Unrepentant Gold Bull and Stock Bear

Looking to buy more physical Gold with one more price dip and looking to short the $%&@*! out of equities with one more price rise. I will be scaling into both positions. With Gold, it will be purchase of physical Gold starting at $1150. With the stock market, it will be primarily via puts on the UPRO triple bullish ETF that tracks the S&P 500 and also some puts on the triple bullish commercial real estate ETF (ticker: DRN).

I actually like the "pan-European" Dow Jones Europe Index ($E1DOW) for a good road map of where global equities are headed, as it has a "clean" chart that gives a good "big picture" overview. Here's a 12 year weekly log scale chart of $E1DOW to show you what I mean:



Perhaps another week or so to squeeze the remaining bears, but then it's showtime. I am waiting for one more significant up day to start scaling into short positions and will likely be using the December contract on UPRO and November contract on DRN. High-risk play with major leverage and potential for major rewards/losses. If you're going to bother playing in the rigged casino, you might as well make sure victory pays well.

When it comes to Gold, this is where I invest. This is where I put my savings. Trading is my "get rich or die trying" money (the hare), Gold is my safe and can't lose money (the tortoise). Not that Gold can't rocket higher and make me 50% in a year, but I don't use leverage, I don't trade it and I simply buy the dips. Gold stocks are just another paper play in the Wall Street casino. Those who think otherwise are ignoring shareholder dilution, ridiculous management pay, political risk, and the current lack of dividend yield that plagues the sector. I believe Gold stocks are for renting rather than owning at this point in the cycle unless you are a mining and financial expert who knows how to analyze a company from the ground up and stay in touch with day-to-day operational concerns or a very long-term investor unconcerned with severe draw downs.

Now once I think general equities are done collapsing, different story. I will be buying Gold stocks hand over fist on the next panic bottom. For now, I am putting my "safe" money into a safe investment. The only currency that can't be debased by decree. The only market besides U.S. debt that remains in an unequivocal bull market. However, U.S. debt is an accident waiting to happen while Gold is getting ready to go into its manic bull phase. You won't find me dabbling in the bond market, though I pay attention to it.

The difference between an equity chart of any country in the world and a long-term Gold chart is striking and shows where we are in the "big picture" type cycles that are important for most investors to focus on (12 year log scale weekly chart of $GOLD follows):



Bond yields at secular lows and Gold at secular highs is a hallmark of a Kondratieff Winter and is not seen in any other season. We are in a K-Wave Winter. It ain't close to being over yet.

The Dow to Gold ratio has been screaming higher along with the copper to Gold ratio and both are due for a reversal in the next week or so IMO. Here's a daily 1 year chart of the Dow to Gold ratio ($INDU:$GOLD) thru today's close:



I am in the Ian Gordon camp here. Banks won't even admit people are delinquent on their mortgages any more! Another collapse is coming - only the timing is in question. "Extend and pretend" works until it doesn't and then the first one to panic wins. True value for the S&P 500 is at 500 or less (500 is the optimistic scenario) and we will get there. I continue to wait patiently for a better buying opportunity in the GDX and GDXJ Gold stock ETFs (my road map for when I'll be buying Gold stocks can be found here). The Dow to Gold ratio will reach 2 and we may well go below 1 before the current cycle is over.

Sorry for the sporadic posting, but it's summer and all...

Another Day, Another Lesson

Uncle Buck trying to break down again and copper is ripping higher. The base metal miners are confirming. From overconfidence to fear, I feel like a sucker right now. I decided not to let profits turn into losses and cut bait this morning on my short positions, barely squeaking out a profit. Plan to watch from the sidelines in cash for now and re-load on shorts if we manage to get higher. Ahhhh, life as a novice trader.

I am now in my largest cash position in months in my trading account. Still waiting patiently for lower Gold prices before buying more physical and still waiting for the Gold miners to come to papa. These are all short term considerations, of course.

Waiting Patiently With Confidence

This chart blows me away. It is a ratio chart of the $VXV (the 3 month CBOE predicted volatility) to the $VIX (current volatility). When this ratio is higher, it means the current $VIX reading is lower than what futures traders anticipate the volatility will be in 3 months. In other words, a higher reading in this ratio is a bearish signal, as it indicates complacency in current investors relative to the anticipated volatility in 3 months. Since the latter "guesses"/bets are traditionally only made by "sophisticated" market players, a high ratio suggests too much complacency. The caveat is that a ratio chart can move as both components trend in the same direction at different rates. Anyhoo, here's a roughly 2.5 year chart of the $VXV:$VIX ratio on a daily candlestick plot (as far back as my data goes) versus the S&P500 ($SPX, upper plot) during this time:



The bond market is screaming higher and the world's biggest bubble apparently has more deflationary medicine for us before it pops. The five year yield is screaming towards the lows made during the March 2009 stock bottom (18 month daily chart thru today's close follows):



Another deflationary wave is coming when it comes to the pragmatic version of deflation: falling asset prices (and thus a rising value of cash / increased purchasing power for Gold). I know this ain't the academic version of what deflation is, but I am trying to make money here and I could care less if the monetary base is expanding when all I really want to know is if stocks and commodities are going to tank again (they are IMO). Many Gold bulls will get scared on a price correction instead of viewing it as a buying opportunity. Gold is money. Gold thrives during a hyperdeflation.

