More tides a turnin'

The ten year US Treasury bond yield declined down to 2.7% today and is deeply oversold (i.e. bond prices are deeply overbought). A correction is imminent and will begin before the week is over. Because the levels became so oversold, it will likely take some time to "work off" the excess momentum before a longer term intermediate correction can occur:



Once yields become stable and start to rise, this will be supportive of a market rally. The US dollar is also thrashing around and showing great price strength, but it's intermediate term game over and a correction will begin before the week is over:



A lower dollar is also supportive of a stock rally, since the same "real" stock price will require a higher number of dollars, so the price can rise in nominal terms with no change in real price. Not a very good deal, I admit, but it's all pointing to the same thing: an intermediate term rally in stocks.

Yes, I saw today's carnage and no, I'm not worried about it. The horrible news you are hearing and reading about has already been discounted by the market. No guarantees when investing but going long stocks and commodities and short the dollar and U.S. bond prices is about the safest intermediate term play out there. Come spring, you can bet I'll have my stock bear suit back on and I'll be looking to make a killing. For now, though, it's stock bulltard time.

Gold stocks for the long term, a small amount of physical gold for insurance, and commodities and general stocks for an intermediate term trade. There will be twists and turns a plenty, but it should be a fun and profitable ride.

Unsustainable fear dissipating

Santa Claus rally dead ahead. The fall panic is over and a tradable rally into the spring has begun. Yes, it will be choppy, but the trend is your friend and for stocks and commodities, the trend is up. If you hold a bunch of stocks in your 401k/403b/IRA, you should stay put and you'll get some of your money back. Remember, though, that come March or so, it will be time to sell ALL OF YOUR GENERAL STOCKS! No excuses.

Also remember that by March or so, everyone will be saying that things are going to be OK, our government is so smart, Obama and Bernanke have fixed everything, blah, blah, blah. It will all be bullshit and completely incorrect. This is an expected technical bear market rally, nothing else.

Panic is a quantifiable item in general equities thanks to the $VIX or volatility index. High volatility = high fear = markets going down and/or uncertainity is in the air. Looking at an 18 year chart of the volatility index, it is clear to see that this fall's panic was one for the history books and that the fear won't last:



Now, the shorter term picture for the $VIX:



Everyone panics, the world is coming to an end, everyone sells, and then the funniest thing happens: the markets stop going down and actually go up. Nothing has changed, our economy is still heading for its worst recession in 50-80 years, yet we're going to go higher into the spring. As the fundamentals get worse, stocks will temporarily go up. Why is this? Sentiment or feelings/attitudes/emotions. Forget the rational market hypothesis crap. What a joke! The S&P was worth 1500 one year ago and last week it was only worth 750 based on rational investor analysis? I call bullshit when I see it and that's complete bullshit.

Though longer term the market is fairly rational, short term it absolutely is not. We just had a classic fall "panic," which means, ummmmmmmm, people panic! One of the worst legs of this bear market is over. I'm not sure if it will be the worst leg down, but it wouldn't surprise me. The long term trend is down. However, because markets are not rational short term, good money can be made by going long here despite knowing that general stocks are in a nasty bear market.

Freeport McMoran - a current play

Freeport McMoran (stock ticker: FCX) is a large multinational blue chip mining company that focuses on copper, gold, molybdenum and silver. It often leads the mining sector on the way up. Like most mining stocks this fall, it got absolutely taken to the woodshed and beaten to a bloody pulp. Because it has a large copper component, I don't like it for a long-term play, but it is a current trade of mine to play the bear market bounce and it has a margin of safety fundamentally because it also mines gold.

UYM, the ticker for an ETF in the basic materials sector, is a more diversified way to play this bounce and gives you 2:1 leverage while trading like a stock. However, FCX has fairly liquid (i.e. heavily traded) options, which give more like a 3:1 or 4:1 leverage, so I am using options on this stock as a trading vehicle. There is a decent precedent for the current bounce in FCX that I am using as a road map to help make trading decisions. Following are my thought processes related to this FCX trade.

