Thursday, April 30, 2009
will bring May flowers, but only if one is a bear...
The New York Stock Exchange (NYSE) Advance-Decline line has just about reached it's limit. I'd give it another 2 weeks max and this thing's heading down and taking the stock market with it. Here's a 2 year 6 month daily cumulative chart:
Supportive data - the bond market. Yield curve steepening (i.e. long term yields higher than short term yields, usually expressed as the ten or 30 year yield divided by the 90 day, 1 year, or 2 year yield) is indicative of economic contraction. Here's a 3 year chart of the ten year government bond yield divided by the 2 year yield (I usually use 10 year divided by 90 day T bill yield, but this ratio has become almost meaningless with 90 day yield under 0.5%):
Bulls, protect or take profits. Bears, sharpen your claws and get ready. Gold bugs - continue to stand aside and hold your Gold.
Wednesday, April 29, 2009
that ensures the economy continues to contract and the bear market goes on. The real estate bubble bursting is the cornerstone of the entire economic mess we are in and it ain't even close to over yet. California is one of the "ground zero" states for the mortgage mess and below is a chart copied from MyBudget360, which was taken from Field Check Group according to their site (typical lazy internet reporting on my part, but what do you expect for free?). This chart shows the "Notices of Default," which start the foreclosure process in earnest in California once someone has missed several payments (each states handles such matters differently but a foreclosure is generally 4-6 months away once this formal notice is filed with the courts when the governments aren't running around constantly changing the rules and the banks aren't hopelessly behind due to the current avalanche):
The dip at the end of 2008 was related to a temporary government-imposed moratorium on foreclosures that has now been rescinded (for the time being). March of 2009 was of course a record month for the current real estate crisis in California. Now, couple that with this chart of mortgage reset dates from Credit Suisse, which has been posted so many different places that I don't remember where in cyberspace I copied it from:
Subprime is obviously so yesterday's news but we are in the eye of the hurricane for Option ARMs and Alt-A loans. These loans are heavily concentrated in real estate bubble states like California, Florida and Nevada. These loans were for higher priced homes, generally required little or no money down and many of these products used stated income (i.e."liars loans") instead of requiring formal documentation.
Add to this the stress on the commercial real estate market, which is absolutely imploding right now, and for mainstream economists to say that an economic recovery will begin in the next year isn't just dishonest, it's insulting to my intelligence.
We are talking about trillions of dollars of loans defaulting and dragging down hundreds of banks. We are talking about all of the big Wall Street firms and the largest banks in this country being completely bankrupt right now, not at some magical time in the future. Yes, the government is suspending the laws of accounting and dousing these corporations with taxpayer money in the classic fascist theft model we used to condemn in this country, but the real economy is withering on the vine as we speak.
Why? Because the money spigots have been turned off for those not in the "inner circle" and most businesses cannot function without adequate access to credit. While these gargantuan firms heal their balance sheets and fight to survive, they won't be lending to people and businesses who need the money and those who don't need the money (the only ones the banks would consider lending to) aren't interested in taking on loans because they are largely risk averse (appropriately so). Are there exceptions? Of course. But we are talking mega trends here, not swing trades (though I like trying to gamble in the casino as much as the next guy).
Deflation is king and the bear market is in full force until the real estate tsunami calms and we ain't seen nothing yet.
Don't forget the Japanese experience - it isn't an exact replica, but the 1990 top in their stock market coincided fairly similarly with a top in their real estate market. In case you forgot what happened next, here it is (monthly chart of the Nikkei stock index followed by a Japanese real estate price chart from The Market Oracle):
By the way, don't forget the demographic trends that we keep ignoring that are another 800 pound gorilla in the room weighing on the bullish case. The baby boomers want their entitlements (Medicare and Social Security) even though the kitty has already been emptied and is filled with IOUs and unrealistic predictions of growing our way out of this mess.
Gold and Gold mining companies will fulfill their historic role and will help to re-liquefy the banking system. Short-term movements aside, holders of Gold and Gold mining companies will have a net increase in wealth while those invested in stocks, corporate bonds and real estate will have a net decrease in wealth. Trading the swings is an interest of mine for now and fraught with speculative hazard, but the longer-term trends and fundamentals are unambiguous to me.
Here's the links for those interested (both links are to the exact same article):
Tuesday, April 28, 2009
Sunday, April 26, 2009
Below are the links for those interested (both links lead to the exact same article):
Four more bank failures this weekend plus a credit union. The 1930s continue to play out according to script and trust me, it ain't any different this time. As commercial real estate continues to implode, regional banks will be under even greater stress than they are now as more of these loans were held on the local books rather than sold to Wall Street (like home mortgages were).
