Pirate of Batavia

The 'Lehman Moment' Is Here ?

2011-11-01T21:59:00.002+08:00

The strangely-named MF Global (MF) is now the subject of the lead article of the online New York Times, with the title "Regulators Investigating MF GLOBAL for Missing Money." Here’s the lede:

Federal regulators have discovered that hundreds of millions of dollars in customer money has gone missing from MF Global in recent days, prompting an investigation into the brokerage firm, which is run by Jon S. Corzine, the former New Jersey governor, several people briefed on the matter said on Monday.

The recognition that money was missing scuttled at the 11th hour an agreement to sell a major part of MF Global to a rival brokerage firm. MF Global had staked its survival on completing the deal. Instead, the New York-based firm filed for bankruptcy on Monday.

One of the reasons for the stock market crash after Lehman is discussed in the article. Innocent hedge fund money (if there is such a thing!) was lost to the rightful owners in the collapse. If indeed there has been misappropriation of customer funds at MF, how many customers are going to withdraw their funds from other commodities accounts as well as from standard stock/bond brokers, after selling their holdings first? Especially after the frustrating decade-plus the US have experienced in the financial markets, why shouldn’t people just move to direct ownership of Treasurys and into FDIC-insured bank deposits?

The story could hardly be worse. MF Global was not just any old futures firm. It was run by a stalwart of the Democratic establishment and the former leader of Goldman Sachs. If his firm was guilty of what would basically be akin to embezzlement of funds owned by the firm’s clients, whether or not Mr. Corzine was blameless, how could one trust a securities firm run by someone who had not been a high-ranking government official?

A major “risk-off” move could be in the making.

Twist And Shout?

2011-09-24T16:39:00.003+08:00

What in the wide, wild world of monetary policy is the Fed doing, giving essentially unlimited funds to European banks? What are they seeing that most do not? And is this a precursor to even more monetary easing at this next week’s extraordinary FOMC meeting, expanded to a two-day session by Ben Bernanke? Can we say “Operation Twist?” Or maybe “Twist and Shout?” Not many charts this week, but some things to think about.

Bailing Out Europe’s Banks

Yesterday the Fed announced that along with the central banks of Great Britain, Japan, and Switzerland it would provide dollars to European banks that have lost their ability to access dollar capital markets (basically each other and US-based money market funds) that are slowly letting their holdings of European bank commercial paper decrease as it comes due. And if they are “rolling it over,” they are buying very short-term paper, according to officials at the major French bank BNP Paribas.

Are US taxpayers on the hook? We will deal with that in a minute. The more interesting question is, why do it at all and why now? Was there a crisis that we missed? Why the sudden urgency?

One of the little ironies of this whole Great Recession is that the central banks of the world rolled out this policy on the 3rd anniversary of the Lehman collapse. The Fed acted AFTER that crisis to provide liquidity. And we know the recession and bear market that followed.

The only reason for this move must certainly be that they are acting to prevent what they fear will be another Lehman-type crisis. Otherwise it makes no sense. They can give us any pretty words they want, but this was not something calculated to make the US voter happy. To do this, you have to be convinced that “something evil this way comes.” And to recognize the costs of not doing anything, and try to head them off.

My guess (and it is that, on a Friday night) is that the European Central Bank made a presentation to the other central bankers of the realities on the ground in Europe, and the picture was plug ugly. It should be no surprise to readers of this letter that European banks have bought many times their capital base in sovereign debt. The Endgame is getting closer (more on that in a minute).

Let’s look at just one country. French banks are leveraged four times total French GDP. Not their private capital, mind you, but the entire county’s economic output! French banks have a total of almost $70 billion in exposure to Greek public and private debt, on which they will have to take at least a 50% haircut, and bond rating group Sean Egan thinks it will ultimately be closer to 90%. That is just Greek debt, mind you. Essentially, French banks are perilously close to being too big for France to save with only modest haircuts on their sovereign debt. If they were forced to take what will soon be mark-to-market numbers, they would be insolvent.

Forget it being simply French or Greek or Spanish banks. Think German banks are much different? Pick a country in continental Europe. They (almost) all drank the Kool-Aid of Basel III, which said there was no risk to sovereign debt, so you could lever up to increase profits. And they did, up to 30-40 times. (Greedy bankers know no borders – it comes with the breed.) For all US bank regulatory problems in the US (and they are legion), I smile when I hear European calls for US banks to submit to Basel III. Bring that up again in about two years, when many of your European banks have been nationalized under Basel III, at huge cost to the local taxpayers.

Next, let’s look at the position of the ECB. They are clearly seeing a credit disaster at nearly every major European bank. As I keep writing, this could and probably will be much worse for Europe than 2008. So you stem the tide now. But for how long and how much does it cost? A few hundred billion for Greek debt? Then Portugal and Ireland come to mind. If bond markets are free, Italy and Spain are clearly next, given the recent action in Italian and Spanish bonds before the ECB stepped in.

Could it cost a half a trillion euros? Probably, if they have to go “all in.” And that is before the ECB starts to buy Italian and Spanish debt (Belgium, anyone?), which no one in Europe is even thinking that the various bailout mechanisms (EFSF, etc.) could handle, which leaves only the ECB to step up to the plate. The ultimate number is quite large.

WWGD?

What Will Germany Do? That has to be the question on the mind of the new ECB president, Mario Draghi, who takes over in November, just in time for the next crisis. I believe German Chancellor Angela Merkel at her core is a Europhile and wants to do whatever she can to hold the euro experiment together. But for all that, she is a politician, who knows that losing elections is not a good thing. And the drum beat of the German Bundesbank and German voters grows ever louder in opposition to the ECB printing euros. Can she explain the need for this to her public?

Germany thought they were getting open markets and an ECB that would behave like the Deutsche Bundesbank. And it did for ten years. Now, in the midst of crisis, the rest of Europe is talking about needing a less restrictive monetary policy. That means potential inflation, which still strikes fear in the hearts of proper German burghers.

What Is the Fed Really Risking?

This will be where I lose a few readers. The actual answer to the above question is, “Not much.” The Fed is not lending to European banks or even to the various national central banks. Its customer is the ECB, which will deposit euros with the Fed to get access to dollars. Making the safe assumption that the Fed knows how to hedge currency risk (fairly easy), the only risk is if the ECB and the euro somehow ceased to exist. And these are swap lines. This is not a new concept; it has been authorized since May, 2010. The real difference is that previously it has been used only for loans with seven-day maturity, and now that is extended to three months. This gives the ECB the ability to lend dollars for 3 months, which they must think will entice US money-market funds back into at least short-term commercial paper. (Just stay one step ahead of the ECB and the Fed, and your loan is “safe.” We will see how enticing this is.)

Now, this is not without costs. It is effectively another round of QE, although theoretically less permanent than the last rounds, as the swap lines have a finite and rather short-term end. And those banks need the money for existing business, so it should not flood the market with new dollars. If that were to happen, the Fed should withdraw the lines or withdraw dollars from the system on its own. Allowing their balance sheet to expand through a back-door mechanism like this is not appropriate monetary policy and would draw deserved criticism.

Why do it? It is not for solidarity among central bankers. The cold calculation is that a European banking crisis would leak into the US system. Further, it would throw Europe into a nasty recession, when growth is already projected (optimistically) to be less than 0.5%. That means the market that buys 20% of US exports would suffer and probably push us into recession, too (given our own low growth), making a far worse problem for monetary policy in the not-too-distant future.

Finally (and this is one I do not like), if the ECB was forced to go into the open market for dollars, the euro would plummet. As in fall off the cliff. Crash and burn. Which would make US products even less competitive worldwide against the euro. While I think we need a stronger dollar, that is not the thinking that prevails at higher levels. You and I don’t get consulted, so it pays us to contemplate the thought process of US monetary leadership and adjust accordingly.

Finally, I think that the end result of lending to the ECB will be to postpone the problem. The problem is not liquidity, it is insolvency and the use of too much leverage by banks and governments. This action only buys time. And maybe time is what they need to figure out how to go about orderly defaults, which banks and institutions to save and which to let go, which investors will lose, whether some countries must leave the euro, etc. Frankly, the world needs Europe to get its act together.

What Will the Fed Do Next Week?

Fed Chair Ben Bernanke has taken the highly unusual step of adding an extra day to next week’s FOMC meeting. While that raised my eyebrows, I thought his monetary policy movements would continue to be constrained. Given yesterday’s announcement of coordinated policy with the ECB, I am not so sure now. These things do not happen overnight or in a vacuum. The phone lines must have been open to Europe. The Jackson Hole meeting seemed innocuous enough, but I bet there were some very deep private conversations. This is something they have seen coming for some time. It is not like the whole euro problem is a surprise. Now, Bernanke has to bring his fellow FOMC members along for the next round.

Operation Twist seems to be priced into the market. The original Operation Twist was a program executed jointly by the Federal Reserve and the (freshly elected) Kennedy Administration in the early 1960s, to keep short-term rates unchanged and lower long-term rates (effectively “twisting” the yield curve). The US was in a recession at the time, but Europe was not and thus had higher interest rates. The equivalent of hedge funds back then (under the Bretton Woods system) would convert US dollars to gold and invest the proceeds in higher-yielding assets overseas. Billions of dollars worth of gold was flowing into Europe each year. (Incidentally, President Kennedy announced Operation Twist on February 2, 1961, which basically corresponded to the business-cycle trough.)

The notion behind Operation Twist was that the government would encourage housing and business investment by lowering long-term rates, and at least not encourage gold outflows, by maintaining short-term rates. Mechanically, the Federal Reserve kept the Federal Funds rate steady while purchasing longer-term Treasuries. The Treasury reduced its issuance of longer-term debt and issued mostly short-term debt.