First, the current chart:



What I think will happen next, based on the prior "crash" in the stock in 1997:



Again, what makes the current opportunity so exciting is that it should only take a few months to make over a 100% return (200-300% with options) from the current levels. Due to impatience and my love of the game, I actually plan to sell my options when we reach the 50 day moving average, then buy new ones all over again two weeks later on the pull back. Again, this is a trade, not a buy and hold stock, as the copper component means this company won't do as well as "pure" gold stocks and copper stocks generally do quite poorly during recessions.

Remember that some of the greatest short-term opportunities to go long occur during bear markets, not bull markets. Traders love bear markets because of the ability to play the wild swings back and forth and make money both short and long. One need only look at the 2000-2003 bear market in the S&P 500 for a classic example of this phenomenon, where monthly swings gave gains and losses that looked more like annual returns for an unstable emerging market:



Even if you traded poorly during the prior bear market shown in the chart above and only caught half of each swing in each direction, you would have made 80% in 2 years time (assuming no leverage) instead of losing 50% of your money by buying and holding and gritting your teeth and waiting for the market to come back "like it always does" (eventually, anyway).

Another fractal encouragement

Fractals are repeating patterns that can be predictive at times. Take a look at the charts below of Newmont Mining (NEM), an old blue chip gold mining company on every institutional investor's radar.

Then (in 2000, notice the months on the chart):



Now (notice the months on the chart):



If you believe, like I do, that the fundamentals are solid and a general equity bear market condition exists that is similar to 2000, then there is no reason to think a similar pattern can't repeat and this often happens in markets. See my previous post for a fractal example that made me a lot of money in the recent past.

If the current chart pattern "rhymes" with the previous one (since they're rarely perfect matches), we might could make some money by anticipating this. By the way, did you notice the lower MACD indicator on the two charts above for some more uncanny similarity? Anyhoo, this is what happened next back in the old days of 2000-2001:



By the way, if you're more patient than I and you're an actual investor, here is what happened next in good ol' 2000 for someone with a 3 year time horizon on Newmont (NEM):



Me, I'm in for the ride. Gold stocks are the GO TO SECTOR FOR THE NEXT FEW YEARS. Embrace this. Enjoy this. Buy low now so you can sell high later. Buy! Comprar! Buy! Acheter!

S&P 500 bear - the pause that refreshes

The bear market is not over by a long shot. I believe we have begun the bear market rally or "bounce" that will take us into the spring and then we will have another wicked leg down. This is not "just another recession." You don't crash the entire world banking system with a routine recession. Housing bubbles are notorious for causing protracted, long recessions when they pop. Just ask Japan. Why is this so?

The banks get heavily leveraged when real estate is involved, even when people are willing to put 20 or 30% of the purchase price down in cash. The current bubble had people literally taking a check from the bank to move into a house with 103%, 105% and in some cases up to 110% loan to property loan value. The banks are screwed and they're still not admitting to half the losses they will need to take before this mess is over.

The S&P 500 chart also gives some clues that this bear market is not over:



I believe the bottom is in, but it's only a temporary or intermediate-term bottom. We still need to go through at least one more significant leg down to complete a 5th wave in Elliott wave terms (a charting technique) and set up a momentum divergence before we can have a year or longer cyclical bull market rally occur. When momentum goes this far (using the MACD and RSI indicators on the chart above), a second reaction back to test these levels is likely and the momentum indicators will probably not reach these same momentum lows the next time they "try", though the price should set a lower low. This will set up a price and momentum divergence on the chart and get we tea leaf readers ready to go long for more than a few weeks or months. The bear market is not over but it won't last forever.

The chart below compares the Nikkei Japanese stock bubble of the 1980s (in red) with the Nasdaq stocks bubble of the 1990s (in black). Gives you an idea of what to expect ahead. History doesn't repeat exactly, but it sho' do rhyme.



So, it's opportunistic transient bull for now, but the bear market is alive and well. If you're playing the markets long it should only be for a short time (i.e. 2-4 months), as the real money to be made is when this bear market rally is over and it is time to go short again.

Pssst! Want to make some quick, easy money?

Then buy UYM, a double bullish ETF that tracks companies in the basic materials/commodities sector. Companies like Monsanto, Du Pont and Freeport McMoran. Do your own diligence at the proshares.com website.