Saturday, April 25, 2009
(not really). This bloomberg.com link describes how corporate insiders are selling their stock at an alarming pace on this bear market rally (sales outnumbered purchases 8:1 in the first 3 weeks of April). Confirmation that this is a sucker's/bear market rally wasn't necessary, as the fundamentals and technicals support this concept, but this is absolute confirmation that we are going much lower in general stocks.
The topping process could potentially last until the end of May but all of the risk right now is to the downside IMO if one is looking at the intermediate to long term (anything can happen in a single day or week, of course). Go short almost any stock sector (be careful if you're shorting gold miners, though, and I remain long Gold royalty company RGLD) if you have a horizon of at least 3 months and you should do well. If you're not comfortable going short, sell equities and move to cash (i.e. Gold or U.S. paper Dollars) or short-term U.S. Federal government bonds (avoid corporate and municipal/state bonds).
Thursday, April 23, 2009
(not really). According to this bloomberg.com article, China has increased its Gold reserves to 1,054 tons since 2003. This puts China ahead of Switzerland and Japan according to Wikipedia.
Now, what kind of government would want to waste precious pieces of fiat paper backed by the promises of apparatchiks to buy shiny trinkets? This doesn't make any sense to those who are trained in "classical" (i.e. neo-bullshit printing press hocus pocus a la Krugman) economics as Gold provides no utility and pays no interest according to this camp. Perhaps there is more to this Gold thing than Keynesian economists care to admit...
China has become increasingly hostile toward the U.S. dollar and press releases like this are intentionally designed to increase doubt about the reserve currency status of the U.S. Dollar in the world. Gold will maintain its status as the currency of last resort around the world. Got any?
or the 90 day maturity U.S. Federal bond dove lower today and is telegraphing the next wave of deflationary pressures. While the spring rally meanders around on fumes with general stocks in the stratosphere relative to their actual current value, "big money" is moving the bond markets and it is buying (not selling) the Treasury bill. A distribution top is forming in general stocks and the money raised from the recent rally is being used to buy safety. The T-Bill is still a primary flight to quality vehicle for institutional money.
I don't trade bonds, but I watch them for clues like anything else relevant I can find that has a chart. Gold bugs are always looking around the corner for hyperinflation but bond yields scream that deflationary forces are much more powerful (which as I have stated many times is not necessarily bearish for Gold). When risk appetites increase, bond yields rise not drop. The big money is selling their stocks to the public and moving to bonds to avoid the pain they already know is coming in the stock market.
To the charts, eh? The first is a 6 month daily chart and I used a log scale because the moves have been so dramatic that a linear chart fails to demonstrate the incredible nature of these moves in the boring old bond market (linear charts are generally better for shorter time frames in most circumstances):
On the monthly log-scale chart over the past 4 years shown below, the bond market drama is overstated, but it's fun for me dammit and I want everyone reading this to get my point:
We're going back to a 0% yield on T-Bills before 2009 is over and the bond markets are screaming at stock investors to get out or get short. The bond market is bigger and often smarter than the stock market and is providing a forecast from the "insiders" and that forecast is deflation and a stock market wipe out. This is where the big boys are actually putting their money (rather than what they are saying on CNBC and Bloomberg), which means institutional money is extremely risk averse right now. This general equity bear market ain't even close to being over.
Wednesday, April 22, 2009
(ticker: FCX) today by buying put options and also entered a smaller bearish position yesterday by buying puts on Southern Copper (ticker: PCU). My other current trading position consists of long term call options on Royal Gold (RGLD). Also continue to hold physical Gold as my core long-term investment and hold a little fiat paper U.S. cash for when the bank failure cascade starts to accelerate (we ain't seen nuthin' yet...).
Old Uncle Buck, the U.S. Dollar, has a value derived from the global popularity and perceived strength and safety of the United States. The U.S. Dollar Index long-term multi-decade chart screams only one thing: "get out now while the gettin' is still good." Trade in some of your paper fiat dollars for physical Gold, the best form of money humans have discovered after trying many different options over thousands of years in multiple societies.
There's short-term trading and then there's long-term horizon "big thinking" to keep the shorter term moves in perspective and protect what you've managed to accumulate. The U.S. Dollar is in trouble, current strength aside. Deflationary forces right now are powerful and have not abated. This is keeping the Dollar afloat. But the U.S. Dollar chart is telling a story that most Americans don't want to hear or accept: after losing even more of their paper wealth invested in real estate, high-end consumer goods and the stock market over the next year, most Americans are then going to face a strong and fast round of currency devaluation. What percent of Americans even know what happened to their currency at the bottom of the stock bear market in 1933?