Let’s look at what Bill Gross had to say in the Financial Times:

“The front end of the curve has for all intents and purposes become inert and worst of all flat as opposed to steeply positive. Two-year yields are the same as overnight fund rates allowing for no incremental gain – a return that leveraged banks and lending institutions have based their income and expense budgets on. A bank can no longer borrow short and lend two years longer at a profit…

“By flooring maturities out to two years then, and perhaps longer as a result of maturity extension policies envisioned in a forthcoming Operation Twist later this month, the Fed may in effect lower the cost of capital, but destroy leverage and credit creation in the process. The further out the Fed moves the zero bound towards a system-wide average maturity of seven to eight years the more credit destruction occurs, to a US financial system that includes thousands of billions of dollars of repo and short-term financed-based lending that has provided the basis for financial institution prosperity.”

Bernanke made it clear in his infamous November 2002 “helicopter” speech that moving out the yield curve was in the Fed’s bag of tricks. By that, I mean they could do what Gross fears. They put a ceiling on the price of (say) the 10-year bond at 1.5%, in hopes of bringing banking and mortgage rates down, thereby theoretically spurring the economy and boosting the housing market. And in a normal business-cycle recession such a policy might work. But in a normal business cycle, it has never been necessary.

This next Fed meeting will likely produce a very interesting statement at its conclusion. If the Fed does nothing, you do not want to be long. If they go “all in” you do not want to be short.

Bernanke clearly believes that stock prices are a tool of monetary policy. He goes so far as to say that the Fed should not try to “prick” what might be perceived as a bubble, because “… attempts to bring down stock prices by a significant amount using monetary policy are likely to have highly deleterious and unwanted side effects on the broader economy.”

But a rising market is evidently not a problem. He uses all sorts of statistical research that shows a seemingly clear correlation between stock prices (risk assets) and monetary policy. I would argue that correlation is not causation. The data is basically over the last 60 years and does not include a balance-sheet/deleveraging recession like we are now in. The underlying economic tectonic plates have shifted. Ask Japan how much an easy monetary policy helps stock prices.

There has been some chatter that the Fed move to coordinate with the ECB will provoke Tea Party criticism, not to mention Governor Perry’s. I hope not, as that would be foolish, and show that whoever takes that tack is not thinking seriously or simply does not get the broader macro environment. To think that policy would be any different under a Republican means you are not paying attention. This should not be that controversial.

But if the Fed does indeed pursue an Operation Twist or “moves out the yield curve,” then vehement criticism is more than warranted. I will be shouting myself!

Have a great week! Trade carefully out there!

Gold : SURE DIE !

2011-08-31T14:57:00.002+08:00

First let’s have a look at the gold price in 2006:

Now let’s have a look at the gold price in 2011:

Now let’s place the two charts next to each other, to see the similarities:

If this isn’t clear enough, have a look at the chart below, which lays one chart on top of the other:

The patterns were nearly identical -- and so was the huge drop that followed.

We can learn something from the past.

Don't catch the falling knife !

A Bigger Correction Underway?

2011-08-27T15:10:00.006+08:00

To quote Charles Dickens, this week was the best of times, it was the worst of times.

This week Quaddafi was finally cast out, Dominique Strauss Kahn was cleared, Japan's credit rating was cut, Washington quaked and everyone waited with bated breath for the words from Jackson Hole, WY.

Oh, and I forgot to mention, gold skyrocketed to $1900 at the beginning of the week and then plunged in one of its worst days Wednesday when gold prices tumbled a whopping $95.80, or 5.1%, to settle at $1,765.50 an ounce -- the lowest level in a week. To keep things in proportion, gold started the year just above $1,400 an ounce.

Also this week SPDR Gold Trust's(GLD) total assets surpassed that of the SPDR S&P 500 ETF (SPY), making GLD the largest exchange-traded fund in the world for the first time. But also to keep things in proportion, the assets of the Gold Trust ETF are still trivial compared to the trillions held in equities and bonds. Four times as much money is held in Apple (AAPL) stock alone. Naturally, there are many other ways to own gold, but in general, this means that not that many people own gold despite all the hoopla.

The Federal Reserve is holding its annual symposium in Jackson Hole, WY, this weekend and all eyes are on Federal Reserve Chairman Ben Bernanke when he addresses the group today. It was at last year’s meeting that Bernanke hinted the Fed would start another round of asset purchases to stimulate the economy and about three months later the Fed announced the $600 billion bonds purchases, later dubbed QEII. And that, folks, was one of the contributing factors for gold hitting $1900 this week.

But it doesn’t really matter to gold what Ben Bernanke will say. If there's QE3, gold should go up in the long term. And if there's no QE3, gold still will go up. The higher inflation and weaker dollar that QE3 would likely cause would be positive for gold, which is known as an inflation hedge. No QE3 would mean a zero-rate policy may continue for more than a while (even longer than they already pledged), which is an ideal environment for gold to grow. A new round of quantitative easing is not likely to be met with approval from the emerging world, particularly China, or other large holders of U.S. Treasuries and U.S. dollar-denominated assets.

No matter what is said in Jackson Hole, there is no doubt that the US economy is in a deep hole. The uncertainty surrounding the U.S. deficit-reduction debate has fueled concern about a U.S. default, potential destruction of the U.S. dollar along with fears of a global recession or depression.

Those that argue that gold is overvalued from a long-term perspective are not looking at the right numbers. They ought to be looking at Europe's banks and at the amount of short-term obligations that are sitting on the U.S. Treasury's books.

The S & P chart see a local top signal from analysis of both volume and Fibonacci retracement levels. In addition, there are two reliable (with proven track record – as seen above) support and resistance factors in play: the 50-week and 200-week moving averages.

The SPY ETF just touched the 200-week moving average and a rally from here is likely. At this point we do not expect the 2008 plunge to repeat. However, even if that is going to be the case, then we would still likely see prices move higher -- perhaps towards the 50-week moving average before the decline continues.

In the S&P 500 Index chart this week, we have seen a decline to and a possible bottom at the 38.2% Fibonacci retracement level. This has been confirmed by the RSI indicator. Although we could still see a sideways trading pattern, the size and rapidness of the recent decline leads us to believe a bigger rally from here is more likely than not in the coming weeks.

Lower gold prices would likely be followed by lower silver prices, not because of the general stock market rally, but because of gold’s price decline. This would likely impact gold and silver mining stocks as well. Overall, the precious metals – stocks link has changed very little recently from a correlation perspective.

Although stocks could move either way from here, it is more likely that higher prices will be seen in the short term. The direction of the market beyond this time frame is uncertain. Based on the persistent negative correlation between the stock market and precious metals the expected short-term rally in stocks would likely have a negative impact on gold and silver.

Georgy-Boy Is Always Right?

2011-08-14T15:01:00.003+08:00

On Wednesday August 10 the Chicago Mercantile Exchange ("CME") came out with an announcement that it would be raising margin rates on the purchase of futures contracts on gold. It reported that this was an effort on its part to cool off the price of gold, which has enjoyed a parabolic run since August 1. It also said that there would be more rate hikes to protect gold from becoming a bubble.

When I read this I laughed at the arrogance of the CME. There is only one reason that it wants to stop gold’s parabolic run: It simply doesn't have enough gold to fulfill the futures contracts that it has already sold. Let’s not forget that one futures contract is sold in lots of 5,000 ounces. That means if we use a proxy price of $2,000 an ounce, to make the math simple, we are talking about $10 million for one contract. Add to that the fact that the CME gets a fee of $50 an ounce above the spot price. So for every contract sold, it earns $250,000. Delivery and shipping are the buyers' concerns.

Let us also not forget that last April the CME raised the margin rate on silver not once but five times to get silver to finally capitulate. The fact is that the CME does not have the physical gold to satisfy the futures contracts that have already been sold. Do you really think this will play out differently than it did with silver last April? Some may call it a bubble, but I do not agree.

George Soros, the hedge fund investor who called gold the ultimate bubble, has divested his portfolio of nearly his entire investment in gold, inciting many to fear that the price will very soon plummet, devaluing the specie-heavy portfolios of millions of investors. Whether you agree with him or not, attention must be paid to his movements. It can be very expensive to ignore the predictions of Soros.

For example, on September 16, 1992 (a date subsequently known as “Black Wednesday”), one of Soros' investment funds sold short more than $10 billion worth of pounds sterling, profiting from the British government's reluctance to adjust its interest rates to levels comparable to those of other European Exchange Rate Mechanism countries. Defiantly, the UK withdrew from the European Exchange Rate Mechanism, triggering an unsettling devaluation of the pound. Not everyone was harmed by this plummet, however. George Soros earned over $1 billion in the ordeal. Consequently, he was described by the media as the man who broke the Bank of England. In 1997, the UK Treasury estimated the cost of Black Wednesday at 3.4 billion pounds. This latest move to take a position against gold may have similar repercussions around the globe.

Soros, the Hungarian-born financier, made the move to cut his holdings of gold only in the first quarter of 2011. As with most things this King Midas touches, the price per ounce of gold had skyrocketed during the period of his investment in it. While at the beginning of last year gold was trading at $1,100 an ounce, the trading price in 2011 has risen to as much $1,800.

The exact date of the dramatic divestment by Soros is unknown. It is known that the majority of those holdings are managed through the Soros Fund Management Company. Filings to the Securities and Exchange Commission (SEC), the American regulator, showed that he had sold 99% of his holding in the SPDR Gold Trust (GLD), an exchange-traded fund backed by gold bullion, by the end of March. The New York-based fund sold its entire holding in GLD, but Mr. Soros bought shares in two mining companies, Freeport-McMoRan Copper & Gold(FCX) and Goldcorp (GG).

Despite the potential for a devastating global impact of such a move by a highly influential individual, there are those on Wall Street praising the insight of Soros. Historically, as the precious metals rally ends, you will get transition toward related equities. Indeed, the gold mining stocks have lagged the underlying asset as people would rather hold gold and silver above the ground rather than these metals that are still in the ground.

As I write, it looks like Mr. Soros did not get this one right, and there are those not entirely convinced of his wisdom.

