Martin Armstrong cycle hypothesis

Love him or hate him, you should at least be aware of the Martin Armstrong Economic Confidence Model and its major cycle turn dates. There are major and intermediate turn dates and the major cyclical peak turn date of 2/27/07 came within a few days of nailing the high in the financial sector (using the Philadelphia Banking Index [$BKX], the Philadelphia Regional Banking Index [$KRX], or the Dow Jones US Financials Index [$DJUSFN] as a proxy). Now the cycle turn dates do not tell you which sector or major market is going to turn at the major date, so it is only clearly evident in retrospect which market the cycle is predicting.

It is now unequivocally clear, with the benefit of hindsight, that the current bear market for the ages is a financial and debt crisis. The financial sector in the US peaked 8 months before the general markets but gave a clear warning sign of the pending disaster for those who chose to listen and had enough knowledge and foresight to know what the financials were telling market participants. While CNBC talked about Goldilocks and Bernanke talked about subprime "containment," the charts of the financial sector were screaming the opposite.

An intermediate term cycle peak date in the Armstrong cycle recently passed on 4/23/09. Now, the intermediate term turn dates are sloppier than the "big" turn dates, but the financial sector peaked a few weeks after this turn date (i.e., again using the $BKX, $KRX and $DJUSFN as proxies) and this sector has yet to make new highs along with the general stock markets. The $DJUSFN index is close to making new highs but the $BKX and $KRX are not.

I am guessing that these indices will fail to make new highs and will respect the cycle turn dates, irrespective of the general market indices, which have already made new highs. This hypothesis is easy to test and watch for, as the $DJUSFN is already in the process of potentially double-topping. If the $BKX and $KRX fail to make new highs along with the general markets this summer, this will fit with my Armstrong cycle theory and confirm in my mind that another wicked bear market leg this way comes.

If the $BKX, $KRX and $DJUSFN make nominal new highs this summer and follow the general stock market higher, then I would have to start to questioning the strength of this bear market rally. What I mean is that I am uber-bearish right now (what's new, right?) and don't buy into this last gasp rally one bit. However, if the $BKX, $KRX and $DJUSFN can make higher highs than their early May peaks, this bear market rally has some serious legs and Prechter will be proven right that this counter-trend rally may have a ways to go. Either way it is a bear market rally and nothing more, but timing is everything when trading.

This stock market has already failed to do what I told it to do - damn these markets sure don't listen, do they?

;]

Following are the 6 month daily charts of the $BKX, $KRX and $DJUSFN to demonstrate the current lack of new highs in these sectors. I decided to test my theory with a little money and placed a debit calendar spread option trade using puts on the FAS (triple levered bullish financial secor ETF) to take advantage of the decay in this instrument over time.

Gold stocks - where are we?

Just got back from the land of Oz and still getting re-oriented. Looks like senior Gold stocks are still correcting and a good buying opportunity should be here soon. Further patience is needed. To a 21 month chart of the GDX ETF:



No need to rush - lower prices are coming in senior Gold miners. A 2 month correction is normal in senior Gold miners, as I have previously covered. One also has to be cognizant that another devastating leg down in the general stock markets is still dead ahead, and may well indicate that the coming intermediate-term low in senior Gold stocks is not the final low for 2009 in the senior Gold mining sector. I was too early in my call for the stock market top for the year in June as we have made new highs for 2009, but if you think one final short squeeze is enough to turn me bullish, you haven't been agreeing with my macro views. We are setting up nicely for another fall disaster in my opinion.

The U.S. Dollar is taking its sweet time in finding a solid bottom, but a strong turn up in the dollar is coming soon and will be a disaster for stocks and commodities/commodity stocks. I don't consider Gold a commodity and think it will remain strong in the face of a rising US Dollar, as it has done at times in the past. Here is a 21 month daily chart of the US Dollar:



You can bet against the US Dollar right now if you want to, but I think it's a lousy bet. It may take a few more weeks for the US Dollar to get going, but I still expect it to rise from the dead in another deflationary wave of terror that destroys all asset values except cash (including Gold, which is money) and the yield on short-term federal government debt. This doesn't mean the US Dollar is strong, it means that people need cash to pay their debts and margin calls and those doing the calling still prefer US Dollars to Euros or Yen. This is a relative, not absolute, US Dollar strength. Me, I'll stick with Gold for the bulk of my cash holdings.

Gold will strongly re-assert itself as money this fall and will likely rise to new highs as people scramble to safety and seek true protection that requires no paper documents or counterparty risk. The current correction in the nominal price of Gold continues, building a strong base for a launch to new all-time highs. The current base/correction in the Gold price is now 1.5 years old, meaning the coming rise will be spectacular in time and price, though this correction is not yet over. However, senior Gold stocks are not immune to stock market meltdowns and may well underperform the price of Gold until the general stock market finds a new lower low that will be far below the March 2009 lows.

The chart of the physical Gold price is solid, healthy, and in a strong bull market. A dip down to the 200 day moving average in the $880-$885 range is possible, but is the worst case scenario in my opinion, and would be simply a final fake out before a new bull market thrust higher in the nominal price of Gold. All fiat currencies are sinking relative to Gold, the oldest and truest form of cash. Stocks, commodities, real estate and corporate bonds are all sinking in true value (short-term fluctuations aside) relative to the price of Gold and will continue to do so until the Dow to Gold ratio is 2 or less.

Off to See the Wizard

so posting will be near non-existent for the next 10-14 days. Options expiration week jam job in progress to squeeze the shorts. More patience required for bears. Gold stock strength means GDX should bottom near top of 29-32 range. If GDX gets down to 32, bulls should start buying! Gold doing well but might need one more head fake down before we challenge the all-time highs.

Good luck and be like David Einhorn and Greenlight Capital - buy some physical Gold and dump your GLD ETF holdings.

Paper Gold

is not equivalent to physical Gold. A recent missive by GATA elaborates on the latest paper Gold scam. There seems to be no end to such scams and no end to the tolerance of investors for believing fake is real/settling for fake in lieu of real.

It is apparently now the case that futures contracts can be settled with ETFs rather than actual metal. This works because Gold has few high volume demand industrial applications and acts to suppress the "real" price of Gold in the marketplace. Gold is money and Gold is savings. Just like a bank deposit is your money until it isn't, so paper Gold is "as good as Gold" until it isn't. But what happens when there are thousands of paper tickets claiming to own the same ounce of physical Gold and 1% of those people ask for their Gold?