Anyhoo, the following roughly 20 year monthly chart of the U.S. Dollar Index tells the story better than I can (as usual):
The break of the critical 80 "neckline" level in the head and shoulders pattern in the long-term U.S. Dollar Index chart suggests that the U.S. Dollar Index is going below 55. It took 3 years to go from 120 to 80 (i.e., 2002 to 2005) and it will probably take 3 years or less to go from 80 to less than 55. The current developing terminal wedge pattern is seen at the end of corrective patterns and could (and probably will) last several more months. However, this final portion of the upward correction of the longer-term bear trend for the U.S. Dollar will likely complete before 2009 does.
Gold will protect you thru the rest of this bear market and the subsequent currency devaluation that will occur once this deflationary bear market is over. The next stage of the Gold bull market will make rapid parabolic moves that will carry the Gold price to $2000/ounce and likely far beyond. Day to day fluctuations aside, Gold remains the only no-brainer investment for those looking to be bullish/go long and it is safe, free from counterparty risk and cannot vanish like paper investments and corporations because it has intrinsic value as real and true money. Having at least 10% of your long-term savings/investment money in physical Gold is wise at this stage of the game.
Monday, April 20, 2009
to the upside. I bailed on some short-term speculative bullish option plays on the Gold miners Goldcorp (ticker: GG) and Novagold (ticker: NG). This was due to the fact that the chart patterns didn't play out as anticipated and time decay is a bitch when using shorter-dated options. I remain longer-term bullish on Gold miners for sure but intermediate-term I have changed my stance based on new data Mr. Market has given me (as all traders must do to protect capital). I will be back in the Gold mining sector from the long side in the fall.
Royal Gold (ticker: RGLD) is a little different play on Gold, however, as it is a Gold royalty company and doesn't have the same risks miners have. It also marches to the beat of a different drummer and doesn't always track with Gold stocks well. I remain heavily invested in long term January 2010 LEAP call options on RGLD and think it is a perfect time to buy this stock if you are not yet in it. I want to show you two different charts of RGLD. First, a current weekly chart over the past 1.5 years:
Now below is a chart that I think rhymes with the current set-up. I have deleted the date, price and timing information to get you to keep an open mind, as I think this pattern is about to repeat based on both technical and fundamental analysis:
Though there are some differences, it is at least a decent rhyme, no? The pattern in the chart above is actually a daily chart (versus the current weekly chart of RGLD shown first) of RGLD from the beginning of the bull market in RGLD and Gold stocks in the late 2000-2001 time frame. It is important to remember that fractals can repeat on different scales and time frames. I think the fundamentals line up well, only we are in the second and more powerful stage of the bull market in Gold stocks. Institutional investors are aware of Gold and Gold stocks and the public is starting to wake up to these investment vehicles, so the moves will become stronger and more sustained as the bull market continues.
Anyway, what happened next in RGLD back then and what could repeat again on a larger scale is shown below (dates and prices for this daily chart left in this time):
For those who think I am being schizophrenic by being bullish on RGLD and yet getting out of other Gold miners, here is a chart of the Gold Bugs Mining Index ($HUI) from the same time frame in 2000-2001:
For those new to the RGLD story, I have covered the confirmed long-term RGLD stock breakout from a 3 year base before and have talked about an ideal entry point between $36-40/share previously.
The market gods have supplied another gift for those interested with this double dip correction, as RGLD has closed below $37/share for the past two sessions. Since I stuffed myself to the gills the last time we hit the $36-$38/share range (early March), I am already loaded up on RGLD heavily and more interested in using my remaining trading capital to go short on base metal miners (and possibly financial stocks and/or commercial real estate stocks).
I'm not an Elliott wave expert and the counts can get a little complicated and esoteric for me, but I think Elliott Wave Theory can be useful when used as one of many other tools for technical analysis. Because I believe the bear market rally is due to be over based on a number of technical indicators I follow, I like to take my guess at the wave count from time to time to help me figure out where we are and where we may be going.
In Elliott Wave, the impulsive waves are easier to identify and characterize than the corrective waves. One of the arguments Elliott Wave theorists (including Prechter) have floated is that the March low was the fifth wave down of wave 3 (out of 5 waves) and a significant time and price re-trace is due in a big wave 4. I think this is wrong and am happy to stick my neck out to predict Prechter will be proven very wrong.
I will start with a NASDAQ composite ($COMPQ) 2.5 year weekly chart of the bear market so far with my thoughts:
This alternate count is not unreasonable IMO when looking at the NASDAQ weekly chart and implies that we have been correcting since the November panic lows and the correction is a not unusual expanding flat configuration for wave 4. That means the final leg, or wave 5 down, is about to begin.
