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.

Secular Chart Porn With Stochastics

I believe the unthinkable is going to happen. My guess is that the March 2009 lows will hold as well for major stock markets as they did for Greece (i.e. they won't):



I am black-bile bearish on equities to the point where I am nervous about Gold stocks here. That's very bearish for me, as I am well aware of the tendency for Gold stocks to largely decouple from equities as they did in the 1970s and 1930s. In keeping with the theme that a picture is worth 1,000 words, here is the paperbug secular nightmare translated through the eyes of someone who has managed to break through the propaganda to the other side of the matrix (21 year monthly log scale Dow to Gold ratio candlestick chart porn with stochastics):



And the path for the stock markets of major economies is being led by China, which is in the same precarious position as America in the 1930s, while we are more like Britain if one wants to look to the 1930s for answers. We ARE NOT EVEN CLOSE TO THE AMERICA OF THE 1930s and any direct comparisons are apples to oranges. Here is the Shanghai Composite ($SSEC) on a monthly 20 year chart to show some more slow stochastic secular chart porn related to what comes next for those not overly concerned with the day-to-day squiggles:



Long physical Gold, short general equities. Biased as can be due to established positions. The Dow to Gold ratio will reach 2 before this cycle is over and we may well go below 1.

Ten Year Yield Back Below 3%

The U.S. Government ten-year bond yield ($TNX), that is. This is not an inflationist message, though it provides cover for "the world is ending, quick we need to give all our corporate friends some taxpayer money" scenario to recur. The biggest bubble of them all has a ways to go before it pops. Here's a 5.5 year weekly linear plot of the yield action:



People playing the "steepening" trade (i.e. betting on the spread between long-term government debt and short-term government debt increasing) are getting killed right now due to a quick rise higher in short-term yields while long-term yields are collapsing. I'm sure these folks aren't using any leverage though and I'm sure this won't contribute to margin calls that intensify selling in the equity space...

Gold continues to hold up well during the new deflationary pressures that have now resumed in full force. The trillions of dollars wasted trying to "stimulate" one thing or another are gone. There is and will be nothing good left to show for it except among those titans of the universe close enough to the keiretsu teat of federal government largesse. Those mere mortals who took the bait and bought houses in the bubble real estate areas are about to experience that drowning feeling of being underwater, regardless of whether or not a new housing tax credit is passed. Enough demand was brought forward that any new measures will likely be ineffective.

The Dow to Gold ratio looks like it is gathering a head of steam to head back to its March of 2009 lows. I suspect this will happen with Gold acting firm (although even $100/oz swings in both directions should not alarm or surprise long-term Gold bulls) and the stock market tanking. I am maintaining my "long physical Gold, short stocks" trade for now.

Morgan Stanley - Toast

And don't let the door hit you in the a** on the way out. I profiled Morgan Stanley's (ticker: MS) chart in a recent prior post and the anticipated break-down occurred today on decent volume. Here's a 19 month daily candlestick chart of MS thru today's close:



Now why would I be happy that a venerable American corporation may have crossed the line into a potential death spiral? Because, like many Americans still trying to work hard to get ahead, I am angry at what has happened over the past 2 years in this country. Yes, it started long before that, but Morgan Stanley has been as American as Hitler or Mussolini over the past few years. A rigged game favoring fascist/corporatist pigs benefits the few at the expense of the many. I am mature enough and aware of history enough to know that this is just how great empires end, but it still stings.

And I am glad that one of the biggest pigs feeding at the government trough is failing. I am glad because I don't want to live under this system of evolving fascism. I believe that economic freedom works, despite all the hardships it introduces and all the responsibility it entails. I want Morgan Stanley, Goldmun Sucks and JP Whore-gan to fail. I want a level playing field, no matter how juvenile and naive it is to think such a thing may happen.

The confirmed breakdown in Morgan Stanley is ominous for the entire U.S. stock market. The third biggest and baddest Wall Street firm, which is only still a company thanks to the unintended generosity of American taxpayers, is a joke. They have all the insider information, the most sophisticated research, access to free money at no interest and the fastest computers on Wall Street. And they are still losing! HAHAHAHAHAHAAAAHHHHHH!

Cronyism works until you need to be smart or agile, then it fails. Inbreeding doesn't work as a policy and only outright theft and cheating can remedy the intellectual deficits introduced by promoting the weak at the expense of the strong. As Martin Armstrong has told us from first hand experience (while he rots in jail for being smarter than the apes), it is about guaranteeing victory on Wall Street by rigging the game, not about the thrill of competition or survival of the fittest.

Two down (i.e. Bear Stearns and Lehman Brothers), three to go (i.e. MS, Goldmun Sucks, JP Whore-gan). Morgan Stanley should go first according to my charts and common sense. Wake me when Morgan Stanley's stock price hits $15/share.

The bear market is back and its job is to destroy the excesses of the prior bull market. The destruction of the U.S. Dollar as the world's reserve currency and the destruction of at least two of the three remaining financial behemoths that support it makes sense from a secular bear market perspective. I am only the messenger and as an American, I would prefer a different message needed to be conveyed. Meanwhile, Gold continues to expose the ridiculousness of our system and its corrupt, hollow core. America is not even close to the worst country in the world, it is just the one with the most to lose. It ain't good for me or the world, but that doesn't change the facts. I am ranting here as an antithesis to the controlled mainstream U.S. financial media - in other words, to speak the truth as I see it, whether good or bad.

Once the Dow to Gold ratio hits two (and we may well go below 1 this cycle), then it is time to become bullish on America again. Until then, let the rot be purged and thrown out to into the oily sea.

OK, sorry for venting, now I feel better...

Deja Vu and Rule Changes

More fractal chart porn. We're back at the 1000 range in the S&P 500 and looking all "head and shoulder-y":



So, perhaps we're due for this, courtesy of the 2000-2003 bear market in U.S. equities (daily chart of some action in the 2001-2 time frame for the $SPX follows):



Could it be deja vu all over again? We'll see.

On an unrelated note, I loved Denninger's rant over at Market Ticker related to Fannie and Freddie getting tough with "strategic defaulters." He says it better than I could. Why is this important/relevant?

Because it shows how governments change the rules at a whim. This is what will happen with our monetary system. Savers who hold paper currency will be screwed by decree one day out of the blue. Only the timing is in question. In this scenario, paper Gold holders would likely get royally screwed. It isn't fair, but c'est la vie.

Hold some actual physical metal as a hedge against insanity and the inevitable outcome that characterizes all monetary systems gone awry throughout history. The U.S. has already changed the monetary rules twice in the last century and we're due for another rule change in the next five years or so if the 40 year cycle holds up as I suspect it will.