Reading items like the linked GATA piece can be frustrating in the short term, but such Gold price suppression schemes are wildly bullish for the longer term. This Gold bull market has a long ways to go. It is not coincidence that the institutions who are short the physical metal in the largest dollar amounts are custodians of the ETFs that may or may not hold any actual physical metal.

But when trust breaks down further, and it will, the paper substitutes for actual Gold will be devalued like any fiat currency in a crisis of confidence. A paper claim on anything is not the same as that thing unless trust runs high. Physical Gold premiums have already increased significantly above the spot price over the past year and will continue to do so until the day the real meltdown occurs. What will trigger the meltdown is a request for actual physical metal from one of the futures' warehouses that is unable to be met.

Suddenly, the market will change and the scramble for actual physical Gold will occur. I don't know when this will happen, but it will before this secular bull market in Gold is over. In the mean time, Gold rests comfortably waiting to assault its all-time highs. Once $1000/ounce becomes the floor rather than the ceiling for the price of Gold in federal reserve fiat notes, I believe the final stage of this Gold bull market will begin. We've got a long way to go in price and time.

And once the game of musical chairs with pieces of paper Gold is over, trust me when I tell you that it won't be retail investors holding paper Gold like the GLD ETF who win. The US Mint, which makes Gold Eagle coins, has made yet another announcement to show how they are looking out for the little guy, however, so don't worry.

Hoping

Hoping we can get back to S&P 1500. Hoping we can re-inflate the real estate bubble. Hoping we have the audacity to hope for the unrealistic. Hope, optimism and confidence are a big part of market cycles. Why do people feel hopeful and optimistic when assets are overpriced and pessimistic when things are underpriced?

I am shorting hope right now. Secular bear markets, which we are in right now in case you’re in denial, do not end with people being hopeful. Now it can certainly seem as though people are overly pessimistic, especially if you come to sites like this, but trust me, we’ve got a long way to go. This in my mind is one of the fundamental aspects of market analysis that is a missing piece of the puzzle for many.

Why would people pay for non-existent earnings during the dot.com bubble but only pay 7-8 times earnings at the end of a secular bear market? Shifts in herd sentiment. For humans are not always the rational animals many like to think they are. As in life, so in markets. Bubbles by definition require irrational actions and thoughts and unreasonable extrapolations and expectations of an existing trend.

Once a bubble pops, it ain’t coming back. Period. There’s no need to worry about picking a bottom, because once the bottom is in, there will be no mad rush to enter the fray. I see so many people looking to time the bottom of the real estate market when the bubble just popped 3 years or so ago (for residential real estate). Now is not the time to be seeking to buy real estate, it is the time to make sure one is fully uninvested and uninterested.

When the bottom comes in real estate, most won’t know and won’t care because when it finally is time to buy, hardly anyone will be interested in real estate. Such secular bears are not measured in 3 or 5 years but in decades (10 years at a minimum). And yet, the discussions many are having are related to trying to figure out when to jump back into real estate! Why? Because sentiment has not fully turned. But believe me, it will. And when it finally does, few will be left who are interested in participating in buying the bottom.

The sentiment for Gold is still quite poor and bearish. This bull market in money will not end in such a fashion. Gold, the investment that pays no dividends and has no growth prospects, will be neither ridiculed nor ignored by the herd when this Gold bull market is over. Sentiment and technical analysis both indicate a rosy future for the ancient metal of kings because money will soon be in high demand. And yet, at the same time, trust in fiat promises is starting to break down.

Gold is already returning to its true role as money. Trustworthy money. Money that needs no apparatchik backing and no confidence in “the system.” Money that is unattached to debt and unable to be created without effort. Money that doesn’t require belief in promises made by those who always break promises when times get tough.

It is coming and it’s not here yet. Sentiment dictates that the secular bear market in stocks and real estate has a long way to go and the bull market in Gold has a long way to go. It is too early to be looking to buy stocks or real estate for the long haul and too soon to be selling Gold. Patience will be rewarded.

First, Corrupt the Language

if you want to destroy a society, Lenin reportedly once said. So, Gold is not money, Gold is for jewelry and other trinkets, etc.

Gold is reviled and ridiculed by the mainstream financial community and the lies told about it are obscenely inaccurate. The classic line is the one about buying Gold at the absolute peak in 1980 for $850/ounce and then getting 20-30 years of lousy returns. Sort of like buying the Nikkei Japanese stock market at the very peak in 1990 and having 20 years of even worse returns, but let's not mention that.

Look, Gold is not money because I want it to be. Gold has been money for THOUSANDS OF YEARS because free men and women decided it was the best form of money out there. Paper money with nothing behind it but the foul promises of those who live off the generosity of others (i.e. apparatchiks) has been tried hundreds of times around the world over thousands of years and has failed every single time. People currently holding the reigns of power have been immersed in a fiat system all of their working lives - it's all they know so most of them are ignorant about why Gold is important and what its role is.

I know that you can't eat Gold. I'm not really sure what this has to do with saving or investing, but otherwise intelligent commentators on financial markets have said retarded shit like this about investing in Gold. You can't eat it! As if you could eat fiat paper dollars, government bonds, or stocks!

I know that you can't use Gold to buy stuff at the grocery store. Just like you can't use bank certificates of deposit (CDs), government bonds, or stocks to buy stuff at the grocery store, so what the fuck is the point of saying stuff like this?

I know that if the shit really hits the fan that you're better off owning guns and food than Gold. Yes, and you're also better off not owning stocks, worthless paper fiat dollars or government bonds if this happens. Again, stupid argument and yet routinely mentioned whenever Gold is the topic.

I know that Gold is a better deflation hedge than inflation hedge, but many things are only fair inflation hedges. In the 1970s, stocks were a lousy inflation hedge and Gold was a great inflation hedge. In the 1980s and 1990s, Gold was a lousy inflation hedge and stocks were a great inflation hedge. In the 2000s, stocks were a lousy inflation hedge and Gold crushed stocks and was a great inflation hedge. Every Wall Street shill talks about the 1980s and 1990s and ignores the 1970s and the 2000s and people still fall for it! Asset classes go in and out of favor and stocks for the long haul is a stupid sales pitch for the lazy, trusting and/or ignorant.