When these companies in aggregate go up 10% the ETF is designed to go up 20%, though the tracking mechanism is far from perfect. This extra leverage can also hurt you if you guess wrong, but no risk, no reward. The chart of this ETF shows massive carnage:



Just to get back to its 50 day moving average, a reasonable target for a bear market bounce after a vicious sell-off, implies at least a 100% gain from current levels and it should only take a few weeks to a few months to get there. Should be a quick and easy way to double your money and this instrument can be bought and sold in any account that is able to buy and sell stocks. Any takers?

Counterparty risk - what?!

None of us want to believe that the government or corporations will fail to deliver on the promises they have made, yet we know it has happened many times before.

From the U.S. government's gold seizure from its citizens in the 1930s, to the U.S. government defaulting on its international gold obligation in the early 1970s, to Enron, MCI, Bear Stearns, and Circuit City - counter party risk is real. It's a low-likelihood event, but if/when it happens, it can be really expensive.

Physical gold is an insurance policy against counter party risk as long as you hold it in your possession or store it via an appropriate custodial relationship. The GLD ticker ETF as trustworthy as any random bank promise and is not the same as holding physical gold. We are entering a time in our history when promises will be broken at an accelerating pace. The government cannot possibly afford the promises it has already made and it is soon to make even more to please the sheeple.

Physical gold is portable, universal, and not subject to debasement by incompetent bureaucrats. Trust is in a bear market, which means gold and cold, hard cash are more valuable than promises and projected future streams of revenue based on hope. The U.S. Dollar is king for now, but the torch will be passed to gold soon. Will you be ready? If your 401k doesn't offer the chance to buy gold, does that mean it is appropriate to ignore your obligation to look out for #1 and avoid stepping in #2? I wonder if most E*trade customers know about their counter party risk.

Hold at least 5-10% of your wealth in physical gold outside of the system. It's no longer appropriate to pretend everything is going to be OK. It's no longer appropriate to pretend Obama can and/or will change anything and ignore your own obligation to prepare for an economic crisis. Gold has survived every recorded crisis over the past 3000 years and is now in a strong bull market compared with stocks, corporate bonds, real estate and especially corporate and government promises.

Back to the fundamentals

Fundamentals are how we're supposed to invest, although technical analysis (i.e. tea leaf or chart reading) can be helpful to time entry and exit points. Gold stocks have the best fundamentals they have had in over two decades. Gold mining companies with operating mines that can generate cash flow and don't need to borrow money (since loans are now difficult to obtain) are in the best position they've been in for over 20 years. How do I know? The chart below, a ratio of gold divided by other commodities, tells me.



Gold mining companies dig gold (or real money as it's known to some) out of the ground. It's hard, labor-intensive and energy-intensive work. When the cost of digging money out of the ground drops, profit margins increase. In a deflationary environment, costs drop, because most commodities like oil as well as labor costs drop. For most companies, so does demand. However, cash (and real money [gold]) are in high demand in a deflationary environment because people are risk averse.

Thus, the gold mining companies have a product in high demand whose price is stable to rising while costs are going down. This means expanding profit margins and profits and that eventually translates into a higher stock price and often, higher dividends and dividend yields.

While other companies struggle to survive, gold mining companies are about to start making money hand over fist. Buy the ETF with ticker symbol GDX to get a diversified basket of senior mining stocks and start making some of that money. The 26% gain GDX had yesterday was just a taste of things to come. Gold miners are already making more money as we speak and earnings surprises will be to the upside for several quarters for producing gold mines.

All stocks are about to rally, but when the next brutal decline hits, it will be just a routine correction for gold stocks, which will now start to separate themselves from the general stock indices and become THE premier asset class for the next few years. This is not an inflation play, it is a deflation play, and the gains should be tremendous.

Deflationary shitstorm

Excuse my French and all, but it's game over. The 2008 stock market crash is one for the history books. The government and for profit "Federal" "Reserve," which is neither of these things, has lost the battle. Not that they really had a decent shot anyway. The scenes coming to America in a short while will test every citizens' faith in the "system."

This is end of empire type stuff we are witnessing. Those who think we're going to bounce back because that's what America does are no longer using reason or common sense, but blind hope and faith. There is nothing wrong with hope, but it's time to come to grips with reality. Our system is in for a complete overhaul that will be forced upon our leaders by external realities, since they are incapable of being forward thinking or proactive.