Filings to the SEC showed that Paulson & Co, the US hedge fund run by John Paulson, left its holding in GLD unchanged. It was reported in Bloomberg online that Hal Lehr, a commodity trader at Deutsche Bank, said he remains bullish on gold despite its current levels and believed it could reach $2,000 an ounce by year’s end. The report went on to say that gold ETF holdings fell by 3.3 percent in the first quarter of 2011, and there are reliable indications that some of that investment was used to purchase physical gold bullion.

As if there's not enough uncertainty, a worldwide devaluation of gold could create a ripple of financial insecurity. There can be no doubt that gold is viewed by a majority of the world as a very safe and trustworthy investment -- one that only increases in value. This sort of reasoned speculation has undoubtedly fueled the bullish ballooning of the price per ounce of the metal.

If the actions of Soros and other global power brokers have the effect of devaluing gold, then the legitimacy and appeal of the call of many to return to a gold standard for the value of paper currency or to abolish the Federal Reserve and other similar central banks around the world, will be similarly devalued.

Once the worth of both gold and paper currency is wiped out by the conspiring of financiers, globalists, multinational corporations, central bank boards, and other like-minded and influential moneyed interests, there will be nowhere to turn for an object of value. This complete obliteration of precious metals and paper currencies will leave those who create such catastrophes as the sole site of economic refuge for those cast headlong into the storm of boom and bust cycles and the devastation that comes in their wake.

One of the most toxic elements present in this pool of bitter water is a worthless money supply. The Federal Reserve creates this non-potable problem by engaging in a practice known euphemistically as "quantitative easing." It is a policy that plain-speaking people would call "printing worthless money."

There is no governor on the engine of the Federal Reserve's printing press, and the speed with which it can crank out reams of worthless paper money is dizzying. However, unlike paper money, gold cannot be manufactured and it is of finite quantity. While this bodes well for the eventual rebound of the price of gold (assuming that it soon begins to descend), there can be little expectation that those who benefit most from a world marketplace dependent on dollars and pounds will allow gold to supplant these currencies as the coin of the realm. From their point of view, access to that resource must be restricted and dependence on printed money must be perpetuated.

The current debt crisis in Europe is an example of how the price of gold can benefit from a currency’s shortfall. The millions upon millions of dollars owed by Greece, Ireland, Portugal, and others in the eurozone devalues paper currency while artificially (perhaps) propelling the price of gold into the stratosphere.

That said, there is a good chance that any effort to sell off holdings in the precious metal by George Soros and others may convince others to dump their own investments in gold rather than run the risk of being found on the outside of the trade looking in.

In fact I’m sure this is exactly what that cagey Soros is betting on.

Double Dip Or Another Great Depression!

2011-08-06T16:54:00.001+08:00

“I did a careful study of the action of the great post-crash rally that occurred during late 1929 into early 1930. The rally was a beauty, stirring up more excitement and volume than did the advances in 1928 to the 1929 top.” - Richard Russell.

You can imagine that market participants during the spectacular advance into April 1930 were convinced that it was resurgence, a revival of the powerful 1921-1929 bull market. Speculators clamored back into the market, thinking it was great opportunity -- they weren’t going to be left standing at the station as the train took off for another great decade of gains.

Truth be told, records shows the economy had actually topped out in late 1928, fading throughout 1929. The market was running on empty. The economy continued to deteriorate as the market roared ahead from late 1929 into April 1930. Just like the market roared ahead into April 2011 as the economy deteriorated?

But then like a bolt out of the blue, the market and the economy came back into correlation and stocks turned down decisively. Just like they turned down decisively in July 2011 as Rosy Scenario divorced Mr. Economy and the fundamental figures could no longer be painted pretty.
With the ending of QE2, the tape could no longer be painted.

With the debt ceiling debate raging, perhaps the funds were no longer easily available for the Plunge Protection Team. Isn’t it special that one day after a debt deal is reached, and funds can be found for The Working Group without the scrutiny of political subterfuge that stocks stage a big reversal? Just happenstance I’m sure. My daddy taught me cynicism well.

Who knows if a double dip will really turn into the Greater Depression. But what is remarkable is that back then the dollar was strong, the US was a creditor nation. Now the dollar and US debt debacle are laughing stocks. Yet most of the jaw jackals, pundits, and financial personalities are sharpening their pencils and ‘calling’ the most likely objective of where the pullback will end and when the next great buying opportunity will arrive.

What if they are all wrong? What if the leg down into the March 2009 low was a big Wave 1, the advance into May 2011 was a big Wave 2, and the stiletto-like angle of attack to the downside since July 2011 is the beginning of a menacing Wave 3?

Few if any are calling for a decline to below 666 S&P. Those that entertain the idea are boys that cry wolf. They are taken serious by few, the financially frail -- those who have fought with and struggled against monster moves in leading names like hyperventilating Faye Rays in the grip of King Kong.

What if?

What if the guns of QE2 are unholstered and the market walks up to Ben Bernanke like Dirty Harry:“I know what you’re thinking. Did he fire six shots or only five? Well, to tell you the truth, in all this excitement I kind of lost track myself. But being as this is a .44 Magnum, the most powerful handgun in the world, and would blow your head clean off, you’ve got to ask yourself one question: do I feel lucky? Well, do ya, punk?”

You feelin’ lucky, Ben?

What if the 4-year or Fibonacci fractal of 1440 degrees from the big top in July 2007 is exerting its influence. What if the pattern of the big spread double bottoms in 2007 that led to a crash when they were broken is repeating here and now with the big double bottoms in 2011 having just broken? Of course, just as the sign of the Bear was flashed in 2008 on the double bottom break, the market backtested the breakdown point. That’s on the monthly charts and the market slid substantially before that backtest played out into May 2008. Be that as it may, a mini-fractal of that pattern could play out now with the S&P backtesting 1260/1264 or even 1280, satisfying a backtest of the broken angle up from March 2009.

What if?

In April 1930, market participants believed the crash was a one-off. They assumed lightening doesn’t strike twice. Sound familiar?

Conclusion:

Tuesday was 90 calendar days from a high which often defines a turning point. As it turned out, Tuesday proved to be a closing low -- for this particular losing streak anyway. On Wednesday the market opened up, implying there was more work to do on the downside. The market proceeded to roll over on top of Tuesday’s flushout with the S&P finally arresting momentum at 1234.

The range from the 1011 low in July 2010 to the 1371 high in May 2011 was 360 points. A Fibonacci .382 retrace of the range is 1234. The closing low so far occurred on August 2nd, 90 days from May 2nd.

However, since 1264 (270 degrees down from high) was broken with authority, the S&P should satisfy a 360 degree move down from the high which equates to 1227. This would accomplish a full backtest of last November’s high (that occurred on November 5th and 1227 ties to November 5th, so these square outs of time and price are worth paying attention to).

Higher USD, End Of QE2 ?

2011-06-20T22:33:00.002+08:00

Of late, there's a lot to of discussion about -- Is Quantitative Easing the Last Gasp Bubble?

In any event, and back to the greenback, take a look at the higher low (bullish) in the chart above (below those luscious legs), as well as the fledgling "W" pattern (that will confirm with a move above DXY 76), whichwould also suggest higher prices for dollar proxies. If history repeats, or even rhymes, this should serve as an asset-class headwind.

While I have you, let me say this: I've been asked a lot about what the end of QE2 might mean for the markets. My response is that the purpose of this initiative was to reflate markets such that corporate America could roll their debt and issue stock -- and that's been largely achieved (lets leave the other sides of the debt sandwich -- sovereigns above, consumers below -- out of the conversation for the time being).

That being said, I do believe that the second derivative of the end of QE2 will be a higher dollar, as everyone looks for the light at the end of the tunnel (regardless of whether of not it's affixed to the front of a train). Given the leverage in the system and the correlation of (carry trade) strategies, I do think this will matter, and that's why I've taken so much time to draw your attention to it.

GOLD, Where Got Bubble?

2011-06-11T19:40:00.002+08:00

Any thoughts of a bubble in precious metals is not pertinent at this time. As long as mining stocks are not in favor then any thoughts of a bubble are not applicable in the current situation. Mining stocks should be soaring in tandem with their brothers in bullion. Such is not the case. Miners are trading far below general market valuation. In past history during a bubble, mining stocks soared to hundreds of dollars a share at the same time as bullion.

Wealth in the ground represents an open-ended warrant on mining potential. Mines can grow, new ore bodies can be found, while bullion has no such potential open-ended expansibility.

Gold mining stocks (GDX) are incredibly cheap at $1500 (GLD). Before the credit crisis in March of 2008 as gold hit $1000 an ounce, miners (GDX) hit its all-time high of $55. Now three years later gold is 50% higher, yet the miners have barely been able to break out of the $55 range. Yamana (AUY) and Kinross(KGC) are two majors that have been significantly underperforming gold over the past three years and are not near their pre-credit price levels in 2008. These stocks have not provided any leverage to the price of gold to their shareholders. Investors are sticking to the bullion ETFs and are disinterested in the miners. This lack of interest in this sector signals we still have some way to go in this precious metals bull market.

The gold miners should be trading higher if they kept pace with the rise in the bullion. The standard deviation between miners and gold bullion has never been so great. It is at times such as these that investors can benefit from this apparent discrepancy.

Currently mining stocks have corrected because of apprehension regarding the possible exit from QE2 and growing difficulties for miners worldwide. Investors who were burned during the 2008 credit crisis are concerned about a repetition of such an occurrence and its effect on a potential counter trend rally in the US dollar (UUP) and long-term treasuries (TLT). Small mining companies depend on a readily available line of credit. Investors fear if the flow of capital were to be shut off as had been their experience in the past, their ability to operate might be impaired.

This may represent a buying opportunity for investors in small miners. Miners represent assets in the ground whereas ETFs such as GLD and (SLV) may have a built in weakness in the actual physical gold and silver they are holding. If called upon to produce the actual bullion, they might not be able to do so. This would favor mining stocks which represent actual wealth in the ground.