Is something rare and natural that cannot be created out of thin air or easily destroyed a better store of value than paper tickets printed with no effort by people with no moral character? Duh, ya think?!

Gold has outlasted all the apparatchiks who seek to destroy it and demonize it. Our current fiat system has gone to excesses that will be looked back on in disgust. The bust that we are now going through is a direct result of a fiat paper money system completely out of control. The problem is that most people have no idea that the cause of the current economic depression was an easy money and credit system fostered by an anchorless global monetary system and fascist central banks that get to help decide how much money/debt is created and the cost of money (i.e. interest rates).

Gold is not a great investment, it is money. It is savings. It is a stable store of value in a world gone mad with fiat disease. It is an anchor.

And the funny thing is that once this deflationary crash really hammers stocks and other asset classes towards the end of this year and probably into next year, the sentiment will turn. Gold will be the savior that allows the apparatchiks to return to inflation.

Remember that inflation is a form of theft. Governments steal their citizens money by debasing its value year in and year out. They force their citizens to run on the hamster wheel faster and faster to feed the out of control government beast that now seeks to control health care, the auto industry, charity/welfare, farming, the drilling of oil, the real estate market, the financial markets, retirement accounts, and the climate! This costs a lot of money, especially when these industries are run in the incompetent and inefficient manner that characterizes all government-run entities. The government desperately wants to create inflation again!

Here's a little secret: Gold is a way to re-create inflation and governments and the central banks they are in cahoots with own more Gold than anyone. Want an end-game scenario? Here's an easy one: re-peg the currency to Gold at a level that makes the current Gold price seem like the deal of the century using a new currency with a fancy new name (sovereign/national, regional or international will do). Rather than directly and openly debase the current currency, simply set an exchange rate between the new currency used for international trade and the US Dollar. This exchange rate, it just so happens, will be the equivalent of a 30-90% overnight Dollar devaluation.

No gloom and doom, no end of the world, just the oldest re-cycled government trick in the book. It's coming, of that there can be no doubt. The question is only one of timing. Deflation first, then inflation by any means necessary. Gold will retain its value and will still buy the same amount of food, real estate, stocks, etc., but the almighty US Dollar will suddenly buy a lot less of those things.

Gold is money, so to measure its value requires that you think of Gold in terms of the things it can buy that you want. An ounce of Gold, as the saying goes, is generally equivalent to the cost of a decent man's suit. This has been generally true for at least the last hundred years. What is the fiat currency price of a man's suit over the last 100 years?

Gold won't make you rich unless you trade it professionally and do it well, but it will maintain your purchasing power in a world of collapsing asset prices. Fiat currency can perform the same role over brief periods of time but its longer term value is always suspect.

Once the Dow to Gold ratio gets to 2 or less, it will be time to switch asset classes once again, as the deflationary crash will have nearly completed and stocks and other asset classes like real estate will again be a good deal. And if you've got the Gold in your pocket, you can eat it if you want (although I admit it's harder to chew than paper fiat currency) or you can use the Gold to buy up the stocks and real estate that your neighbors can no longer afford.

Rio Tinto - How a Bear Devastates

I follow blue chip base metal stocks closely as I am very bearish on them. Rio Tinto (ticker: RTP) is the world's second largest mining company and focuses on base metals (e.g., aluminum, copper). The stock has been pounded over the past month. The chart below shows how fast a bear can devastate a stock that has been climbing for months (6 month daily chart):



Base metals are important for growing economies. Economies are shrinking and deflating. Over the next 6-12 months, base metals are toast and so are the companies that mine them. A printing press can't stop this fact in the shorter term.

Royal Gold (ticker: RGLD) is a buy again and should be bought anywhere at 39 or lower for those willing to take a risk on a speculative smaller cap stock. I was hoping for lift-off after the last correction but I am a patient bull on this stock. Gold did not bottom at $913 as I has predicted and is a buy for longer-term investors. I don't think we'll go below $880 and then we'll be set to re-test the all-time highs.

If Gold mining stocks make lower lows than yesterday's lows, then we are in the final wave "C" part of this correction and traders and longer-term investors will be presented with a buying opportunity in GDX (individual stocks have their own charts but the principles are the same) very soon (a week or so). Wave "C" corrections can be fast and brutal in Gold mining stocks and the opportunity to buy GDX in the 29-31 range will probably last 2-3 days. No rush to buy, but be prepared. Again, this may well not be "the" low, but nothing is certain in markets and this is a low-risk buying opportunity for the intermediate term. A quick 20-30% return is likely for a trade (more with options).

Goldman Sachs - The Pig is Dead

Long Live the Pig. Short the Pig if you've got the guts to wait it out. Goldmun Sucks (ticker: GS), the desperate hedge fund that failed despite all its insider information and government support, is done. Will it take awhile to reap major dollaz from this trade? Yes. Will it be a volatile ride? Yes.

Goldman Sucks is the most overvalued hedge fund on the planet and they're going to new lows. If not this year, then in the first quarter of 2010. They are currently in the 130s and they're going to break below their Panic of '08 lows at 47. If you know how put-buying works and you're comfortable buying 2011 LEAPS, this is a MAJOR opportunity.

The pig is dead and today's volume confirmed. Someone stole their cheating (I mean trading) program and now the full force of the government and law enforcement will rise up to crush Goldmun Sucks' opposition. And you know what? Even if they succeed, the pig will fail anyway!

All taxpayers can participate to get some of their money back, as this is the guaranteed trade of the next 12 months. With Goldmun Sucks, however, it is always prudent to wait for a spike upward before initiating a put buy. I would recommend buying puts instead of shorting Goldmun Sucks, as the government will absolutely ban shorting Goldmun Sucks again (to no avail) and you don't want to be caught in the short squeeze and have to turn a profit into a loss when the apparatchik decree to save Goldmun Sucks comes (and it will, believe me).

The evil short sellers are about to have a field day with this overpriced hedge fund that cheats and still can't win. The wall at 150 was insurmountable, as predicted, and now the volume has confirmed that the pig will fail. To the charts, yo (1 year daily on a log scale due to the volatility of failure followed by the pump that comes from free taxpayer money and screwing the public on every trade):



GOLDMUN SUCKS WILL MAKE NEW LOWS BELOW 47 IN THE NEXT 12 MONTHS. ONLY A REVERSE STOCK SPLIT CAN PREVENT IT! The government can't stop it, cheating can't stop it, and Hanky Spanky Paulson has already sold all his stock at 150, so he could care less...