When looking at the S&P 500, such a count would require what is called a running flat, which is a rare corrective pattern that would be uber-bearish as it implies that the downward trend is VERY STRONG and distorts the correction downward, which of course fits perfectly with the fundamentals. Remember that not as many bank and real estate stocks are in the NASDAQ and tech fundamentals are lousy due to the recession/depression, but they have been beaten up so bad over the past decade that their fundamentals and valuations are actually much healthier and more rational now than financial firms (many of which, including the largest banks and Wall Street firms left standing in the U.S., have a negative actual value). A 2.5 year weekly S&P 500 chart is shown below with comments focused on the last 6 months:
If you're not into Elliott wave, the bottom line is that if the time from the November panic lows until now is all a sloppy fourth wave called a running correction, then the fifth wave will be big, bad and ugly and S&P 400 will be the best case scenario for the bulls. Very few want to admit that the deflationary and debt contractionary forces in play are MUCH WORSE right now than during the last so-called great depression in the early 1930s bear market and yet the fundamental data is there if you choose to review it. If the fundamentals are worse, why wouldn't the bear market be just as bad (i.e. 89% top to bottom losses) if not worse?
For those who say the government and federal reserve will print the money and won't let it happen I say watch and learn how powerless these apparatchiks are to stop a panicked herd. They couldn't prevent the GREAT FALL PANIC OF 2008 and they won't stop the devastating losses that come next. Seasonals dictate a turn by the end of May, the other technical indicators indicate a top is due, and the NASDAQ chart looks like its' wave IV correction may have already completed.
The next year in the markets is going to be very ugly. Get short, get into physical Gold (or less desirable paper fiat cash) and/or get out of the way. Grrrrrrrrrrrr!
Sunday, April 19, 2009
This article is hilarious to me as it spins the truth in MAJOR ways. First, China wants more Gold. Lots more. India always wants more Gold so this isn't really big news. Neither of these countries gives a rat's ass about tackling poverty - they want the IMF's Gold.
Gold being characterized as an "idle asset" on the IMF balance sheet is also funny to me. Perhaps selling China Gold from the IMF is a bribe to allow the U.S. Dollar to retain its death spiral for a few more years (or months)? Any promises made by China will be broken once it obtains the Gold, of course.
Hold your physical Gold and avoid the GLD ETF when seeking portfolio protection (the GLD ETF is a fine vehicle for trading the Gold price if you're brave enough, but offers unacceptable counterparty risk when looking for portfolio insurance). Accumulate more Gold on price weakness (like now). Remember that the final phase in a Gold bull market is the mania phase and the total rise from $250 to $1000/ounce over the past 8 years isn't even close to satisfying a mania requirement! As trust continues to break down, more and more people around the world will be accumulating physical Gold since paper fiat currencies will increasingly be seen as unreliable and overly volatile. The market will choose the global currency it knows will outlast the current chaos: Gold
This is a long-term bull market in Gold that could last 20 years and though we are in the midst of one of the more trying times during the bull, the trend remains up for the long term and this is one of the only vehicles available for accumulating on the long/bullish side that has good fundamentals!
to short and I think it's going to be Freeport McMoran (ticker: FCX), a base metal copper miner (which also mines a little Gold, but not enough to be considered a Gold miner). Base metal miners and commodities are screwed during a deflationary depression/bear market. The price falls and demand plummets, so it's very hard to make any money. Remember that Gold will behave as a currency during this crash, not a commodity. Silver is schizophrenic and I am concerned it will get dragged down with base commodities before it can shine agin.
Anyway, the fundamentals are terrible right now for base metal miners and please don't give me the de-coupling nonsense of China and India a la Peter Schiff. He has been proven wrong even if he ends up being right 5 years from now. The saying for market speculators is that being early is no different than being wrong. There is poor demand for copper because international trade and real estate construction have both ground to a halt and this will not turn on a dime in the next year.
The rally in copper has been impressive and is just about done, which means the rise in the FCX stock price is about done. Here is a 5 year daily chart of copper:
I am thinking this is a heavy "A-B-C" zig zag correction (i.e. down-up-down) of the entire copper bull market that began in 2001 and the B wave has just about completed. The C wave down in the copper price should make lower lows than seen in December, 2008. Next up is a 2 year daily chart of FCX thru Friday's close:
I am not a newcomer in analyzing FCX and I recommended going long FCX in late November and again twice in December here and here. I made only a small profit on the move as I committed a larger percent of my capital to gold stocks.
