rises above -400 million. Another negative, the market is now on day 23 of the current daily cycle.
We are late enough into the cycle that the next swing high should probably mark the top of this daily cycle. We are already starting to see a divergence in the Stochastic oscillator. And to top it off, according to Jason Goephert at sentimentrader.com, of the 6 times we’ve seen the market gain more than 2.5% prior to a holiday weekend, 5 of those had a negative return the next week and the one time that did manage to eke out a gain gave it all back the following week. The collapse in the spread between longs and shorts last week on the S&P contracts also has me worried. The bottom line is that a bunch of longs exited the market in the last three weeks. As a matter of fact, the number of long side players is down to the same level it was in the middle of Aug. right as the market was getting ready to roll over into the Oct. crash. If this continues this week I have to wonder where the buying is going to come from to take this market higher. All of these negatives are suggesting that we are probably getting close to an intermediate top - at least price wise - and at best I think the market will probably chop sideways through earnings season with a daily cycle low thrown in there somewhere. Whether or not the market can bounce out of that cycle low and make another stab at the declining 200 DMA will remain to be seen. I had a talk with a subscriber yesterday and I posed this question: "if you knew that gold was ultimately going to $4000 or $5000 dollars an oz. within the next five years, would you be willing to hold through a temporary correction to $850? How about $800? $700?"
I suspect that most of you would say sure, if you knew gold was going to ultimately make you rich. You would just take your position and start counting the days till you were going to retire on Maui. Remember, liquidity always finds its way into undervalued assets. For gold to just equal the old 1980 highs, in inflation adjusted terms, it would have to reach $2000+. The take away is that gold is still terribly undervalued and all the liquidity the Fed is creating is going to continue to find its way into the gold market even if a lot of it disappears down the rat hole - that is the current financial system. Now let’s face it, nobody ever rings a bell at a bottom in gold. Every bottom is “too scary” to buy into if you let your emotions govern your decisions. I’ve never seen a bottom that I was comfortable buying and if I was, it obviously wasn’t a bottom. However if you can see the big picture then it really doesn’t matter whether you get the exact bottom in gold or not. You don’t even have to get that close to get rich. Heck, someone could have bought at the exact high of $1007 seven weeks ago and still expect to make 300-400% before this is over. Of course we aren’t really interested in making 300-400%. No, we’ve been given a rare opportunity to make much more than that. I would say we’ve been given a once in a lifetime opportunity. The panic selling in Oct. and Nov. depressed mining shares to never before seen valuations. So not only do we have the prospects of the final phase of a huge bull market, we have the added benefit of the market handing us mining stocks at valuations never seen before in history. So not only do the miners have the upside pressure of a bull market but they still have to return to normal valuations, which they are in the process of doing BTW. So let’s look at the miners. The first thing I see is that the XAU is still making higher highs and higher lows. At this point the intermediate trend is still intact.
Now what I would like to see, as I said in the last report, would be for the miners to break down out of that coil. That would push the 3 day RSI into extreme oversold levels and set up a violent snapback rally once the daily cycle in gold bottoms. A final push down to $850 on gold would probably do the trick. Gold still has two more days before it enters the timing band for the daily cycle low so my guess is that we will get that final push. If we can get two more down days in a row it will also set up a 4 day corollary possible trend change (see terminology doc).
Now I have some capital available from the FAS trade that I would like to put to work. I certainly don’t want to buy terribly overbought and overvalued stocks for all the reasons that I’ve outlined above, but I am interested in maybe trading some worthless Federal reserve notes for some miners that are on sale at half price. Actually, I’m more interested in adding to my juniors that are on sell for ¼ to 1/8 price. So if we can get that break lower next week I will look to add to my juniors, which BTW, have, for the most part, been holding up very well during gold’s B wave correction. Several are at multi month highs and most are down only marginally. Almost all the short term indicators are now overbought and, like I said Thursday afternoon, the odds are now in favor of a short term short trade. If I was so inclined to take this kind of short term trade I would look to hold into the coming daily cycle low.
Gary
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