Fun with Elliott Wave - short term

I am not an expert at this Elliott Wave (EW) stuff and it can sure get you into trouble if you use it as a stand-alone tool, but it can also give some stunningly accurate road maps at times. The labeling on EW can quickly get complex and if you're not familiar with it, don't look to me for answers. Let me repeat, I am not an expert. But when wave patterns set up smoothly and easily, like they do in many impulsive waves, it can often be worth the effort to try to figure out where you are in the wave count so that you can figure out what comes next.

To warn you of the type of gall that I possess, I currently have a different wave count than Mr. Robert Prechter on this bear market so far. As far as big picture EW, I am of the belief that the 4th "big" wave of a five wave bear market completed last month and we are now in the first intermediate-term wave down within the final big fifth leg down in this cyclical stock bear market (i.e. 1 of V).

Here's a 4 month intraday 60 minute chart of the New York Stock Exchange Composite Index ($NYSE or $NYA), detailing my current proposed wave count and what I think could happen next (I prefer $NYA or the Wilshire 5000 at times because their charts get "painted" less by da boyz):



Bottom line: I think we're in "the third of the third," aka nirvana for Elliott Wavers, on a short-term basis for the major U.S. stock indices. The next few days should be fun for the bears if this count is correct. Now, many variations are possible, they are just less likely. For example, the third wave could end up being the same size as the first, which would set us up for an extended fifth wave. Of course it's not easy and of course there are never any guarantees - now step right up and place yer bets...

On another note, head and shoulders topping patterns are everywhere and if you're a bear, it only makes sense to consider them valid. Some have already broken down. My favorite right now on a macro basis is the German stock market ($DAX):

Where Are We in This Bear Market?

The short answer: somewhere around halfway through it. The long answer follows. The price to earnings ratio for the S&P 500 is currently greater than 100 and earnings are not coming back strong in the next few quarters, I can assure you. If you think so, stop reading here and go back to CNBC to get your analysis. Cramer has a hot stock tip for you right now!

This is not a regular bear market. This is a credit contraction bear market like the one in the 1929-1932 time frame or the Japanese 1990-1992 bear market. Those who go on and on about money printing fail to realize that most of the money printing over the last decade didn’t come from the private, for profit federal reserve corporation or the government. It came from bankstas and Wall Street leveraging the printed money via loans and other credit instruments.

In a sense, we’ve already had a hyperinflation in asset prices and now asset price collapse is causing a deflationary storm before the next inflation can begin. If you wipe out half of Wall Street, leave the other half begging for money at the government teat, and also wipe out the banking system, you get asset price deflation and credit contraction. Yes, fiscal and monetary “stimulus” will eventually cause some inflation in asset prices, but a deflationary collapse is in progress and won’t be stopped by incompetent apparatchiks. And the private non-government agency known as the federal reserve corporation will buy as many assets as it can for pennies on the dollar before the next inflation begins (which they will profit from, believe me).

The inflation versus deflation debate rages on and I am no expert compared to some of the commentators out there. However, regardless of what is happening at the pure monetary level, asset prices will continue to collapse. Price changes are not inflation or deflation, I understand. But when you’re making investment decisions, aren’t you trying to guess whether asset prices (e.g., stocks, commodities) will rise or fall rather than whether or not we are in deflation or inflation?

If I am wrong and monetary purists are right that we are in inflation because money creation is net positive right now, I don’t care. Because what I do know is that the stock market is going much lower and commodities are going to get crushed. Real estate is dead for the next decade. Gold, the ultimate form of money and a good deflation hedge, and fiat cash (better pick the right country’s currency, though) are the only places to hide if you don’t like to short the markets.

Anyway, this cyclical bear market has a long way to go. I have two fractal-like patterns that I am following right now as a general “road map” to this bear market, although these are just rough guidelines. The most relevant in my opinion, is the stock index of the last country that went through a real estate and stock market collapse due to asset price deflation: Japan. The Japanese bear market from 1990-1992 is shown below in chart form with where I think we are in a relative sense using this template as a guide for what’s in store for the US stock market:



We have started the first leg down of the final big leg down, but nothing moves in a straight line. A re-test of the fall ’08 and/or March ’09 lows is in order, followed by a bounce into the early fall, followed by more devastating downward moves that will likely last into early-to-mid 2010. Note the duration of the bear market at roughly 2.5 years.

Another potential crude template (off in magnitude and timing) is the Panic of 1907. The following chart is stolen from www.thechartstore.com with my scribbles on it:



A similar conclusion is reached for the shorter-term: re-test the fall ’08 or March ’09 lows, then a weak bounce into the fall. This template, however, suggests the final leg down will be the most severe and worse than the Panic of 2008. This is certainly not out of the question!

And finally, the ultimate bear market of 1929-1932, during which the Dow Jones lost 89% of its value (chart stolen from http://www.technicalanalysisbook.com):



Even I’m not quite this bearish for the current cyclical bear market at this point, but I can’t rule out the possibility that this replays. We’re talking Dow 1400 and S&P 500 at 175 if a similar decline is coming.

In any event, this bear has a long way down to go and this is why my bullishness on the Gold mining sector is geared towards realism rather than irrational exuberance. No stock sector can make much progress higher under such conditions. Of course, once the dust settles, it will be time to bet the farm on Gold miners. But until the S&P 500 gets below the 500 level, I won’t be looking to “buy and hold” anything besides physical Gold as the ultimate cash equivalent.

The RSI shift

This is something I learned from Frank Barbera, the Gold Stock Technician, and I find it useful so I thought I would pass it on. I posted about a set-up for the XLF ETF as a short trade before and I still think it is a great short at current levels. The RSI shift concept relates to how the RSI moves during bull and bear thrusts.

When in a bullish mode, the RSI likes to stop around 30-40 at the low end and then rise to 70-80 on each mini-upward move and mini-correction/downward move. When the chart turns to a bearish posture, the RSI peaks around 60-70 and likes to plunge to the 20-30 range on each mini-decline and mini-correction of the decline. In other words, the "normal" RSI range is different for a bull move versus a bear move.