There may be an implicit weakness in the very nature of a strictly bullion ETF. Simply put, a large quantity of bullion may not be able to be produced on demand. Do not be surprised if the bullion ETFs find themselves unable to meet the demands of the marketplace.

In such cases, the miners would once again come into favor as the investment vehicle of choice. At present there is a deviation between bullion and assets in the ground. Investors may be reluctant to hold paper in such a climate of fear and uncertainty. There are presently astute wealthy investors who have sold some of their bullion to purchase mining stocks.

Again note that many miners are presently languishing while bullion ETFs strut across the financial stage. This anomaly may not last much longer. Presently mining stocks are going through a major fire sale, while bullion commands center stage.

In the markets, it is prudent to expect the unexpected. That is why we should seize the opportunity to buy straw hats in winter. Such an opportunity may be upon us now as bullion ETFs may stumble in the future.

The gold mining ETF GDX may be making a critical turn in the low 50s as it has broken through trend support. The technical conditions are even more oversold than the reversal lows in January 2011, July 2010 and February of 2010. A move above the trendline and moving averages may turn out to be a very powerful buy signal and signal the current correction is over. Careful monitoring of the uptrend is required.

The 7 Signs.

2011-05-29T20:51:00.002+08:00

As a trader who relies on the qualitative art form that is appraising market psychology, I have been collecting some interesting anecdotes and observations from the field. Specifically, traders seem to be ignoring some of the more readily apparent hazard signals the market has been throwing off in the past month.

1. I have repeatedly heard and read to the same effect, "the market is hanging in there, considering...(x y z)." While that is certainly the case broadly speaking, the market has a way of distracting your attention from where it should be focused most. The rampant attention and bipolar swings in investor sentiment surveys appear to be the illusion of choice in declaring the waters safe for the return of risk. I believe there is some utility in knowing where the sentiment vane is pointing over the very short term, however, the market's technical structure typically trumps sentiment (unless it is at a statistical extreme such as in March 2009) over time. If anything, the fact that the market is "hanging in there" on a relative basis could actually portend a more serious underlying condition indicative of distribution. Distribution by institutional participants can create broadening top formations in the indices and erratic sentiment surveys by the swinging price action.

2. A major momentum darling has crashed and burned with silver. Silver's historic decline, coupled with a very shallow bounce, is bearish toward risk returning to the same degree of indiscrimination it represented before it broke down. You could even speculate that the tepid action in stocks like Apple (AAPL) over the past six months was a precursor to the diminishing influence on the risk/momentum continum.

3. The indices all broke their respective 50-day moving averages this week. Friday's action was interesting, considering they were all siting directly beneath them after retracing the break.

4. Ignoring the symmetry and historical context in the two charts below would be Pollyannish at best, irresponsible to risk at worst. Furthermore, knowing what we now know about the developments in Europe and the risks they have going forward -- specifically over the next few weeks in Spain and Greece -- their respective influences to the commodity and equity markets could be strongly reinforcing.

5. The government bond market continues to confuse. The chart above shows the relative disconnect over the past year. This chart should be qualified, in that yields have been in a downtrend relative to the SPX for almost three decades. With that said, the degree of yield erosion relative to the SPX over the past two months should not be ignored or passed off as insignificant.

6. Weekly economic data surveys have taken a turn negative. Whether revealed in the most recent weekly unemployment trends or decelerating GDP, the market is facing an ever more hostile headline risk environment. I typically shy away from incorporating economic data surveys into my short-term calculus because their correlations are erratic at best. But considering the backdrop, it can pay off with timing. Next week will provide the important ISM manufacturing index. Above is a chart of the Empire, Philly & Richmond surveys overlaid on the ISM survey. As the correlations have shown, the already received EPR surveys indicate the ISM will likely be quite weak. The degree of which could be a catalyst (both positive or negative) in the market.

7. The market has respected my monthly meridian chart to the tick. If May continues to follow course away from the meridian at 1363, the June-July months could see an acceleration to the downside.

Overall, I'm skeptical to hanging onto long positions for anything more than a bounce here and feel more comfortable on the short side of the market. That could all change in an instant, and I try to never limit myself from trading the flip side as revealed by my agnostic trading approach.

"Tonight's....The... Night...."

2011-04-27T22:09:00.004+08:00

TONIGHT's FOMC meeting and press conference has the potential to either put in a daily cycle bottom in the USD index or initiate a waterfall decline into the dollar's three-year cycle low. There is a lot riding on this meeting.

Let me explain. Today will be the 26th day of the current dollar cycle. That cycle typically lasts about 20-25 days. So it's already starting to stretch here. The last few days the dollar has been consolidating while it waits to hear what the Fed has to say. I suspect if the Fed clearly states it will close down QE2 in June that will give the dollar the impetus for another dead-cat bounce.

Make no mistake though: This will only be a dead-cat bounce. Just because Benny-boy ends QE2 in June doesn't cure the problem of the trillions of dollars he's already printed. The foolish attempt to print prosperity is going to have dire consequences; it is going to cause a dollar crisis. There's no way Bernanke can avoid that now. The damage has already been done. There's no way to push the toothpaste back in the tube!

In the event that the Fed does clearly state their intention to end QE (and I think this is the most likely scenario) the minor dollar rally should drive a continuing correction in gold and silver. They are due for a daily cycle correction. It will only be a correction though. The dollar catastrophe isn't done yet and gold's C-wave still has further to go (a lot further).

The other scenario, and the one I think is less likely, is Bernanke doesn't state a clear intention to halt QE and the dollar tanks, thus initiating a final dollar crisis immediately.

Only a Keynesian academic would think lasting prosperity can be created, with no unintended consequences, by printing money. But it would be crazy to risk sending the dollar over the cliff that it's hanging on. Bernanke had better say the right things tonight or all hell is going to break loose in the currency markets.

The Impact Of Budget Woes.

2011-04-17T19:11:00.002+08:00

Regardless of whether a compromise is reached over the approaching lockdown of the United States ceiling and the raising of the debt, this impasse has momentous significance for holders of gold (SPDR Gold Shares (GLD) and silver (iShares Silver Trust (SLV). The serious weaknesses of the US economic structure is exposing it as a paper tiger. Instead of seeking fiscal sanity, the inability of our leaders to agree on even the smallest of issues is reminiscent of the Roman Empire dealing out bread and circus to the masses when Rome could no longer afford the good times and the games.

Let’s look at their pathetic reality. US legislators are unable to come up with as little as 2% of a total budget measured in the trillions. While the Republicans and the Democrats are separated by only several billions, the underlying issues are ignored. This may be because they are witnessing political theater in a dress rehearsal for the 2012 election. The actual battlefields on which both sides face one another are not only fiscal, but ideological as the debate raged over Planned Parenthood funding. The media in their attempt to sell newspapers and program time sensationalize the basic issues. Simply put, the US is approaching insolvency. Their ship of state is sailing straight into a sea of icebergs. Sooner or later they will have to come to grips with the urgent reality that belts will have to be tightened. If they do not sober up to the reality of our situation, the decision to keep her national vessel afloat will occur whether they like it or not.

Remember that they have to borrow forty-three cents out of every dollar that thet use to pay for their expenses. To put it succinctly, 50% of the US population pays no taxes. The revenues to pay their national debts are coming off of the hides of the middle class, the wage earners and the small businesses. It is somewhat peculiar that the basic truths for their survival are not mentioned. Do not be diverted by the ambient noise that tends to complicate the issue. They have been sidetracked by irrelevant issues; they are spending themselves into a financial quagmire. This is hurting the hard-working middle class who are dealing with a deteriorating US dollar (PowerShares DB US Dollar Index Bullish (UPP) and simultaneously carrying the load of increased tax burdens. Also long-term yields are rising and institutional investors are selling their US debt holdings raising long-term yields.

It would all be worthy of a Fellini farce if it weren't so sad. The situation cries out for solutions I've proposed in the heat of the financial meltdown, concentrating on precious metals and key natural resource stocks to hedge against a dollar devaluation and burgeoning debts.

What goes completely unmentioned is the role of the Fed in the entire equation. The Federal Reserve Bank is the one factor in this equation that has the unquestioned, uncontrolled power to change unexpectedly the best laid plans. The Fed is omnipresent, omniscient and omnipotent. All this time it watches and waits. One change in the Fed discount rate, one raise in margin, one change in the direction of interest rates and quantitative easing by the Imperial Fed can rewrite the whole script. They are accountable to no one and answer to no one. They can and have, if needed, print fiat money and cheap paper to obfuscate growing budget deficits. All eyes are on QE ending in June and what will occur with long-term interest rates. As the act continues in Washington, as the Democrats and Republicans try to show the masses who is more fiscally prudent, the reality is that the Fed will have to continue printing cheap dollars to pay off huge debts. Investors realize this and that is why I am seeing these major moves in gold.

Let us keep a firm hand on the wheel and steer a sound course with the compass tuned to the North Star of our technical discipline. It is important to remember that the charts give us clues during this treacherous times and allows us to go where the smart money is moving.

We are living in extremely volatile times and the market will play on our mind and emotions. That is why it is crucial that we become stronger than the average investor who easily gets caught up with the herd mentality. These amateur investors get aggressive at overbought levels and dump their positions during sell-offs. Remember when you invest in anything you become subject to inner feelings of anxiety and greed. You need to realize that a technical system protects you from becoming subject to the dangerous, contagious emotions of the investment community. I have unfortunately learned that what takes you months to earn can be taken from you in a matter of days.

The gold silver:ratio has dramatically favored silver since I wrote that. Silver is extremely volatile and has often in the past exceeded its measured targets. It is much less reliable for timing purposes than gold and could easily overshoot my late January $40 target. The US dollar is heading into new lows without showing any sort of dead cat bounce, which is quite concerning. Investors have flocked to the Euro (CurrencyShares Euro Trust (FXC)) which is quite dangerous for some countries paying back huge debt burdens and for countries who rely on exporting overseas. Do not be surprised if we see some economic weakness resurfacing in the eurozone.