I used a pattern from the late 1990s to help provide a road map and everything is rhyming according to script. Here's that prior pattern again using a daily chart and below that, a weekly chart of FCX in the 1996-1998 time frame:
Astute readers may have noticed the final 1998 date on these charts is April 17th, the last day of closing price information currently available for this year! Here's a current 3.5 year weekly log scale FCX weekly chart to highlight the similarities when comparing with the prior late 1990s weekly chart:
Of course, the analysis wouldn't be complete without showing what happened next in the late 1990s after the bear market countertrend rally/bounce:
By the way, here's the chart of copper prices from the same time period in the late 1990s:
Now, those not used to going short need to realize the type of opportunity being presented here. If we are going to new lows in FCX from here, and I strongly believe we are, that means the stock will decline from the 45ish level to below the 16 level and I think it will occur in 1 year or less (I'll be out by this fall). With long-term put options bought next week, this could be a 400-600% gain in less than a year using deeply out of the money puts!
I'm going to be scaling into FCX 2010 LEAP option puts this week after a good up day or two, which should correspond with a low in the $VIX (making puts even cheaper). This one's going to be big and profitable for those with an intermediate-term horizon.
Saturday, April 18, 2009
is sinking the banks and the banks are sinking the rest of the economy. Two more bank failures this Friday and articles like this explain the insane tactics of banks to buy more time and wait for more bailout money.
Real estate will continue to plunge for at least 2 more years and will drag many more banks into failure, which in turn will drag the economy deeper into the current depression.
Such a spiraling cycle of debt deflation takes more than 2 years to complete. The stock market will respond accordingly. Deflation is picking up steam.
is getting very close. This is is the reason I bailed on my [failed] Gold stock trades. It is time for me to raise capital to go short. Make no mistake about it, this is the biggest bear market that most of us will get to witness during our lifetimes. The next leg down will be wicked and relentless.
Where are we in this bear market - perhaps in the spring of 1931 in the United States (75% losses in the Dow Jones over the next year), the spring of 2001 in Japan (40-50% losses in the Nikkei over the following 2 years) or the spring of 2001 in the U.S. NASDAQ (60% losses over the next 1.5 years)? All I know is that it ain't even close to being over and some devastating losses are in store for even the good companies that weren't responsible for the mess we're in, whether publicly traded or not.
That said, money can be made playing the swings up or down in a bear market. However, the big money for this bear market is still on the short side as the trend is strongly down. A big, grinding leg down is dead ahead. It may start Monday or it may take until May to get going. In either case, I don't think the old adage "sell in May and go away" is going to be wrong this year.
Following are a multitude of data indicating the top is VERY close to being in, starting with the Advance Decline line of the New York Stock Exchange (chart below is a cumulative daily chart of the past 2 years [i.e. the current bear market], this chart calculating the number of advancing/rising stocks minus the number of declining/falling stocks):
Next is an 8 year daily chart plotting the number of stocks in the New York Stock Exchange that are above their 50 day moving averages (8 year chart used to show that we are overbought even for a bull market by this measure right now!):
Below is a 3 year chart of the 24 day moving average line (to smooth out day-to-day volatility in this measure) of the CBOE Options Total Put to Call Ratio ($CPC):
Next is a 2 year chart of the NYSE Summation Index, a measure of breadth:
A 2 year daily chart of the Volatility Index ($VIX) follows:
Finally, here is a chart showing that the Investors Intelligence sentiment survey from last week indicates that there is no longer excessive bearishness and I would assume that this coming week's numbers will indicate an even higher ratio of bulls relative to bears:
The bottom line is that I'm now looking to get short. My favorite candidates are FCX, PCU, WFC and GS. More on individual shorting opportunities later. I will be starting to scale into 2010 LEAP option puts on FCX this week. I think Gold will hold up just fine and any weakness (like now) should be considered a buying opportunity for those who have not fully allocated a portion of their capital to the mightiest form of cash on the planet. Gold stocks, however, are not immune from the coming equity downturn and long-term holders will have their faith/resolve tested over the next 6 months or so.
Friday, April 17, 2009
of GG and NG. Can't afford too much of a drawdown on a short-term basis as I need to be ready to go short and my stop losses were hit this AM. I thought we would turn up for one more pop but the recent action tells me I am wrong and the top is likely already in for this cycle. More later.
Remain in RGLD, as this is a longer-term position, would never sell my physical Gold at this stage in the game, and a few long-term miner holdings are just that. Though I could still be proven wrong on selling these short-term trades this morning, I would like to apologize in advance for my wrong call.