A serious currency crisis no longer seems implausible and is the only real alternative to a long lasting deflationary depression that will make the first one not seem so bad. If you have not bought physical gold coins or bars to be kept in a safe physical location near you, stop procrastinating. Paper money and the banks behind it are broke, desperate and suspect.

I only have one chart for today, which I ask you to look at long and hard - Citigroup over the past 15 years or so:



How many times have we been deceived by and about this company? Remember when the government banned short selling this company? Remember when everyone and their brother on CNBC/MSNBC/Cramer's show said to buy this company on the dips? This company has been dog shit sitting on a foundation of cancer for years. Who warned you? Who helped the poor retail/individual investor avoid losing everything they owned? This is a widow and orphan stock, people. Apparently, financial planners in this country don't think much of our widows and orphans.

Stop listening to people who got it wrong. Stop believing all the bullshit you're told about investing in blue chip companies and holding them forever. Gold doesn't bullshit anyone. India, China, Russia, Saudi Arabia and Iran are all buying the precious metal hand over fist. When promises can no longer be kept and all the illusions are shattered, gold will remain real money and a real store of value. Did you know we've been in a secular bear market since 2000? Did you know the bull market from 2003-2007 was composed essentially entirely of currency debasement/inflation and recklessly low government sponsored interest rates?

OK, enough gloom and doom. It's time for a brief rally already. I think the lows for this leg down will be put in this week, although tomorrow has the potential to be crazy as all hell.

Gold is holding strong and actually managed to go up today amidst the carnage. Unfortunately for me, that means my final gold stock low ball order offers didn't fill. It doesn't pay to chase stocks up in a market like this.

One ounce of gold will buy the entire Dow Jones Industrial Average before this bear market is over. At $750/ounce gold and a 7500 Dow Jones level, we're still at a 10:1 Dow to gold ratio. We're going to get to a 1:1 ratio. You do the math. This is what opportunity is made of - BUY PHYSICAL GOLD! Traders should buy gold stocks (or any old turkey stock really) and look for a multimonth rally potentially starting tomorrow. Investors should buy physical gold and gold stocks mingled with short-term US government bonds of 1-5 years' duration (or other cash equivalents).

By the way, once the coming short-term rally is over, there will be HUGE profit potential going short next spring. If you don't know anything about going short stocks, you have 3 months to learn. The next leg down after the obligatory 2-4 month bear market bounce may be almost as wicked as the one now ending. This is more opportunity knocking up ahead.

Blood in the Streets again - Buy!

Tomorrow and/or Friday may be the last chance to board this train before the next intermediate trend, which will be up, not down. Trying to call an exact bottom is a mug's game, but we're VERY close. Not only gold stocks, but all stocks will rally for at least a few months, and it should be fast and furious.

Remember, the fastest, craziest, and highest percentage positive gains over the short term occur in BEAR markets, not bull markets. Yes, it's counter-intuitive, but history repeats and this year has been no exception. Gold stocks are the best fundamental buys out there, but if you're stuck in the ol' company 401k with 4 shitty mutual funds to choose from, you're still going to make some of your money back over the next few months, so sit tight and don't sell everything at the bottom.

To the charts, yo. The put to call ratio over the last 6 months is shown, which looks at the ratio between people betting for the market to go down versus those betting it will go up. When the chart is high/up, people are heavily betting on a further decline. The herd is usually wrong when it goes to extremes.



Next up, the VIX/Volatility index or the "fear" gauge. When it's high, people are scared and the market is going down. The concept of declining momentum takes a while to get comfortable with, but it helps predict trend changes before they occur.



Commodities have been crushed and will be "done"/in a bear market for as long as deflation lasts. However, no market moves in a straight line and this one has had a straight line trajectory toward zero and is due for a fast and furious "relief" rally. This relief rally may well be good for a 40-50% gain within a few months once it starts.



Remember, gold is schizophrenic because it is lumped together with commodities (unfortunately for my portfolio), but it is also the world's safest currency. This means it will outperform commodities (and already has by losing less than other commodities like oil) and revert to its role as money if deflation persists. The gold play is not based on it being a commodity but being a safe currency that cannot be debased by the government (though confiscation is always possible, which is why gold bugs often also like guns, but we'll save that story for another day...).