Like any technical indicator, it is completely worthless in isolation but can add weight/confidence to a trading decision and can work on a weekly, daily, or even an intraday chart, although time frames of less than 15 minute intervals are beyond my area of interest as I still have a day job (knock on wood...). The RSI shift from the 30-80 bull range to the 20-70 bear range can be a clue to directional changes as they are occurring.

Here is the 60 minute intraday chart of XLF demonstrating this RSI phase shift concept in real-time:



Just another widget for the trader's toolbox...

The Ongoing Gold Stock Correction

Bulls never want to hear it, but this is a healthy and necessary correction in the senior Gold stock indices. The current correction is more than half-way over by my estimate, but lower prices are coming. See my previous post on Gold stock correction timing as a preview to this update.

I believe the "steep correction" template is playing out as anticipated, which is a 4-8 week "A-B-C" correction consisting of an initial "A" wave down, a "B" wave up and then a final "C" wave down. We were in the "B" wave last week and I am uncertain as to whether or not we have started the "C" wave down. Whether we are still in a complex "B" wave up or have started the "C" wave down will become clear over the next few days. We are now in week 5 of the correction and I think we have at least one more week to go, but it could be up to 2-3.

Here's a rough roadmap of where we are and where I think we're going, using a 6 month chart of the GDX senior Gold miner ETF (since it is easy to trade unlike the $XAU or $HUI):



When trying to time a purchase to catch the intermediate-term bottom in GDX or another senior Gold mining stock, here are some tips to know you are not buying too early:

1. Are we near the 200 day moving average? If not, probably too early.
2. Is the RSI on a daily chart near 30? If not, probably too early.
3. Is the "C" wave down of the "A-B-C" correction nearly equal in price movement to the "A" wave down? If not, may be too early.

The current "B" wave top in GDX is 40.26, so this would put the bottom of the "C" wave near the 30-31 level. If the "B" wave extends and makes another higher thrust upward, then the ultimate "C" wave bottom should be roughly 10 points below the ultimate "B" wave top. The "C" wave will also make a lower low than the "A" wave did.

Not too complicated, I hope. There are no guarantees in stock markets, but this will at least be a low-risk entry point for a trade where it will be easy to set tight stop losses.

Where it gets more complicated is in figuring out if the coming low is "the" low for the whole correction, which is absolutely uncertain. There is no question we could make a lower low in the fall before the next strong bull market leg up. Here's what it could look like:



For me, I'm going to try to buy the pending lows in the senior Gold stocks for a short-term trade, likely using my favorite blue chip Gold miner Goldcorp (ticker: GG) because I like their call option pricing and liquidity. The principles for picking the low in GG are the same as with GDX. I'll be going for a short-term trade to try to make 25-50% in 4-8 weeks, then I will sell out and wait.

I'm in no hurry to buy Gold stocks because: WE ARE STILL IN THE MIDDLE OF THE BIGGEST BEAR MARKET ANY OF US WILL LIKELY SEE IN OUR LIFETIMES! Gold stocks are not immune from downward pressure in general stock markets, so don't be in a rush to buy. I know after reading a bullish commentary about Gold going to the moon any second you're scared of missing "the" move, but there's plenty of time in my opinion. If you're looking for a cheerleader who is always telling you to buy (or sell), you've come to the wrong place. I would short Gold stocks (and I have in the past) if I thought there was good money in it.

I want to use most of my trading capital to go short the general stock markets this fall, as another big leg down in this bear market where big dollaz can be made should occur in the fall. Patient bears can simply place bearish trades now on general stocks of their choice and ride out the bear for another 6-12 months, but I am going to try to time some of the intermediate-term swings. I found a decent template for where the general stock bear may be going that I'll post tomorrow.

Longer-term buy and hold bulls in Gold stocks could either ignore this first low or put a partial buy in at the pending bottom here and a second (larger?) buy near the fall bottom. This will dollar cost average in at a great price. Gold stocks should be done correcting before 2009 is over and then they will make massive gains of 200-300+% in 2010 for the seniors (i.e. GDX) and between 0-1000% for juniors (some juniors will go out of business, which is why the range starts at 0% and you have to diversify when playing the small cap Gold miners).

For those who insist on being bullish right here right now in Gold stocks, I wish you luck. But remember: a stock sector does not make 200% gains without a subsequent rest unless it is at the end of its bull run and we ain't even close for the Gold mining secular stock bull market (we've only just begun). We will get to the mania phase in Gold stocks before this thing is over. I know this time it's a little different, but the biggest gains in Gold miners during the 1930s came after the 1932 stock market bottom, not before it. Cash is an admirable temporary position in a bear market even if you hate the US Dollar.

Gold Outperforms the US Dollar During Deflation

Karl Denninger over at Market Ticker just came out with his 2009 prediction review bashing Gold and Robert Prechter has considered the entire run in Gold since 2000 some kind of weird Elliott Wave correction despite a 300% advance from the early 2000s. Deflation and Gold are not incompatible and it seems odd to me that such seasoned commentators are blind to it. I respect both of these gentlemen and their opinions but I disagree with their views on Gold.

Don’t get me wrong, I’m currently in the deflationist camp. I’m not calling for the collapse of the US Dollar. But I think both of these gentlemen and others in the deflation camp who seem to despise Gold and call for its price collapse would be reasonable enough to look at the actual data. And no, I’m not talking about the 1930s because I know we were on a Gold standard then and now it’s different.

If Gold is not a safe haven, then pray tell me what is? If you say the U.S. Dollar, how about we look at some inconvenient facts that prove Gold is doing better than the U.S. Dollar during an actual fiat deflation? The current debt deflation bear market began 10/11/2007. If you bought Gold and the US Dollar at the closing price on 10/11/2007, here are your real, actual returns since this bear market began:



So, why again isn’t Gold a safe haven in a deflation? Yeah, sure, you can call for a pending collapse in the Gold price any day now and call for a stunning rise in the U.S. Dollar index any day now. But you need to admit when you’re wrong and so far many deflationists have been absolutely and entirely wrong about Gold. Are there any deflationists out there who would like to dispute the actual facts? In the end, aren’t the facts more important than what someone believes should happen?