Wednesday, April 15, 2009
That shiny Gold is so nice that I've decided to pay it the same respect as the United States Dollar. From here on out, I am going to capitalize the word "Gold" every time I use it. As the world's potential next global currency, at least in some form, and as a chosen form of money in various cultures over the past few thousand years, Gold deserves that respect IMO. Hail to Gold! BWAHAHAHAHAHAHAHA!
(Gold buggin' it, yo...)
This little signal is not back-tested over a longer period of time but has worked in the recent past and is fun for me to watch. Monitoring the internet traffic (i.e. number of website visits) at mainstream gold site www.kitco.com using Alexa.com traffic data can be a way to make contrarian bets. Gold and gold stocks are in a secular bull market, yet the average retail investor loses interest in gold (using kitco.com traffic as a proxy for retail interest in gold) at exactly the wrong time - right before bull thrusts higher! This allows the bull market to carry as few riders on its back as possible. Spikes higher in traffic also can portend tops in the market as retail investors only start to buy when the price has gone up significantly.
Anyway, below is a 3 month traffic chart for kitco.com to show yesterday's traffic data chart spike in better detail and below that is a longer-term traffic chart going back to August, 2008. I have drawn arrows of interest to show traffic spikes:
The chart below shows the daily price of gold over the past 2 years with arrows drawn in to correspond to the times of the kitco.com traffic spikes from the charts above.
Not a bad indicator in recent times, eh? If you are interested in monitoring kitco.com's (or any other website's) traffic, visit Alexa (it's free).
over the past 18 months demonstrates a secondary principle of markets. Price is number one when speculating and and is the only thing that matters when calculating profits and losses, but like momentum and other technical indicators, volume speaks to the conviction of a move. The "big boys" move the markets and when big institutional investors want to buy something, the price generally goes up and when they want to sell something, the price generally goes down.
A look at the ETF GLD, which tracks the price of gold and is not an investment I recommend at all for those looking to get exposure to physical gold, is revealing. This is the way many institutional investors get exposure to the gold price, which is why it is important.
The chart below is an 18 month GLD daily linear chart. Notice the difference between the 2008 spring top and what is happening now in terms of volume spike trends. The black dots show the volume spikes of interest and notice the declining volume after each spike is predominantly for days that trend in the opposite price direction. On to the chart:
This tells me that the "big money" was doing more selling than buying last spring and they are doing more buying than selling this spring. Just another piece of evidence supportive of the gold bull case...
for those worried about the ongoing spring rally. Chart below stolen from ZealLLC and indicates the gold price's seasonal tendencies during the current ongoing secular bull market in gold that began in 2000 (data from 2000-2006):
We have just entered one of the seasonally strongest time periods for gold and we have a Martin Armstrong cycle turn date dead ahead on April 19th, 2009. Though I am always concerned about and monitoring my trades in the gold mining sector, I am not worried. Trading has risks and those risks need to be managed. Fundamentals are strong, technicals are supportive and the seasonal winds are at the backs of those long in the gold sector.
Tuesday, April 14, 2009
is the Panic of 1907. Fractals are helpful to me to picture what type of market rhyme might be coming, as there is very little new under the sun when it comes to markets, which are dominated by the human emotions of fear and greed. We haven't evolved enough over the past 500 years to make any historical chart patterns that can be found irrelevant.
Below is a chart from thechartstore.com of the Dow Jones Industrial Average from 1905 thru 1909 that shows the bear market action from early 1906 to the end of 1907:
And here is a 3.5 year daily chart of the S&P 500 up thru today's close:
Now, there are some interesting similarities in the pattern in these charts but there are also some differences. Perhaps understanding that the deflationary pull of current economic forces is more akin to the 1929-1932 period than the briefer 1907 period would help explain the greater intensity of the current pattern (i.e. greater percentage losses). If this fractal grossly repeats, however, the bear market plunge coming after this spring rally peters out will be one for the record books as the pattern has each of the 3 legs of the bear market increasing in severity (i.e. percentage loss increases for each leg). This would make for a final death-defying plunge to end the bear market that terminates well under the S&P 400 level.
Food for thought and please don't think it can't happen.
Check out this link recounting events of 1934, related to a senator who was an expert in the banking industry:
Will this time around finally allow the federal reserve (I refuse to capitalize the name of this foul institution) to fail and be revealed for what they are? Don't count on it, as Americans are unfortunately as ignorant as ever when it comes to money and what it means (a few notable and important exceptions aside)...
Monday, April 13, 2009
Sunday, April 12, 2009
I am currently long Novagold (ticker: NG) as a short-term play using call options. Looking at a long-term chart I found an interesting fractal that may indicate a chart "rhyme" is coming. The fundamentals for gold miners are wildly bullish and would be supportive of such a scenario. To the charts...