Yen Carry Trade May Return.

2011-04-07T00:26:00.004+08:00

Japan had lost the race to the bottom against the US. " Ben, Ben, he’s our man / if he can’t print ‘em / no one can! "

As the risk of yen revaluation in deflationary Japan exceeded the risk of dollar inflation in the US -- where the Fed declared its intentions to have inflation rise and then abjured responsibility for inflation when it did rise and as Japan’s customers were forced into “must-do” trades for buying the YEN to pay their Japanese suppliers -- why would anyone take the risk of borrowing the yen when they could borrow the dollar instead?

Now the US is faced with the situation where the G-7 central banks have arrested the upward spike in the yen threatened after the country’s disasters and affirmed the old highs just under 80 as resistance. The net result of this move is a global borrower can now borrow the yen without fear of further revaluation!

The Dollar Carry Into the Yen

If we turn the trade around and look at the two components of the dollar carry into the yen, the interest rates spread and the spot rate return, we can see just how meaningless the interest rate component has been since the US went to a zero interest rate policy in December 2008. The spot rate return on borrowing the dollar and lending the yen has moved higher as Japan has been unable to break away from its deflationary miasma while the Federal Reserve has convinced investors the US will, one day, defeat the deflation that never existed.

Reviving the Yen Carry Trade

If the US does adopt an exit strategy from QE2 and the dollar becomes more expensive to borrow while the yen is not at risk of running away to the upside, the wider interest rate gap between the US and Japan will make Japan the preferred funding source once again. As noted last November, this has not been the case since the financial crisis; we can match the carry return of the dollar into a basket of emerging market currencies quite closely, but the yen carry trade has been irrelevant.

Where does this lead? If the dollar carry seized the baton from the yen carry trade and allowed all manner of emerging market assets to shoot higher in 2009 and most of 2010, then the yen carry trade can return the favor and finance the US should the Federal Reserve adopt an exit strategy. US would tighten; they would un-tighten for the US.

That would be quite bullish for US financial assets should events unfold this way.

The USD Endgame.

2011-03-23T22:12:00.002+08:00

The dollar came under extreme pressure again. I expected it to happen in the March. Many people thought I was nuts. They were sure it was the euro that would collapse, despite the fact that the EU is doing everything it can to protect its currency while Fed Chairman Ben Bernanke is doing everything he can to destroy the USD.

On Friday the last confirmation occurred to signal the final collapse is now underway. On Friday the November yearly cycle low was violated. Cyclically this event is a major catastrophe.

We are now going to see the dollar get absolutely hammered for the next couple of months. The viability of the dollar as a currency will be questioned. There is a decent chance it may start to lose its status as the world's reserve currency. (Coincidentally, about the time everyone becomes convinced the dollar is going to hyper inflate will be the point where the three-year cycle low will bottom and we will see an explosive rally, along the same lines as what happened in the latter half 2008.)

This is what all the top pickers in gold and silver fail to understand. They are all trying to call a top based on charts without any understanding of what is happening to the currency.

In a currency collapse the market will flee into assets that will retain their purchasing power. Four weeks ago we went past the point of the stock market being able to protect one from Bernanke's printing press any longer. So buying stocks as a protection is no longer a viable solution.

Four weeks ago spiking inflation rose to the point where profit margins are now being hit. Bernanke will no longer be able to prop up the stock market by further debasing of the currency. Stocks have now decoupled from their inverse correlation with the dollar and will now follow the dollar down.

The more Bernanke prints and the faster the dollar collapses, the faster the stock market is going to fall... and the quicker the economy is going to roll over into the next recession.

What will happen is that liquidity will rush into the commodity markets as the only true protection against the accelerating currency crisis.

This is why one has to ignore the top pickers. Overbought oscillators and stretched conditions are meaningless in a currency collapse. This is all about fundamentals. It's about protecting your purchasing power. You can't do that by exiting the one sector fundamentally best suited to protect you during this storm, which is precious metals.

Now isn't the time to be selling your gold, silver, or mining stocks, it’s time to be buying more.

Could This Be A Technical Case for a Continuing Bull Run ?

2011-03-20T21:21:00.002+08:00

Many key stocks are now testing their 200-day moving averages bottoming out, or is their behavior the sign of the bear?

Is this a pause to refresh and just another correction or the start of something more pernicious?

Market history reflects that deep corrections in bull trends such as what occurred from the April top into July 1 are seldom followed up by similar deep corrections over the next 12 months or so.

Consequently, if another deep correction plays out, it will signal a bigger picutre bear market, not a continued new bull market.

And this correction is deeper so far than the November correction. The percentage of NYSE stocks below their 50-day moving averages shows that the percentage of stocks ABOVE their 50 dma’s is just 40%. Put another way, more than half of NYSE stocks are below their 50 dma’s - below the November correction threshold.

Does this "overbalance" of the reading from November indicate a change in trend?

At the same time when 50% or more of stocks hit new 20-day lows, a snapback often times plays out. This occurred on last Wednesday. The snapback came in on cue.

With the S&P tagging the levels where the year opened on Wednesday, it was a likely place for a rally attempt to play out. However, with the average portfolio as reflected by the NYSE percentage above the 50 dma probably below water for the year now, will the animal spirits be able to generate traction?

Previously I thought that a snapback attempt would stick and not to be too eager to short into it and that trade over initial resistance near 1272 implied a run to second resistance near 1290.

The Daily Swing Chart above has not turned up and will eventually. If a higher open on Monday will trace out the first Minus One/Plus Two Sell pattern since the S&P stabbed below its 50 dma. Why? Because the 3 Day Chart is down and two consecutive higher lows assuming we get that Monday will carve out the Plus Two part of the setup.

This will coincide with a backtest of the 50 dma setting up a solid risk to reward short.

Even if the market is tracing out another bullish correction, I think there should be one more move down below Wednesday’s low, likely to 1235ish.

Last week, a friend sent me a chart of the S&P with the following Elliott Wave labeling. Note that another hit at the top of the channel comes in at 1400.

Recently, I mentioned that 1401 is opposite February 18. If the S&P should extend to 1401 following the current correction, it will be squaring out the February 18 high.

The above Square of 9 Chart shows that 1254 is 180 degrees down from the 1344 high. On Wednesdays surge lower, the S&P tagged 1249 intraday, closing at 1254. It is possible that this marks the low of the correction, but the level should be tested or undercut, possibly to 1235. If this is a correction in a bull market then as The Wheel shows 360 degrees up from Wednesday’s low equates with 1400 which ties to the upper end of a daily S&P channel.

Strategy: It looks like we’re in a big "B" wave up, with a big "C" wave decline to come, so I would not be long over the weekend. A decline below 1254 suggests an extension to at least 1235.

Mirroring The Crash In 1987.

2011-03-15T22:10:00.004+08:00

Debt is a drug that was sanctioned by the Bretton Woods Agreement in July 1944.

The question is, if a tree is felled in the forest for the purpose of printing more dollars, does anyone hear it if they’re not in the forest?

I think it is fair to say that in denseness of the world currency system, it is next to impossible to tell the trees from the forest.

On August 15, 1971, the US unilaterally terminated convertibility of the dollar to gold. As a result, the Bretton Woods Agreement was de facto ended.

The US dollar became the sole backing of currencies and the reserve currency for member states.

The thing is that fiat monies seldom last more than 40 years. 2011 is the 40th year since Nixon tuned the US dollar into a fiat currency.

Forty days and 40 nights in the desert, the biblical day for a year?

The Fed probably relishes all the talk of deflation mongering while it is printing with both hands as the chatter holds down long-term interest rates.

But, how long will it be until the bond and stock markets begin to discount a disaster of compounding?

What I mean by that is the interest on the US national debt is now around $375 billion annually. In 2020 interest costs will double to $750 billion annually. That assumes interest rates will stay in this vicinity. That is a huge and inordinate chunk of a $14 trillion GDP. US'S creditors will probably want higher interest to make up for the increasing risk as the compounding goes on.

I can’t help but wonder if the quake in Japan will bring things to a head sooner rather than later with the Bank of Japan (BOJ) failing to show at one of US's bond auctions.

This is at a time when the dollar is already under pressure which is underscored by the recent fact that it has not responded to its traditional role as a safe haven. The US dollar seems to have lost its grip on its status as the world reserve currency given its poor price action since the unrest in the Midle East.

Moreover, there may be a huge amount of Japanese liquidation going into their fiscal year end at the end of March. If so, the Street could be caught short puts and long stocks on this "pullback opportunity" -- just like they were during the October expiration in 1987 and ensuing crash. Tuesday should be the tell if they are for sale for expiration: I would watch the big heavyweights, which were pretty much all to the downside except for Apple on Monday. If they don’t rally on Tuesday, the market is vulnerable into Friday. As offered last week, the bulls could experience a blood bath.

Monday was an important day because the Monthly Swing Chart on the S&P turned down. This is only the fourth time it has turned down since the low in March 2009. The behavior from this turndown will be important to observe. The normal expectation when a big wheel of time such as the monthly turns down is for a snapback rally over the next few days in keeping with the Principle of Reflexivity. That snapback attempt may have begun yesterday with the market recovering roughly half its losses. Maybe. Again if the expiration is for sale, all bets are off.

There is a good excuse technically for the S&P to attempt a one- to three-day rally however. The S&P satisfied a measured move at 1282 on Monday. The first move down off the 1344 high was 50 points while a similar 50 point decline off the last swing high (1332 on March 1) equates to 1282. However, 180 degrees down in price from the 1344 high is 1272 which has not yet been satisfied. A down open on Tuesday which tests toward this level could set up a reversal.