By the way, as far as Denninger’s prediction for 2009 on the scoreboard so far, Gold closed on 12-31-2008 at 884.30/ounce and now is at 929.50 (a 5% gain – pretty good 6 month return for a safe haven, eh Karl?). The US Dollar Index closed at 81.21 on 12-31-2008 and is now at 80.26 (a small loss negated by a 1-2% yield over the past 6 months). So, Gold has been a more profitable safe haven than the US Dollar in the middle of a deflationary storm.

Gold is money. I don’t agree with the hyperinflationist crowd for this cycle (we just finished a hyperinflation in asset prices!), but it is naïve and shows an ignorance of history to assume that nothing could cause a one-off event to devalue the US Dollar literally overnight by 20-70%. This would wipe out the entire “safety” concept of the US Dollar and make that 3% yield seem a little foolish to chase, no?

Now, I understand that some people are traders and I understand that you can’t eat Gold. I am not calling for the end of the world, I am not calling for the US Dollar to become completely worthless, I like shorting the markets when it is profitable to do so and I am a believer in deflation. But if cash is king during deflation, then Gold is the emperor and king of kings.

It’s time for deflationists to stop their antagonism towards Gold and recognize Gold for what it is - money, not a commodity. I understand the aggravation deflationists experience when trying to argue with hyperinflationist Gold bugs, but that doesn’t mean such deflationist commentators should steer people towards the wrong investment. In a global fiat system with no apparent anchor, it is foolish to assume that those seeking safety around the world will as a rule prefer the US Dollar to Gold given global sentiment towards the US. It’s Gold-dispensing ATMs that are now popping up in Europe, not US Dollar-dispensing ATMs.

The US Dollar can rise and Gold can rise – these concepts are not incompatible to those who understand that Gold is an independent international currency with no debt or other political promises attached to it. There is a limited amount of physical Gold in the world versus a seemingly endless barrage of fiat promises despite their relative decrease due to deflation/credit contraction. As a believer in Exter's liquidity pyramid concept during deflation, I believe even a small further global move into physical Gold will cause its price to remain firm and likely rise further during this deflationary depression.

Prechter has been calling for people to be in T-Bills and bank CDs since the 2000 stock market top. That protected people from wicked stock market declines. But before we praise him for all his amazing calls (and some of them were), let’s look at a strategy of holding Gold instead of his call to hold cash, using the closing price on 12/31/1999 and the current price levels of Gold and the US Dollar Index:



Now, I have ignored yield and returns on the US Dollar, but I didn’t want to be presumptuous and pick a yield that would be considered unfair. I would rather hear from one of the Gold-hating deflationists to put in the correct yield on cash and tell me what the appropriate return on cash is since the start of 2000. No matter how you slice it, it falls way short of Gold.

The risk of a US Dollar currency “event” is not even close to negligible over the next few years and the added insurance Gold provides as a hedge against such an event is of high value. For a deflationist to say that a geopolitical event couldn’t knock the US Dollar down a notch and wipe out the paltry yield on cash over the past 2 to 10 years is unreasonable in my opinion now that we are the world's great debtor nation. I am happy to give up the current safety of a 2% (or lower) yield on short-term US government debt for the safety of Gold during deflation.

Apparatchiks can decree that Gold is not money but they cannot prevent people from swimming for the lifeboat that has worked for thousands of years. Gold can thrive in a deflationary collapse and has already shown it can outperform the US Dollar in this deleveraging cycle. And if you think China, Brazil, Russia, Germany and India would rather be paid in US Dollars than Gold for their goods and services right now, I think you’re the one who needs to wear the tinfoil hat.

Wal-Mart and Target - Bellwether Retail Failures

The retail sector in aggregate contains many sloppy, hard to read charts, but clearly retailers are getting and will continue to get crushed in this ongoing deflationary bear market that is not yet close to being over in time or price. Many of the charts are not very exciting from the bullish or bearish perspective right now and are simply in limbo land.

Though retailer stock prices will almost universally resolve to the downside, the charts of bellwether retailers Wal-Mart (ticker: WMT) and Target (ticker: TGT) are telling to me. These are "defensive" stocks, meaning stock brokers recommend them so that their clients only lose 20-40% during a bear market instead of 50%.

When the going gets tough in the economy, people go to Wal-Mart and Target to save money. If these retailers can't benefit from the trends of saving money and frugality, which retailers are going to do well (and I'll give you gun and pawn shops)?

Here are the charts of these two bellwether retailers announcing in loud voices that retailer stocks are toast (first WMT using an 18 month chart and then TGT using a 6 month chart):






Now these two stocks rarely move big and I don't find them exciting enough to bother with, but other retailers will make death-defying plunges and several won't make it through this bear market alive. Ghost malls with multiple vacancies are the new trend and the trend is just starting to pick up a head of steam. I'll leave you with an example of what many retail charts are going to turn into during the remainder of this bear market. Following is a 3.5 year chart of Macy's (ticker: M):

Reinstating Short Sale Restrictions

Never one to let a crisis pass without pretending to care and "just doing something," the elected and appointed friends of bankers are at it again. The SEC is being asked to reinstate short sale restrictions again. The pompous and ignorant apparatchiks like Barney Frank are happy to hold the evil short sellers responsible for the aftermath of their own stupid policies.

Such announcements can be good for a few days' short squeeze, but will change nothing and will not alter what happens next in the stock market. If you trade on a daily or weekly time frame, these are the types of risks of which you have to be cognizant. The timing of this possible rule change would be convenient for some of the behemoth financial firms that line Barney's pockets. Following are the current 6 month charts of Skank of America (ticker: BAC) and then Shitibank (ticker: C, used log-scale on this one due to the wild swings in what is now a penny stock):





Last fall, if anyone remembers, instead of talking about re-instating the uptick rule, there was an absolute all-out ban on short selling of the financial firms that helped create this mess. Not surprisingly these firms who were "protected" from the evil short sellers read like a list of who's who among those that donate the largest amounts of money to the campaign coffers and back pockets of our elected bureaucrats. Using the charts of BAC and C again, here's what happened when this even more restrictive measure was passed in September last year:





So, yes, the casino is rigged and the little guy is always good for a squeeze. I don't like it but to think it can be changed by crying about it is silly. Over the longer-term, market forces beat apparatchiks every time. Those evil people who dare to profit from an obvious bear market need to be mindful of such short-term jerk jobs, but with a longer-term time horizon and proper risk management, these evil brethren of mine will make a killing.