First, a 6 month daily chart of NG up through Friday's close:
Next, a daily chart of NG from 2004:
And, as someone happy to talk up my trading book, you can probably guess what happened next:
Only Mr. Market knows what happens next...
If the Volatility Index (i.e. $VIX or "fear" gauge) was a stock, I'd be starting to buy it aggressively. This is what a long-term chart (12 year weekly chart using a log scale) of the $VIX says to me:
As anticipated, people are starting to think the clouds are breaking up and sunny days are ahead. Me, I see a return to the previous highs in the $VIX and significant new lows in the general stock market indices before 2009 is over. The only question in my mind related to the $VIX chart above is whether or not the previous highs in the $VIX hold. The next wave of this wicked deflationary bear market will catch many by surprise, while others will only be surprised by its intensity and depth. Forget inflation for now - deflation needs its chance in the sun first.
Saturday, April 11, 2009
for the S&P 500 has relevance to me for a few reasons. One is that a flat to rising stock market is supportive of all equities and gold miners are no exception. Yes, the correction over the past week was brutal and demoralizing if you were a gold stock holder, as general stocks went up and added salt to the wound. However, the gold stocks and gold are bottoming on a short-term basis and I believe are about to turn up into their final 4-8 week spring run. This I believe will match the topping out process of the S&P 500.
When the hot money flows out of rapidly rising sectors like the financials/banks, it will flow into gold and gold equities. Once the S&P 500 starts topping out, I'll be looking to exit gold mining stocks. Remember that gold miners will fall with general stocks during the next leg down of this cyclical bear market. Gold mining stocks will be making a routine bull market correction (i.e. will NOT be making new lows) while general stocks will be heading for new lows.
Knowing these things in advance can help traders focus and long term gold stock holders understand that a correction will come after the spring top and gold stock corrections can be sharp and ugly. I hold physical gold as my cash, which is not to be traded, and speculate with the rest of my investment money. I am currently fully long the gold mining sector using call options on Goldcorp (ticker: GG), Royal Gold (ticker: RGLD) and Novagold (ticker: NG) as my speculative vehicles.
I think the S&P 500 can reach its 200 day moving average before the end of May, which is not a great deal higher from current levels. This will be a sign the top is in and I will then be looking to get rid of gold miners and go short general stocks to ride the next leg of the bear market down. Below is a 6 month daily chart of the S&P 500 with a rough projectional sketch of where I think we're going:
Because the 200 day moving average is declining, the S&P only has to reach the 900-930 range in May. Touching the 200 day moving average will satisfy the parameters of a typical intermediate-term bear market correction for general equities and generate my "widow and orphan" sell signal for the year. This would also fit with fairly typical seasonal patterns in the stock market (i.e. "sell in May and go away"). Because I am not interested in holding through a potentially steep correction in the gold mining sector, I will be exiting this sector before the end of May.
As far as shorting goes once the top is in this spring, almost anything will work, including senior gold stocks! This next leg of the bear market will take everything with it, including silver stocks. In fact, I believe everything except the gold mining sector will make new lows.
Friday, April 3, 2009
Corrections can be boring and frustrating when you have taken a directional position. Gold is in correction mode right now. People are starting to get quite bearish on gold, including traders I respect like The Financial Ninja and that evil speculator Mole. Day-trading aside, I think gold is in a bull market and any surprises will be to the upside. The current correction in gold is not unusual. Here, let me show you.
Below is a current daily chart of the gold price over the past 18 months:
Now, here's a roughly 11 month daily chart of the gold price from the end of 2003 to the end of 2004:
Not all that different, eh? You can probably guess what happened next...
Now, I am not expecting some dramatic move in gold to $2000/ounce here. I am in the deflation camp and think gold will retain its value and rise a little bit over the next year. I'd be happy with a quick spurt to $1100 to allow $1000/ounce to become the new psychological floor/support for the gold price instead of it being psychological resistance. Gold is for safety and acts as a cash equivalent. The hyperinflationists may well be right eventually, but deflation comes first. Gold can rise right along side the U.S. Dollar and has many times before during this gold bull market, but neither will make you rich unless you play with dangerous degrees of leverage.
Gold miners are for getting rich quick and will leverage the expanding profit margins caused by a stable to mildly rising gold price while costs fall. Wait and see what happens to gold versus other commodities after this spring rally is over. Gold will hold up (again) and commodities like oil will get spanked lower (again). Gold miners will make a routine correction in their new cyclical bull market while general stocks (and most commodities) will make new lows.
for a small loss today while at the day job. Glad I used the stop loss as SRS got killed today. I should have used the money to buy gold stocks instead, as they went on deep discount sale today. I am putting in a buy order now with my final remaining speculative funds (not much as I am already just about all in) that I hope will trigger at the market open on Monday to buy more Goldcorp (ticker: GG).