That being said the defense team is on the field. There is a lot going on out there besides the fact that the technical condition of the market is in a weak position: The S&P has closed below its 50 dma for the first time since the September 2010 kickoff. The index has also snapped a rising trendline from those lows. So, let’s keep it simple and try not to second-guess things. Surprises happen in the direction of the trend. The problem is that there is always a primary trend and a secondary trend working concurrently like twin strands of DNA. The secondary trend may have broken but the primary trend may still be intact.

The behavior this week following the turndown in the monthly chart will tell us something about the nature of the intermediate trend and the position of the market.

Let’s take a look at the prior instances where the monthly chart on the S&P turned down since the March ’09 low. The first turn down occurred in July ’09. The S&P turned right back up leaving a bullish outside up monthly bar. The first turndown in the big monthly chart found low almost immediately and turned back up vigorously signaling that the market’s agenda was higher. The next turn down of the monthly chart occurred in January 2010. The correction carved out the first Plus One/Minus Two buy set up since the low. Why? The move into February 2010 was the first pattern of 2 consecutive lower monthly lows since the March ’09 low.

Once again the market rallied vigorously into April 2010. From there the Monthly Swing Chart turned down again. However, the action was conspicuously bearish with the S&P accelerating to the downside on the monthly turndown. Another Plus One/Minus Two set up played out on two consecutive lower lows into June. However, the S&P made a slight new low on the first trading day of the new month, July, which carved out an important pattern: The lower low in July left three consecutive monthly lows for the first time since the March ’09 low. The Three Month Chart had turned down. The S&P rallied off the set up but the first turn-up of the monthly in August defined a high suggesting the position of the market was bearish. However, significantly, the S&P never turned its monthly back down. The monthly low remained the July low near 1010 S&P and has remained up -- until Monday.

Note that the move up from March ’09 to the April 2010 top was 13 months with the turn down coming on the 14th month. From the turn-up in August 2010 following the July 2010 low the S&P ran up seven months.

Typically, these six- to seven-month and 13- to 14-month counts are critical to keep count of.

What is interesting is that the range from the 666 S&P low to the April 2010 high is 554 points. Adding 554 points to the 1010 low gives 1564 which ties to the all time S&P high.

The normal expectation from the perspective of pattern would be for a textbook backtest of the April/November highs around 1225 S&P. I can’t help but wonder if after a multi-month decline that the S&P rallies up culminating in tag of 1400 and the upper channel as show completing another 13- to 14-month run periodicity from the June/July 2010 lows. In other words, following this correction, it's possible that the S&P will run up into July or August. July being the anniversary of the 2007 Initial Top and August being opposite or 180 degrees from this year’s February 18 peak.

On the Square of 9 Chart, 1401 is opposite February 18.

Conclusion: 270 degrees in price down from the 1344 high is 1235 which ties to the idea of a backtest of the April/November 2010 highs. A full 360 degree decline off the February high is 1201 which ties to a backtest of the 50-month moving average. In my opinion the primary trend will remain up as long as 1177 which is 50% of the range from 1010 to 1244 holds. It is no coincidence that 1177 ties to the 1173 low in November. Got geometry?

The Quarterly Swing Chart low for the duration of the first quarter of 2011 which has very little time to run comes in at the early October low in 2010 at 1131.84.

The quarterly range from that low to 1344 is 212 points. The mid-point of the range is 1238 which also ties to a back test of the April/November 2010 highs.

The current quarterly low for the first quarter occurred at the beginning of January at 1257.59.

It the S&P slices through 1272 like a knife through butter, it should make a beeline to 1257 and the quarterly low. Below 1257 the S&P could quickly waterfall to 1235.

Strategy: For the last few weeks I’ve reflected on the analogue of the 1987 crash with our February top this year being opposite the February 24 top in 1987. If option expiration was for sale it could be a blood bath eliciting fears of an ugly quarter end for portfolio managers. The crash in 1987 was the Monday after options expiration.

The crash in 1987 was 24 years ago. There is a compelling vibration with 24 squaring the date of February 18, the high, which squares by definition August 24, the high in 1987.

The crash in 1987 played out when a correction in October that mirrored a correction some four months prior failed to hold and the "mirror" broke. I have been pointing to the fact that the current correction has mirrored the correction in November, some four months ago. That is until yesterday. Yet yesterday was accompanied by a strange complacency just as has the devastation in Japan and the unrest in the Middle East been greeted by the market with an unusual complacency as to potential negative financial consequences. I have been warning that if the pattern of the prior correction from last November breaks, the market may go with it as it did in 1987.

Despite an oversold short-term condition, I remind myself that crashes are born not of too much bullishness but of too much complacency, and that the most bearish thing a market can do is continue lower despite it being oversold -- just as the most bullish thing the market did in recent months was continue higher despite being overbought. I remind myself that markets don’t crash directly off tops, but off lower tops. We have a lower top in place in the short-term picture from the February 18 high. Widening the lens, in the big picture, we have what may be a lower high in place from the all-time high.

If the S&P knifes and stays below 1270 on Tuesday, I would not try to catch falling daggers. The plains are littered with the bodies of heroes.

Another Spectacular Up Leg For Gold.

2011-03-01T22:28:00.003+08:00

The S&P 500 has rebounded about 100% in 100 weeks. What crisis? What new normal? The economy is recovering and happy times are here again. Old normal is back. Stocks for the long run! Permabears be damned! The permabulls are back! Rates are low, core inflation is low, its Goldilocks time!

US stocks are only following the same pattern they’ve followed in the last three bear markets. The midpoint crash (1907, 1937, 1974, 2008) gave way to a furious rebound in each case. Following 1937, the market retraced 62% of its losses. Following 1907 and 1974, the market peaked three and a half years later after retracing roughly 95% of the losses. Three and a half years and a 95% retracement equates to the S&P 500 peaking at 1500 in April of this year.

Before you assume I’m a permabear gold-bug, take a look back 2009. With the S&P 500 at 764, I called for a 15% decline before the market bottoms and rallies for months and significantly in percentage terms.

Data from Bank of America Merrill Lynch survey of asset managers and hedge funds who cumulatively manage nearly $1 trillion. Shows what percentage are overweight or underweight US equities. The percentage of managers overweight US equities has soared in recent months and is basically at a 10-year high.

This growing bullish sentiment will coincide with the S&P 500 hitting major multi-year resistance. Excessive bullish sentiment coupled with multi-year resistance is not exactly a recipe for a major breakout. It’s a recipe for the end to this cyclical bull market.

Moreover, as we’ve noted time and time again, the factors that will cause stocks to reverse are the same factors that will propel precious metals into the early stages of a bubble. Increased monetization will be required as interest rates begin to rise and as the economy fails to grow fast enough to mitigate the debt burden. New debts and the rollover of old debts will be financed at higher rates, thereby increasing the debt burden which in turn, impacts the government's ability to juice the economy.

Higher rates won’t be good for stocks and higher rates won’t mitigate inflation or inflation expectations. The reason being, when you have a super high debt load (as most Western nations do) higher rates only exacerbate the debt burden. It will force local and state governments as well as the federal government to cut back, which has an impact on GDP. Higher inflation will also cut into corporate margins. We are expecting a mild bear market and not the 40%-plus decline we’ve seen recently.

Moving along to gold, we see a lack of interest in the market yet it is currently only 3% from its all-time high.

Furthermore, a survey of wealth manager of Canada showed only 33% of advisers as bullish on gold. That figure was 64% as recently as the fourth quarter of 2010.

This doesn’t mean gold will immediately soar. More so, it tells us that gold’s downside is limited as sentiment has shifted significantly.

With stocks nearing major resistance carrying excessive bullish sentiment and gold’s downside limited, let’s take a look at the gold/S&P 500 chart (above). The 2009-2010 price action has some similarities to the 2006-2007 price action. The chart shows that this is likely a good time to increase positions in gold and reduce positions in stocks.

After all the bubble bursts of the past decade, everyone wants to be a contrarian. If you are a regular Joe investor, now is your opportunity to be a contrarian and look smart in a few years. Mainstream managers now feel vindicated and feel a chance to promote stocks again. Don’t make the mistake many have already made twice. I’m writing this for the mainstream investor and the retirement investor because I don’t want to see them get sucked back into the market at the wrong time courtesy of asset managers who will find any reason to promote stocks.

Meanwhile, gold is providing an excellent opportunity. Its holding up well while the focus is currently elsewhere. The hot money is out of gold, yet it's only 3% off its highs. In the long run, that is scary bullish. In the coming months look for stocks to peak and for gold to regain its leadership.

Emerging Markets Bashing, Sending Warnings Of Bear Market.

2011-02-24T23:44:00.002+08:00

Bear markets begin when something fundamental breaks. Usually the sector initially affected will roll over before the general market and tends to be a warning sign of what lies ahead.

The last bear market was triggered when the credit bubble created by Alan Greenspan's foolish monetary policy burst. It was exacerbated by Ben Bernanke's foolish attempt to debase the currency and reflate the bubble. All he succeeded in doing was to inflate oil to $147, which put the finishing touches on an already crumbling economy.

The market gave us a warning when the financials began to diverge from the rest of the market. Considering that the banks were one of the leading sectors during the '02-'07 bull the fact that they couldn't follow the rest of the market to new highs after the February '07 correction was a big red flag that the bull was on its last legs.

I've been saying for more than a year now that the unintended consequences of quantitative easing would be to spike inflation, which in turn would poison the global economy. I knew all along that Bernanke was never going to create any jobs by printing money and of course he hasn't.

So if inflation is going to sink the economy and kill the stock market we should see warning signs from the sectors most affected by rising inflationary pressures, just like the banks warned us in '07 that the fundamentals were broken.

Sure enough I think we are starting to see those warning signs.

Emerging markets have been hit hard by food inflation. We are now seeing food riots in many third-world countries. Emerging markets, just like financials during the last bull, were one of the leading sectors. The iShares MSCI Emerging Markets Index (EEM) is now starting to diverge from the rest of the global stock markets. It's now on the verge of breaking back below the November cycle low.