Patience is no virtue when you're holding onto options, given the time decay. However, I continue to wait patiently for the next market meltdown while holding puts against the S&P500 and commercial real estate and I also continue to wait patiently in paper debt-based cash to buy more real money (i.e. Gold) and to buy Gold miners at a lower price. The Dow to Gold ratio will reach 2 before the secular stock bear market is over and we may well go below 1 this cycle.

Imminent Waterfall Decline in Commerical Real Estate

Only an evil speculator would bet on a price collapse. And once you place your short bet, you become evil (unless you work at Goldmun Sucks, and then it's God's work). I have been anticipating a steep fall in commercial real estate stock prices. The current ratio chart between the $RMZ (a commercial real estate index that underlies the DRN and DRV ETFs) and S&P500 ($SPX) has me drooling in greedy anticipation of the next big move:



The reason I am excited about the prospect of this happening is not only the fact that I think this ratio plunge will occur while the stock market is falling, but also the two prior precedents in the commercial real estate bear market using ratio charts of $RMZ to $SPX. Here are two ratio charts (a daily 4.5 year chart followed by a weekly 6 year chart) to show you what I mean:





I am VERY biased because puts on the triple bullish DRN ETF are my largest current trading position, but I smell a waterfall decline coming soon in the stock prices of the commercial real estate sector. I remain black-bile bearish on all equities currently and think all stocks are going to tank over the next month or so, including Gold stocks. I don't think the first leg down of the return of the general stock bear market is done yet. I am keeping my stock market crash helmet on here and clinging tightly to my physical Gold (as well as some, ugh, U.S. Dollar cash in anticipation of buying more physical Gold and Gold stocks at lower prices).

The Dow to Gold ratio will reach 2 before this secular Gold bull market (and secular equity bear market) is over and we may well go below 1 this cycle. Since Gold is going to continue to outperform the U.S. Dollar as it has for the past decade, Gold is a better form of cash to hold if you prefer to sit on the sidelines and watch the rest of this secular mess rather than try to trade it.

Intermediate-Term Thesis Reviewed

I think a big and fairly fast move down is coming over the next month in all stocks, including Gold stocks. Keep in mind that I am biased as I am heavily invested in puts on equities (the DRN and UPRO ETFs) and I am waiting in cash to buy Gold miners if they get cheaper. After being as bullish as anyone this winter on Gold stocks, I backed off because blue chip Gold stock indices failed to significantly leverage the Gold price (i.e. barely kept up with the gains in the metal price). I created a new tradable thesis a while back based on what I thought Mr. Market was telling me. So far, so good.

Here is where I think we are for Gold stock indices and why I am not interested in being long Gold stocks in my trading account right now (1 year chart of the GDX ETF in candlestick format follows):



This fits in with my thesis of where we are in the stock market, as a big move down in the general stock market indices will probably drag the Gold stocks down with it. This isn't always the case, but given the weak price action in Gold stocks and their recent lack of leverage to the Gold price on the upside, they are vulnerable here. Here's a 4 year daily candlestick chart of the Wilshire 5000 ($WLSH) thru Friday's close to show how this fits in with my trading thesis for general equities:



Could I be wrong and miss the train completely on Gold stocks? Of course, which is why it's called speculating. But I am starting to salivate over the prospect of picking up Gold stocks again at lower prices. The pieces seem to be coming together, although things can (and often do) change on a dime. I think the coming buying opportunity in Gold stocks will be a doozy and will precede a massive leg higher in Gold equities. Once we reach the next low point, I think Gold mining stocks will once again outperform the Gold price to the upside in a major way.

Shanghai Ready For It's Bear Market Birthday

China is 2-3 weeks away from being ONE FULL YEAR into it's most recent bear market leg. Amazingly, despite the old retrospectoscope pointing out that the Shanghai Stock Exchange Composite Index ($SSEC) peaked on August 4th of 2009, people are still looking to the "miracle growth story" of China to lead the world out of its slump. This goes to show how long the average investor can be deceived into thinking a burst bubble can re-inflate. It is the same scenario as people wanting to believe the housing market was coming back last year. Or this year. Or next year. Ain't gonna happen, folks, so move along.

Now, I am not saying that China will not become the world's next superpower. To be honest, I don't know. It is certainly possible although by no means certain. Did knowing that the United States was destined to become the world's next superpower in 1930 help you make money by investing in the U.S. stock market over the next decade or two?

China is a burst bubble because it was one of the largest recipients of hot money flows during the final stages of a multi-decade reckless credit expansion. Here is a 5 year weekly log scale candlestick chart of the $SSEC through today's close with my thoughts:



Investors need to recognize a replay of the same ol' chart to know what a hot money-fueled bubble and collapse look like. China's done for now. Put a fork in her and come back in a few years to see how things are going. Shanghai's current chart looks kind of like these charts:





If you don't know what came next on these historical charts, you've got some homework to do in my opinion. China is no miracle. It is a hot money bubble that is set to continue collapsing with the rest of the world as the secular credit contraction grinds onward relentlessly. A productive society that manufactures goods the rest of the world needs will fare better than a society drowning in debt, but how well did America's stock market do as the up and coming manufacturing powerhouse and major creditor nation during the last secular credit contraction in the 1930s?

