Now I want to point out something. Every single one of these sectors have had their fundamentals impaired. Let’s face it, the banks are insolvent. The global depression has crushed energy demand worldwide. Does anyone really think tech is going to be untouched by a worldwide depression? Yeah, me neither. How about retail? Anyone think the fundamentals for retail are improving? Anyone buy the notion that housing has bottomed? Ok, remember this because I’m going to come back to it in a minute.

For the last two weeks I’ve been pointing out that sentiment is pushing into dangerous territory. Yesterday the dumb money confidence level hit 67. That’s the second highest reading since the bear market started. Today the smart money confidence level hit 42. That’s the lowest reading since the bear market started.

So what we have is Moe Ronn sitting at home on his computer getting all fuzzy inside over the stock market rally, while at the same time, John I Que is sitting at his trading desk in Goldman Sachs and he’s nervous as hell. Now you tell me, would you rather be on the same team as Moe or John?

We saw more selling on strength today. The total is now over -450 million. Institutional money continues to unload stock into this rally. Today’s narrow range day wasn’t a particularly positive development either.

The next thing I’m going to point out is sector breadth. As of Friday there were only 4 sectors that weren’t stretched way too bullish. They are Utilities, Consumer staples, Biotech and gold. To tell the truth, the first three are just on the verge of becoming too bullish.

Gold, however, has dropped back down into the buy zone. 6 weeks ago these positions were reversed with gold too bullish and everything else depressed. As might be expected, money flowed out of gold and into everything else. Now here’s the thing: everything else has impaired fundamentals. How long can we expect this hot money to remain in sectors where the fundamentals are declining?

The mining sector on the other hand is not impaired. Far from it, the fundamentals are improving. For one, miners are still too cheap compared to the price of gold. Heck, they are too cheap even if gold were selling for $700 an oz. Next, and probably just as important, miners main expense, energy, has fallen by 65%. That alone is going to improve the bottom line immensely for mining companies.

So at a time when every other sector is seeing profit margins squeezed, mining companies are seeing margins expand. Now you tell me, if you were going to buy a company would you rather pay “up” for one with shrinking profits or one with expanding profits?

It’s been some time since I’ve discussed the 4 year cycle. Many new subscribers probably don’t even know what I’m talking about so I think it’s about time we took a look at it again - especially since almost everyone seems to think we’ve put in a bear market bottom.

I’m going to start off with a long term chart.

What I want to point out here is that the most recent 4 year cycle was the second longest in history at 65 months. The only one longer was 66 months for the 32 to 37 cycle.

Now for March '09 to have been a secular bear market bottom it would also have to be a 4 year cycle low. That would mean the last cycle didn’t bottom in March of last year but in fact bottomed in March of this year. If so, that means we just saw a 77 month four year cycle. 11 months longer than any other cycle in history.

Let’s just say I’m skeptical. Here’s what I think is more likely:

I think it’s more likely that the last four year cycle bottomed in January or March 08. Then the current four year cycle topped out in May. So what we are witnessing now is the most left translated 4 year cycle in history. Check the terminology doc for an explanation of right and left translated cycles. Suffice it to say that when the market failed to move above the Oct. 07 highs and then broke the March 08 lows it triggered the most bearish cyclical structure in history.

So for our most recent low to be the final bear market low we would somehow have to explain a four year cycle that only lasted one year. That’s not very likely in my opinion since it’s never happened before.  

The next 4 year cycle low isn’t due till the summer or fall of 2010. Needless to say I don’t think we have seen the final lows. I think they are still more than a year away and much lower than the 666 we saw in March. Sooo I’m not buying into the whole bottom of the bear market thing.

Next I want to look at the CRB cycle. For new subscribers, the longer term cycle in the CRB tends to run 3 years. That being said a few have run longer at 4 seasonal cycles and if memory serves me, one or two ran short at only 2 seasonal cycles. What I’m wondering is if we aren’t going to see another short cycle.

I’m starting to wonder if the historic collapse in commodity prices last year didn’t shorten the 3 year cycle down to two years. Of course that doesn’t mean all commodities have to soar to new heights again quickly. As I’ve noted previously the demand side fundamentals for just about everything from aluminum to zinc have collapsed.

One of the markers for a left translated 3 year cycle (a cycle that tops out in less than 19 months, which the last one did) in the CRB is that the move down into the next 3 year cycle low almost always breaks below the previous 3 year low. You can see from the chart that this did in fact happen with the second seasonal cycle low in Feb.

What I’m thinking is that the collapse may have already taken commodity prices back to levels that represent rock bottom pricing. Case in point, oil. Despite collapsing global demand price just seems to hover between $40 and $50. So far this seems to be a level that no amount of demand destruction can push oil below.

At some point this year we will get the seasonal cycle top but I have a feeling the CRB is going to hold above the Feb 09 lows as we drop into the next seasonal cycle low some time later this year or early next.

That brings me to gold. Here is a long term chart.

I’ve marked the last four 9 year cycle lows (they actually average 8 years as some seasonal cycles are short which ends up compressing 9 seasonal cycles into 8 years).