The other sector that is extremely sensitive to inflation is the transports. When energy costs spike, shipping companies' profit margins are squeezed. The last two days have seen the Dow Transports fold under the pressure of surging oil prices. Keep in mind oil is only on the 17th day of its intermediate cycle. That cycle lasts on average 50 to 70 days. I think we are going to see $5 gasoline by the time the dollar collapses into its three-year cycle low later this first quarter.

If the market can recover from the recent correction and make new highs I don't expect the transports will be able to follow. That will set up a Dow Theory non-confirmation and most bear markets begin with a Dow Theory non-confirmation.

China is already in a bear market. I think most emerging markets have probably topped and I doubt the rest of the global markets have more than two or three months left before the next leg down in the secular bear market begins.

I think the brief party created by Bernanke's printing press is about to come to an end.

The Asset Class to Avoid.

2011-02-20T16:52:00.006+08:00

Whats the worst asset class to invest in right now?

Research suggests the asset class that offers the poorest long-term returns from today’s valuation levels is commodities.

Historically, commodities have generated astonishingly low returns. Based on the Foundation for the Study of Cycles data, from 1264 to 2010 commodities went up 0.70% on an annualized basis. That is rather unattractive.

Using data obtained from measuringworth.com spliced with modern day US CPI figures, over the same time period inflation increased by 0.75%.

After looking at different data sets for inflation indices and commodities over different time periods (spanning centuries in some cases), a pattern begins to emerge. When viewed over very long periods of time, there is a very high correlation between commodities prices and inflation indices.

Perhaps this is not so surprising when one considers that the commodities are a significant component of inflation indices. However, it is always nice to run the data and observe the actual correlation. It is real.

Now this may sound like a rather elementary deduction. But understanding this seemingly simple phenomenon is the key to unlocking the mystery of the commodity cycle.

The commodity cycle is as follows: Commodities do not do much for a long time. Then there is a fantastic spike up for a number of years. Then there is a crash. Lather, rinse and repeat.

What causes these spikes?

The most dramatic catalyst for commodity spikes occurs when a country takes itself off the gold standard. This occurred in the US Civil War, in 1933 when FDR took the United States off of the gold standard on a domestic basis and in 1971 when Nixon cut the final ties to the gold standard on an international basis.

Commodity spikes also often occur when a country runs big deficits. This almost invariably occurs during wars. Since 1900, there have been nine years when the deficit/GDP was above 9%. All were during times of war. All had commodity spikes. The quintessential example of this would be the World War I commodity spike. The most recent nine-year spike would also fit into this category. The US also had big deficits in the Civil War and World War II which contributed to those commodity spikes in addition to being taken off the gold standard which produced a “double whammy” effect.

What causes the crashes?

The high profit margins (due to the spike in prices) attract competition. Competition causes overproduction. Overproduction causes crashes. Eg . like what had happened to Tin prices in the 70s!

Another reason why commodities are poor investments is they have no yield. Actually with storage costs and security costs they have negative yield. This stands in marked contrast to pretty much almost all other asset classes which provide some sort of return on investment.

So after reading all this why would anybody ever buy commodities at all?

Well this is a good question. You can do just fine if you avoid commodities entirely for the rest of your life. However, one can argue you may do even better by keeping all your options open and wait for a time when commodities are poised for a big run.

This begs the question: How do you tell when commodities are dramatically undervalued? While the question is simple, the answer is complicated. The main problem, once again, is commodities have no yield, which makes it difficult to compare them to other asset classes. However, perhaps the mere fact that it is difficult to value commodities because they have no yield is telling you something. Moving forward, another valuation alternative is comparing ratios. This also presents issues as well because the ratios between other asset classes and commodities exhibit a secular upward creep. That is because most asset classes outperform inflation and therefore commodities. This makes timely buy and sell signals by this method impossible in most instances.

There are actually some ways of figuring out when it is a good time to buy commodities for a secular buy and hold strategy. A pretty good time to take a look at commodities is when they have been in a bear market for many years. Since the US was founded, commodity bears have lasted 11-33 years. Another good buy indicator is a lack of investment demand.

Clearly the current situation does not fit either of the above criteria at all. Rather than wasting time trying to figure out whether or not one should still be buying commodities, perhaps people should focus their efforts on figuring out if this is a good time to sell. As mentioned earlier, a telltale sign of the end of a commodity bull is a spike. History says you don’t want to buy them after a nine-year spike such as what we just had. While it is possible that the spike can go higher and longer, the laws of probability simply are not in your favor at this point.

In every instance without exception over the last three quarters of a millennium, if you had bought commodities when they had at least a 176% rally over the last nine years, you had extremely unattractive returns over the next 13-50 years.

1613-1622: Up 254%. Commodities went immediately into a 50-year 78% bear market.

1938-1947: Up 240%. Commodities went down 16% in 1948, 19% in 1949, up 58% in 1950 and peaked in February 1951. Then they had a 37% 18-year bear market. Therefore, in the quarter century after 1947 the upside was 12% (early 1951) and the downside was 32% (August 1968).

2001-2010: Up 238%. (???)

1910-1919: Up 202%. Commodities went immediately into a 13-year 66% bear market.

1971-1980: Up 198%. Commodities went immediately into a 19-year 45% bear market.

In all four prior instances since 1264 when commodities went up 176% in nine years, they went down the next year AND the year after that. If history repeats commodities will go down in 2011 and 2012. I am shorting the CPO big-time, @ RM3900/MT!

Egypt, And Its Ramifications On Global Oil Supplies.

2011-02-17T21:36:00.003+08:00

Before the Egyptian revolution,I thought that if successful, it could spawn similar uprisings in oil-exporting countries.So far, it appears to have been successful. And it has heartened groups fighting for democracy in other lands. And now, following uprisings there and in Tunisia, we hear of growing unrest in Algeria, Iran, Jordan, Libya, Morocco, Saudi Arabia and Yemen.

The situation has become so troubling that Obama dispatched his most senior military officer "to discuss the events in Egypt, convey best wishes from Obama and welcome Abdullah's "recent reaffirmation of Jordan's ambitious modernization agenda". That must have been an interesting discussion -- like what was said about whether or not the US military would help or hinder an overthrow of the monarchy.

But all of this warrants another examination of where the wave of democracy might lead and its impact on global oil supplies.

The Wave of Democracy

Let us now look again at the major oil exporters and where further uprisings might occur. In Table 1, listed the 24 leading oil exportersalong with their freedom status as judged by Freedom House. Of those 24, I view only Russia, Canada, Norway, Mexico and Argentina as likely to be free of any political disturbances moving forward. That leaves 82% of the oil exports of the countries listed at some risk. And unlike Egypt and Tunisia, major disturbances in any of these countries could cause an immediate spike in global oil prices.

Oil Dependencies

What countries are at greatest risk if there is "an oil supply disruption"? Table 2 is relevant here. It lists the top 20 countries in terms of oil imports. It also indicates what percentage of global oil traded they import along with what percentage of domestic consumption comes from imports.

Political leaders of all countries will do whatever is needed to insure oil supplies for their citizens.

Investment Implications

Looking at Table 1, it is highly likely there will be one or more serious disruptions in the next 12 months causing a super oil-spike. In light of this, risk oriented imvestors should have some form of oil hedge in their portfolios.

Correction? - Minimum 5%.

2011-02-13T19:08:00.004+08:00

Is it getting better....?
Or do you feel the same...? - U2.

The relevance of trading with time and cycle may alone be less accurate than forecast with price; however its relevance increases as forecasted times approach, price patterns and momentum wanes showing signs of reversal.

When taken together, time/price harmonics have accurately predicted significant market turning points.

Numbers don’t mean anything until they turn the market, but numbers, not fundamentals, turn the market. It was not the fundamentals that turned the market in March 2009.

One of W.D. Gann’s major methods for market timing was to use fractions of a circle, specifically into quarters, eighths, and thirds, to count the number of days, weeks, and months between highs and lows.

For example, the circle has 360 degrees, 90 is one-quarter, 45 is one-eighth.

Rounding, one-eighth of 90 is 11, two-eighths is 22, three-eighths is 33, and four-eights is 45.

W.D. Gann was the greatest student and researcher of the market ever but he was very secretive about what he revealed and how he revealed it. He never chose his words without a distinct reason.

For example, one of Gann’s books was called 45 Years in Wall Street. Note that the title was not 45 Years on Wall Street, but in Wall Street.

The book was not about his career on Wall Street but about a cycle on Wall Street.

As well as regular cycles, there are random fluctuations in things too. The random occurrences can camouflage the periodicity of cycles and also generate what appear to be new, smaller cycles… which they may not be. This is one of the problems with market-timing signals.

In addition, many things act as if they are influenced simultaneously by several different rhythmic influences, the composite effect of which is not regular at all.

Cycles may have been present in the figures you have been studying merely by chance. The ups and downs you have noticed, which come at more or less regular intervals, may have just happened to come that way. The regularity, the cycle, is there but in such circumstances it may carry no significance.

Cycles can invert, appear and disappear, and elipticalize.

When forecasting stock market cycles, they can be influenced by random events. The predictive value of cycles provide only specific probabilities when the suggested time period is approached.

Fixed time cycles are apparent in stock market tops and bottoms. But, eventually a cycle may cease to continue. For example, the four-year cycle in the US stock market held true from 1954 to 1982, producing accurate forecasts of eight market bottoms. Had an investor recognized the cycle in 1962 he could have amassed a fortune over the next 20 years. But in 1986, the cycle’s prediction of a low failed to provide a bear market and in 1987 its rising phase failed to prevent the largest crash since 1929.

When the market doesn’t do what is expected it is talking, but ultimately the regression to the mean is vicious.

Long-term cycles, such as the Kondratieff Cycle as well as Elliott Waves, suggested that the big-picture bull market was coming to an end in 2000.