Those long the gold sector, don't despair - gold is volatile and this is how short-term bottoms are made. Weak hands get discouraged, sell to the strong and then things turn on a dime and the gold bull roars ahead. A panic reversal day, where a steep plunge is followed by ending the day up (i.e. a "hammer" reversal candlestick for those into candlestick charting) may occur next week and send us off to the races.
Busy over the next week so posting will be light. The April-May rally in gold stocks is imminent and these final legs up can be fast, volatile and strong, so buckle up!
Thursday, April 2, 2009
One chart, one message: we're replaying the 1930s, not the 1970s. This is a long-term chart of short-term (3-6 month) U.S. Treasury Bond (i.e. T-Bill) yields from 1920 to 2008. Chart copied from thechartstore.com (good site for historical chart data if you're interested) and doodled on to give it a smidge of originality:
Deflation investments when trying to play the bullish side and/or maintain capital are limited: gold (and other safe cash equivalents such as short-term U.S. Federal government debt [i.e. T-bills] or cash under the mattress) to maintain capital and gold miners to make money from the long side. Everything else is toast and should either be shorted or avoided.
Investing with a longer-term time horizon of 2-4 years is easy in a deflationary crash, so don't hate, celebrate!
Cartoon below stolen from the outstanding www.jsmineset.com website, apparently sent in by an astute reader and copied from a 1934 Chicago Tribune newspaper (source not verified by me - typical sloppy internet reporting...).
Assuming this cartoon is valid, though, remind me: how is this time around/this economic depression different?
Anyone who thinks policy makers are taking a different tact to fight deflation compared with the 1930s is reading revisionist history detached from reality. The main difference this time around is that we are a debtor nation instead of a creditor nation as we were in the 1930s, which means our currency is at risk due to our insane and irrational policies of rampant government debt creation during a debt crisis.
Buy gold for safety and buy gold miners for profit. Gold under $900/ounce is a tremendous value and gold miners are quite under-valued right now.
on a short-term basis. Gold got spanked this morning and gold stocks did, too, and if you only look at today's action in isolation you might be in despair. The following short-term 1 month intra-day chart shows a different bullish take on the action, this chart comparing the AMEX Gold Bugs' Index ($HUI) to the price of gold (proxy used is the ETF GLD):
This is bullish action in a gold stock bull market and suggests that the next intermediate-term move is higher in both gold and gold stocks. The alternative scenario, that gold stocks are going to fall to "catch up" to gold on the downside is what those who are bearish on gold stocks may think is going to happen. We'll see who's right soon enough...
Wednesday, April 1, 2009
which is good for those that do, as the trade is not too crowded (yet). Here are some prime misconceptions that will take the majority of people at least another year to get:
1. A secular deflationary credit contraction is in effect and cannot be stopped at this point.
2. An economic depression has already begun in the United States. In 1930, the unemployment rate was slightly over 8% in the U.S. (it's 8.7% now) and there were no soup lines!
3. Governments are powerless to stop #1 and #2 and only have the ability to make them worse and the depression more prolonged via their incessant meddling and piling debt on top of a debt crisis. This demoralizes and crowds out the private sector and squanders precious capital.
4. The G20 summit is a worthless event (as are other such pomp and circumstance government meetings) and will not produce significant economic change, though whatever is said will be used as an excuse for whatever move the market makes during the days they say non-newsworthy things.
5. Deflation is good for gold and UNBELIEVABLY BULLISH for gold miners.
6. When the general stock market goes up, gold stocks will outperform and when the market goes down, gold stocks will outperform. Gold stocks are in a bull market and general equities are in a wicked bear market.
7. At the end of this bear market in general stocks, gold stocks will be much higher while general stocks will be much lower.
8. The same forces in effect that caused the last so called "great depression" are in place now but the forces are even stronger, thus a 90% top to bottom drop in 5 years or less in the stock market is absolutely possible (not saying it will happen, but it could). This bear market is not even close to being over.
9. Inflation is highly unlikely to be significant in the next 12-18 months in the U.S.
10. Gold is better thought of as a currency than a commodity - the "hardest" debt-free currency out there. Once you understand that, you understand why gold does well during deflation and why gold miners kick ass during deflation (digging money out of the ground is more profitable when costs drop and everyone wants cash in a deflationary crash).
Hold your gold and hold your gold miners. Ignore the conventional wisdom and have a profitable portfolio.