Here's an important list of ongoing and future failures of the bureaucracy when it comes to markets and the economy:

• They couldn't stop the bear market from occurring
• They couldn't stop the biggest financial panic since 1987 despite changing the casino rules
• They couldn't stop the real estate bubble bursting and crash in prices and they damn sure can't re-inflate this bubble once it's done bursting in several years (no, we're not close to the bottom in real estate)
• They couldn't stop the deleveraging process that is now well-established and they can't stop it from completing (though they can prolong the agony for all of us)
• They can't force consumers to spend and they can't stop the new consumer trends of saving, debt repayment and frugality
• They can't create jobs without stealing money from the real economy and making the economic contraction worse
• They can't force "green shoots" to grow since they are not the people who actually take risks in the real world to create economic growth

Any measure to prevent the stock market from going down to its natural level will fail. The bear market is not over and a new leg down in the bear market has already begun. The bear market will continue until at least the beginning of 2010. Going long with new money in any sector, including Gold miners, is high risk right now unless a short-term trade or part of a core investment philosophy that invests a fixed amount in Gold stocks every month to dollar cost average into the only long-term secular stock bull market out there. And Gold? Gold is a safe way to stay out of the casino for a while until the dust settles.

Gold is Money and Nothing Else

The title of this post is actually a quote from Mr. JP Morgan in the early 1900s during a Congressional hearing in the United States. Big league bankstas know the role of Gold in the system. Gold is the asset base upon which paper schemes and leverage are constructed. Gold is not a way to get rich, but it is savings and it is money.

When paper schemes and scams collapse, he/she who holds the Gold gets to start and/or participate in the new scheme because he/she has the money! Speculating in currencies is fine if it is one's interest, but Gold speculation is simply that. There are many other inflation hedges besides Gold. But to preserve wealth in US Dollars or any other paper fiat currency is risky over the longer term.

Most people want to multiply their wealth, not preserve it. But for those who understand the nature of the current economic crisis and the nature of the typical cyclical government responses (yes, there are even more still ahead) to combat these unstoppable economic forces, owning at least a little physical Gold makes sense. If the return on the stock market, real estate and commodities is negative over the next year and the government is about to get desperate to once again debase the currency by any means necessary, where is a safe place to store your money?

This is why the inflation versus deflation debate is so spirited and so important to those trying to preserve and/or grow their wealth. Gold is a hedge. It is a fair (not great) inflation hedge and a good deflation hedge and it provides catastrophe insurance as well. I would never advise anyone to put all their money in Gold but I also think it's foolish at this point in the economic cycle (i.e. a Kondratieff Winter or secular credit contraction) not to have at least 5% of one's liquid net worth in physical Gold held outside the system.

This is not doom and gloom, this is being smart and being prepared. If you end up not needing the insurance, you'll probably make an almost risk free profit on the price of Gold and you will avoid the inevitable further losses coming to other asset classes. Yes, most deflationists prefer fiat cash over Gold, but not me. This is because I also think a coordinated regional or global response to this crisis could knock the US Dollar down a peg and might dethrone it. If I am wrong, I will have missed a few percent of yield. If I am right I will have avoided losing 30-70% of my savings to chase a few percent of yield.

I don't claim to know exactly what's going to happen to the US Dollar over the next decade but I do know that the Dow to Gold ratio will reach 2 at a minimum. I am trading the bear market to make money and patiently waiting to put all of my speculative capital into Gold stocks from the long side once I think the bear market is almost over. But Gold is my hedge and my boring savings account in case I'm not as good a speculator as I'd like to think I've become. I also cannot time bureaucratic decree as I am not privy to any insider information, so how can I know exactly when a big apparatchik-decreed currency event is coming when it will almost certainly be announced out of the blue on a random day known only to insiders?

To end, I'll leave you with a quote I disagree with but the first two sentences of it are what many central bankstas and governments in effect tell their people (all the while holding more Gold than anyone):

Gold is not necessary. I have no interest in [G]old. We will build a solid state, without an ounce of [G]old behind it. Anyone who sells above the set prices, let him be marched off to a concentration camp. That's the bastion of money. - Adolf Hitler

Negative Interest Rates on Bank Deposits in Sweden

Finally, the stupidity and bizarre nature of a fiat currency system is being laid out in obvious detail and easy to understand terms thanks to Sweden's central bank. This is big, big news for holders of Gold. Sweden's central banksters announced a 0.25% repo rate but a -0.25% (that's negative 0.25%) interest rate on bank deposits. In other words, member banks will now have to pay the central bank to store their money in Sweden.

This is what both Gold bugs and Ben Bernanke have been screaming about since this crisis began. With a fiat system, a "determined" central banksta can always create inflation, or so the story goes. And in a way, it is theoretically true. If the US government decided to pass out $1 million to each of its citizens tomorrow, you can bet that some inflation would be created.

If such a policy change were transmitted to individuals, a run on the bank would occur. This comes on the heels of the Japanese banskstas thinking about banning paper money and forcing people to get on a digital-only monetary system. These are the potential end-game type moves that will not only send Gold to the stratosphere, but will finally make a critical mass number of people wake up and begin to question the ultimate bezzle.

Such policies also open the door to re-instating Gold confiscation and/or harsh penalties/taxes for buying and/or selling Gold (i.e. worse than the current obscene and unfair capital gains tax on Gold). Just in case any apparatchiks are reading this, I have already given my Gold away to the poor - I swear!

This is a strong central banksta salvo to force inflation and/or tells you how much risk is truly out there when a central bank doesn't want its member banks depositing money. It may or may not work to force inflation but it's very bullish for Gold and very bullish for waking up a few more members of the public from their stupor. It's also very bearish for banking system stability and very bearish for trust in the government.

Even if you believe (like I do) that deflation will trump inflation for at least another year, buy Gold and sleep well. As someone determined to spread the word about the true causes of our current economic crisis, this is a major step towards shining light into a very dark hole of deceit. Paper is only as reliable as the people backing it and those people aren't 1/100th as reliable as a shiny piece of yellow metal.

EDIT: Post has been altered since original posting due to the nature of the negative interest rate being charged to banks - I misunderstood the press release when I first read it. My apologies for the error.

Seven Bank Failures Announced Today

The FDIC decided to do a swarm over the state of Illinois as six of the banks were in Illinois and one was in Texas. This may be the spark that gets the program traders to switch to the short side and sell the stock market rallies instead of buying the dips.