How many investors have really let it sink in that China has been back in a bear market for almost a full year now? Is this telegraphing global economic strength and growth? Or is it the truth no one wants to hear so it is ignored? If the government publishes a GDP of +15%, Intel "blows away" earnings estimates and Bernanke says everything is going to be OK, what could possibly go wrong?

I'll stay on the short side here for a while and see how things play out. The Dow to Gold ratio will reach 2 before the global secular equity bear market is over and we may well go below 1 this cycle. The "powers that be" cannot stop this train wreck because they enabled and helped cause it. Yes, they can push too hard and destroy the currency, but anyone who doesn't recognize Gold as the ultimate form of cash by this point in the cycle may have gone too far down the paperbug vortex to be financially saved...

Baltic Dry Index Collapse

The chart says it better than me:



Anyone besides me wondering why Exxon Mobil (ticker: XOM, 42 month daily linear plot) is struggling at levels below its closing lows from the Great Fall Panic of 2008? I'm sure it's nothing:



Meanwhile Apple (ticker: AAPL, 6 month daily candlestick chart) looks like it's forming a decent topping pattern here:



Heavy put buying day today for me. I am done buying puts on the S&P 500 and have one last order in to buy puts on commercial real estate if the triple bullish DRN ETF goes higher. I'm not buying this rally at all and I'm wondering if we're headed for another "flash-y" crash. I think a medium strength wind can blow this market over and when it rolls, watch out. I remain black bile bearish on all equities here.

Is the Luck of the Irish About to Run Out?

As one of the so-called "PIIGS" over in Euro-land, Ireland's stock market has held up better than the other countries that make up this acronym. However, I see fireworks to the downside likely starting soon in the land of Guinness beer. Here's a 17 month daily chart ($IEDOW) thru the close on 7-12-2010 with my thoughts:



Talk of excessive bearishness out in cyberspace makes me smile as I rely on charts and they show nothing of the sort from my perspective. I am glad to see many traders looking for a significantly bigger bounce from here. I added to short positions today. A reminder of what excessive bearishness looks like usually involves put to call ratios, as this defines what people are actually doing with their money. Here's a daily chart of the 5 day moving average for the equity put to call ratio ($CPCE) over the past 3 years of a cyclical bear market that I believe is not close to ending:



I hope the bulls are also cognizant of the fact that volume on this short-term rally has been anemic, particularly relative to the selling volume that preceded it. Today was the lowest daily volume for the S&P 500 and Dow since the week between Christmas and New Year's in 2009!

Still uber-bearish on global equities and still biased as I have large short positions on the S&P 500 and commercial real estate. If we go higher, I will be buying more puts. I am keeping my crash helmet on for now. The Dow to Gold ratio will reach 2 before this secular general stock bear market is over and we may well go below 1 this cycle.

Gambler's Perspective on Gold Stocks and Stock Market

I don't like Gold stocks here. I know Gold stock investors don't want to hear it, but I am in this to make money. Buy and hold investors don't have to worry about a temporary draw down, as the second major multi-year cyclical bull market in Gold stocks has only begun. I have laid out a potential road map for Gold stock indices like the one behind the GDX ETF previously. Instead of rolling over, Gold stocks have done what looks like a double top to me on a longer-term chart.

Here is a log scale weekly chart of GDX thru Friday's close with my thoughts:



Now I know that tea leaf reading (i.e. technical analysis) is fraught with hazard and can cause one to miss the big move, but I am willing to take that risk with Gold stocks. I believe that Gold stocks are better for renting than owning as a sector and I am a trader when it comes to stocks. I hold physical Gold as a buy and hold investment to weather this economic depression. It has worked so far and I don't think that is about to change.

I am very interested in Gold stocks as a sector and will continue to monitor them closely. However, I remain black bile bearish on stocks and, after taking partial profits on short positions a week or so ago, I am now reloading and scaling back into shorts via puts on the DRN and UPRO ETFs. Here is a 3 year chart of the SPY ETF (tracks the $SPX and allows me to show volume trends on an intraday chart) using a 60 minute intraday charting format thru Friday's close with my thoughts:



I think the Gold price could also dip a little here as well. A touch of the 50 week moving average (currently at 1107 and rising quickly) wouldn't be unreasonable if we get another round of nasty deleveraging among the hedge funds behind the computers that now run our markets. If you don't think this can happen, did you read the recent piece on zerohedge.com regarding Paulson's fund, which is heavily weighted towards paper Gold, facing redemptions? I don't trade physical Gold, I buy more on weakness in the paper price. I am patiently waiting with a small stack of colored debt coupons (i.e. fascist federal reserve notes) to buy more real money when I feel the time is right.

Taking A Break

Taking a break. Back at it in a week.