The last cycle, if it in fact bottomed in October, was slightly short. I’m thinking the crash that may have taken down the CRB early may have also taken gold down into the long term cycle low just a bit early. The only other scenario would be for the unprecedented crash to be followed by another crash taking gold to new lows. That just doesn’t seem likely to me. It seems more likely that what we saw was a very extended D wave down last year that also marked the 8 year low and served to separate the 2^nd phase of the bull market from the third and final speculative phase.

I think the public is still looking for the next bubble to salvage all the losses they’ve taken from the collapse in tech (2000), housing (2006) and now stocks. While I do think gold and especially silver will be their savior, the public, like it always does, will come in too late at the top and they will end up riding the crash all the way down. Let’s face it, the gullible public is going to forever be too late to the party and they are always going to stay too long.

That being said the bull is never going to make it easy to stay on board. First off, he scared the crap out of every gold bug with that dip to $680. The mining stocks got hit much harder. We still see a tremendous amount of indecision and fear in this sector despite miners being incredibly cheap. Instead of focusing on valuations like they should be doing, investors and traders are wrapped up in technicals. These kinds of valuations can not last and in fact they have already seen a 123% recovery from the Nov. lows to the recent highs. Despite that the miners are still ridiculously cheap.

Let me see if I can explain valuations in a way that everyone can understand. Let’s say you are in the market to buy a big screen TV. You walk into the store and for what ever reason the store manager went insane today and cut prices 50% below cost (not below retail , below cost). My question is do you hesitate hoping that he will get a little more insane or do you not ask questions and just buy the damn thing right then and there? Or in Lady G’s case those $850 dollar shoes are on sale for $300. Do you ask questions or do you just buy them and get out of the store as quickly as you can before the manager comes to his senses?

So many investors nowdays get trapped into watching their portfolio every day.  They often let a tremendous bargain get away from them because the market doesn’t come to it’s senses and reprice their stock back to true valuations immediately. Someone once said “the stock market in the short term is a voting machine but in the long term it’s a weighing machine”.

Right now the market is voting for the candidate that can give it the immediate reward (instant gratification) but longer term true valuation is going to rise to the top. The question is are you willing to buy that valuation regardless of the short term direction or do you wait for the manager to come to his senses and charge full price first?

Let me ask a question. Let’s say you were going to buy a mining company. You aren’t going to buy shares though. Let’s say you are going to buy the entire company and take it private. Are you seriously going to try to figure out every day or hour what price someone is willing to pay you for it or are you just interested in what your bottom line is? I know that the several companies I’ve owned I never wasted time trying to price my business daily. All I cared about was whether the business was making money and how much. If someone came along and offered me a ridiculously low price for my business I smiled at them and then sent them on their way. Are you kidding me? Sell this cash cow for that price? No way!

However this kind of stupid behavior happens all the time in the stock market and owners (stockholders) often sell their cash cow for pennies on the dollar for no good reason other than a line on a chart isn’t going up at the moment or the lines on a chart are forming a certain pattern. Seriously, would any of you sell a very profitable franchise because the offers you’ve received lately form a head and shoulders pattern if you chart them out on a graph?

People, and investors in general, don’t act rational much of the time. This is how secular bear market bottoms are put in. At some point the market is going to give away great, very profitable companies for pennies on the dollar. When that happens, value investors are going to start buying hand over fist with no regard to lines on a chart. All they will know is that owners have temporarily gone insane and are giving away their companies for a song.

We literally saw that with miners in November. The market isn’t exactly giving away mining companies for a song anymore but you can still get them for pennies on the dollar. In Nov. value investors couldn’t believe their eyes at the incredible price of gold and silver. They were buying in such a feeding frenzy that you couldn’t get actual physical gold and silver at any price. Does anyone think we won’t see that same feeding frenzy again if the market is again stupid enough to take price back to that level?

So the bottom line is that many investors are going to balk because a line on a chart isn’t going up. Many investors would rather wait till prices are much higher before they buy. They would rather wait till the store manager comes to his senses and charges full price for that big screen TV.

Doesn’t make a hell of a lot of sense does it?

So now let’s look at some mining stocks.

That’s right, they are all showing a Bollinger band crash trade signal. That has been one of the bread and butter trades during this bear market and not just in miners, but in almost everything. That’s not surprising as we typically tend to see the biggest rebounds during bear markets. Granted gold isn’t in a bear market.  For those looking for a short term trade buying any of these miners on the open Monday for a Bollinger band crash trade has very high odds of success. (you can find the rules of the BB trade in the terminology doc)

Before I forget, check out the COT for silver this week.

Finally a quick note on the dollar.

On Friday the dollar broke above the recent closing high. That suggests this is now a right translated cycle and as such it should hold above the Mar. 19^th low. We are still up in the air as to whether the next daily cycle will move below the March 19th bottom. Since this is now week 17 of the current weekly cycle and that cycle averages 19 weeks I’m starting to have my doubts that the dollar is going to make a lower low.

Short term indicators are still overbought for stocks.