Five banks last week (which was until today a record for this bear market cycle) and seven this week. Two weeks does not a trend make, but numbers like this should scare any rational investor, especially when the PE ratio for the S&P 500 is at 120 right now. Watch the term "green shoots" fade from the CNBC lexicon as fast as the phrase "Goldilocks economy" did last year.

Regional Banks Break Down (Again)

The regional banks don't get no TARP, ain't part o' no keiretsu, and ain't in good shape. Many will be failing over the next few years and the bigger keiretsu banks will devour their carcasses, keeping all their "good" assets and shitting out the crap/"bad" assets into the laps of the FDIC and US Treasury (i.e. we, the taxpayers).

I follow the KBW Philadelphia Regional Banking Index ($KRX) as it continues to lead the new bear market leg down (which has already begun). A fresh breakdown below support occurred today. See my previous recent post on the $KRX and here's fresh intra-day charts showing the carnage (first a 60 minute chart of the last 4 months, followed by a shorter term 15 minute intra-day chart of the last 15 days):






Happy hunting!

EDIT @ 1350 hours (Cali time): Another bank failure just announced by the FDIC, as always, after the close. We'll see if any more pop up over the holiday weekend.

Capital Gains on Gold

are punitively taxed at a higher rate than stocks or other investment capital gains, as they are treated as "collectibles." This is yet another way the government discourages Gold ownership and forces people to accept their intrinsically worthless paper tickets. Forcing people into the fiat casino so that they can be stripped of the fruits of their labor is the heart of what Gold Versus Paper is against.

A Senator Michael Crapo is sponsoring a new bill to change the capital gains treatment on Gold and other precious metals investments. Gold capital gains are currently taxed at 28% and the bill seeks to lower the capital gains tax rate to 15% as with other long-term (i.e. held for more than 1 year) investments like stocks.

Reducing Gold to "collectible" status is another subtle method the fiat statists use to debase the reputation of Gold. The attempts to demonize, trivialize and de-monetize Gold in a fiat system are paramount to the fiat system's success. Why would anyone accept the paper promises of bureaucrats and/or banksters except under the threat of force (i.e. law) or extreme desperation? Paper tickets that can be created at will with no effort or the truest and longest-standing form of money that has been accepted by humans for thousands of years and cannot be debased by those who run the debt/printing presses? Hmmmm. Tough choice but I think I'll choose Gold for at least a portion of my savings.

As our fiat economic system swings from wildly inflationary times to deflationary busts, only one thing is certain: the swings keep getting wilder and wilder and will continue to do so as long as we remain in a fiat currency system. Through it all, Gold just sits there as an anchor of stability. It won't make you rich other than through perfect timing of your trade(s), but it will protect your savings from the wild swings of the rigged paper casino in which the entire world now finds itself. This is why the Dow to Gold ratio chart looks like an expanding megaphone pattern ever since we handed the debt press keys to the private, for-profit federal reserve corporation.

Just like in a casino, there are some big winners among the patrons, but the owners of the casino (i.e. those who run the fiat debt presses) always come out ahead. By putting some of your money in physical Gold held outside the system, you are siding with the owners of the casino. You see, they hold more Gold than anyone because they know the secret.

And what is that secret? Gold cannot be effectively demonetized by decree for any significant length of time. The cycle of asset inflation has swung back the other way and those who hold the Gold sit patiently like vultures. Once the collapse is complete, they will use their Gold to buy up the assets of the world for pennies on the dollar and start the next round of the game all over again. Those who sit in fiat cash waiting out the debacle should do well unless they pick the wrong paper currency to ride out the storm. Pick the wrong currency and you may lose everything (or at least 30-90% of everything) with the stroke of a government pen.

Gold will retain its value during this collapse. If you think you're smart enough to trade this bear market, I wish you luck (and I'll be trading along side you with a significant portion of my capital). Don't think of Gold as a get rich quick scheme, think of it as the vultures' asset of choice. Be like the casino owners and you're sure to come out on top. Put a portion of your assets into physical Gold and sleep well at night knowing you can never be wiped out.

Risk is high and will remain so for at least the next year. Gold stocks will be the go to speculative asset class for those with a bullish bias but are not immune to steep corrections, whether due to normal bull market resting periods and/or bear market legs down in the general stock markets. Later this summer and fall there will be wonderful buying opportunities in the Gold mining sector.

125% Loan to Value Mortgages

are now going to be offered by Fannie Mae and Freddie Mac to "prevent foreclosures." This is beyond atrocious, beyond stupid and simply fraudulent. The government refuses to accept normal market forces and instead will squander every dollar it can of other people's money on worthless programs.

The predictable consequences of this program, if it is actually utilized, are numerous:

The taxpayers will be raped and pillaged for billions of dollars

The refinanced loans will be re-defaulted on at rates of 30-70%

The banks, mortgage companies and Wall Street CEOs will find a way to dump all their toxic mortgages into Fannie and Freddie's laps and walk away unscathed with piles of free taxpayer money and "consulting" and "servicing" and "packaging" and "miscellaneous" fees

The housing crisis will be prolonged and a bottom in real estate will take 10-20 years instead of 5

The secular stock bear market we are in will last an extra 10 years

People in many states like California will be tricked into turning a non-recourse loan into a recourse loan and will become debt slaves for life with no hope of ever paying off their mortgage (unless they win the lottery)

Government apparatchiks are the worst businessmen on the planet, due to incompetence and/or being lackeys who steal money for their corporate masters.

Every single mistake from the last economic depression is being repeated and the only difference is that this time will be worse. I just hope unemployment can stay below 30% this time around.

No rational bank or mortgage lender would do a 125% loan to value on a home because it makes no financial sense. Only government (and the lobbyists paid to discover new ways to loot the US Treasury) could conceive of a plan so stupid and/or brilliant (depending on whether you're a taxpayer or lobbyist) that it will hemorrhage money and be doomed to fail under the best of circumstances.

The good news is that the program will likely be run poorly and inefficiently. Many homedebtors (since the people who need this program do not own anything but the debt on their dwellings) will refuse to participate either due to the red tape required to get approved or because they smell a rat.

Oh well, at least everyone who still has a job can look forward to markedly increased taxes to pay for such harebrained scams (er, I mean schemes)...