The Kondratieff Cycle is a common, often-quoted cycle of financial and economic behavior that lasts about 54 years. This 54-year cycle is close to the Fibonacci 55 number.

One year is a little less than 55 weeks.

Fifty-five was an important count for W.D. Gann. He called a period of 49 to 55 days the Death Zone. February 8 was the 49th trading day from November 30, the day prior to the December 1 kickoff of this last leg up.

A Synodic Period is the length of time two planets meet in Conjunction, which means revolving 360 degrees to each other. The 360-degree period is divided into fractions known as the Sextile (60 degrees), Square (90 degrees), Trine (120 degrees), Opposition (180 degrees), and back to Conjunction again.

Many of the Synodic planetary cycles conform to the Fibonacci Summation series. Their relationship to natural harmonic vibration is not by chance.

For example Venus revolves around the sun in 61% of one year, or 225 days. Two-hundred-twenty-five was an important number for Gann because 180 + 45 = 225. These two planets possess the unique Fibonacci relationship of the 0.618 Golden Mean.

Every other conjunction of Mars/Jupiter is four-and-one-third years, or 233 weeks, another Fibonacci number. This ties to the four-year cycle mentioned above. While the four-year cycle went out of whack in 1986, there was a significant low in the fall of 1990 and late 1994, which began the parabolic move into 2000. There was a shakeout into 1998 and of course there was the 2002 low. There was a two-month shakeout into June/July of 2006 from 1326 S&P to 1219, which marked the low prior to the advance into the all-time high. Then there was the summer low in 2010. It's interesting that these same numbers from the last cycle 1326 and 1219 are so prominent four years later.

The recent S&P high this week was 1325 and the big April top in 2010 was 1219.

The Synodic period for the Saturn/Uranus combination is 45 years. One-eighth of the 360 degree circle and one-half of 90 is 45.

I bring this up because 45 years ago marked the top of the secular bull market in 1966. That bull market began in June 1949.

The powerful two-year advance from March 2009 may have been a result of the 60-year cycle exerting its influence.

One cycle of 45 years back from 1966 gives 1921, which was the big low prior to the run up into 1929.

If the four-year cycle holds up the next trough should be in 2012. Somewhere prior to then we should see an important peak. Will a two-year advance be followed by a two-year decline?

It is interesting that it was eight years from the 1921 low to the vertical peak in 1929 and that it was eight years from 2000 to the vertical drop into 2008. I can’t help but think that a mirror image foldback of sorts may be playing out with the market, making an important peak three years following the 2009 low, just as it made an important low in 1932, three years following the 1929 peak.

Conclusion: 1320 ties to March 6 and squares the 666 price low for a potential square out. The market has respected this level for two days and is gapping below 1320 on 10th Feb.

The pattern looks reminiscent of the November top, which was a grind up followed by a climatic spike.

Monday we saw a spike on the heels of a grinding move up.

The November correction was between 4% and 5% and 152 points. I think another 4% to 5% correction is going to play out quickly into the anniversary of the March 6/9th 2009 low.

Fifty percent of the range from the November 1173 low to this week's 1325 high is 76 points. A decline to 50% of the last swing projects to 1249. There is some good DNA and symmetry there as this was the projection for the big inverse head-and-shoulders pattern from 2010. Moreover, 1248/1249 represents a 180-degree decline on the Square of 9 Chart.

A study of market history shows that corrections against the main trend are much more uniform while impulse legs in favor of the main trend can have a large degree of variability. Said in another way, it is easier to define and anticipate corrections not in favor of and against the primary trend that it is to judge the extent of the primary trend itself. In my experience, this is one of the most important lessons revealed in the study of stock market history.

Looking at the form of the advance from the September 1 kickoff, there are two legs separated by the November correction. Because of the persistence of the advance, which has seen no more than one 2% move in the last five months (compared to 14 moves of 2% or more in the preceding five-month period), the normal expectation would be to see a similar, uniform near-5% correction be bought with both hands by market participants. At the maximum I would expect the correction to extend to a backtest of the April/November 2010 highs of 1219/1227 respectively.

If the correction overbalances the November decline in time and price then the high was more significant.

If a uniform correction plays out it would give rise to a possible third drive up. Whether such a third drive into the anniversary of the April high if it plays out is a marginal new high or a significantly higher high remains to be seen.

Strategy: It looked like James Brown had left the building following the decline of January 28. However, after a genuine sell signal that players pounce on, there is often times a final squeeze. That may have been the run to 1320.

Fifty percent of the range from the 1275 low on January 28 to this week's 1325 high gives a midpoint of 1300. Any break of 1300, especially on the weekly closing basis (Friday) confirms a correction is underway from where I sit. This 1300 level ties to 1296, which is 6 X 6 X 6 X 6, resonating of the 666 price low. 1296 is in the upper right-hand corner of the Square of 9 Chart and aligns with May 6, the flash crash, so I would not underestimate how quickly a reversion to the mean in the persistency of the advance and a revulsion to sentiment could take place if everyone tried to get out of the door at the same time.

A Dow Theory non-confirmation has been ongoing for three and a half weeks now, which is long in the tooth while the market has been overbought for months -- a situation where the chickens could come home to roost violently and quickly, despite the fact that the market has proven to be a Shrine of Boys Crying Wolf.

It may be time to yell wolf.

The $ignal Is In The Dollar Cycle.

2011-02-10T23:47:00.003+08:00

It has been my contention all along that the Fed would print until something breaks. Once that break occurs we will enter the next leg down in the secular bear market. This time I don't expect it to be the credit markets, although we will almost certainly have trouble in the municipal and state bond market. Some may even default.

I actually think the greater risk is from massive layoffs by American state and local governments in an effort to cut expenses and avoid default. When that begins we will see unemployment levels start to spike again.

The real danger is going to come from inflationary pressures unleashed by the Fed's QE programs. We are already starting to see severe inflationary pressures in food and energy and it's already causing social unrest in many third-world countries. Expect this to continue and intensify as we move into the summer months.

Besides starting an inflationary spiral, QE is also "stretching" the stock market cycles.

To explain: The 2009 yearly cycle low occurred in March. The 2010 yearly cycle low should have arrived in the early spring roughly 12 months after the March '09 bottom. We did have a decent correction in early February. That should have marked the yearly cycle low. However, because of QE1 that cycle stretched into July, and was more severe that it should have been absent Fed meddling. We even witnessed another mini-crash -- a direct result of the extreme complacency generated by the QE-driven rally in March and April.

It's now clear that QE2 is going to stretch this cycle also. I now look for the next intermediate bottom to arrive this summer sometime around July (roughly 12 months after the 2010 bottom).

This should correspond with a violent dollar rally as it blasts out of the three-year cycle low.

This should mark the beginning of the next leg down in the secular bear market. Confirmation will come if the correction is severe enough to test the July 2010 lows. In a healthy bull market each intermediate correction should bottom well above the prior low (higher highs and higher lows). A move down to the 1050-1000 level will be a clear sign the bull is in trouble.

We should also see the dollar rally out of the three-year cycle low force the CRB down into its three-year cycle low (actually the cycle runs about two and one-half years on average).

And, gold will go down into a severe D-wave correction. (We still have one more parabolic leg up before this D-wave starts.)

Even though I have been expecting the market to correct (into the normal yearly cycle timing band) I've been warning readers not to short the market because the dollar is dropping down into a major cycle low. I suspected there was the possibility the dollar collapse would stretch the cycles and make selling short very risky.

The time to short will come once the dollar puts in the three-year cycle low and all markets begin the move down into the timing band for the next yearly cycle low this mid-year.

I will be watching for a sign the dollar cycle has bottomed sometime in April or even as late as early May. At that point one might consider looking for a sector, or sectors, that are extremely stretched above the mean to sell short. (Not precious metals though. I never short a bull market.)

Until that time it’s still too early to play the short side. The odds are better positioning for the final leg up in gold's massive C-wave advance.

A Sneak Peek into 2011's Crystal-Ball.

2010-12-29T23:17:00.002+08:00

It's almost impossible to find anyone who's long-term bearish on the stock market or economy at this time. In the recent Barron’s poll, every single analyst expected a rise in stock prices next year and continued economic expansion.

I think they're all going to be wrong, horribly wrong.- The Chinese say : "droping one's specticles." I believe next year the stock market will begin the third leg down in the secular bear market. And the global economy will tip over into the next recession that will be much worse than the last one.

I've gone over the three-year cycle in the dollar index many times. The dip down into the next three-year cycle low this spring should drive the final leg up in gold’s massive C-wave. What I haven't talked much about is what happens after the dollar bottoms.

I actually expect this three-year cycle in the dollar to play out almost exactly like it did during the last three-year cycle. When the dollar collapses this spring it will not only drive the price of gold to a final C-wave top, it will drive virtually all commodity prices through the roof, the most important being energy and to some extent food.

It was the sudden massive spike in energy that drove the global economy over the edge into recession in late 2007 and early 2008. The implosion of the credit markets just exacerbated the problem. You can see on the above chart that just as soon as Ben Bernanke drove the dollar below long-term historical support (80), oil took off on its parabolic move to $147.

What followed was a collapse in economic activity and the beginning of the second leg down in the long-term secular bear market for stocks.

This was mirrored by the dollar rallying out of the three-year cycle low. That rally was driven by the severe, but brief, deflationary pressures released as the global economy and then credit markets collapsed.

We'll see the same thing happen again. In his attempt to print prosperity and reflate asset prices, Bernanke is going to spike inflation horribly as the dollar collapses down into the three-year cycle low next spring. Just like in 2008, that will tip the global economy back into recession and another deflationary period as the dollar rallies out of the three-year cycle low.

The stock market will begin the trip down into the next leg of the secular bear market that it's been in since 2000. The global economy will roll over into the next recession, which I expect to be much worse than the one we just suffered, though mainly because it will begin with unemployment already at very high levels.

Contrary to what economists and analyst are saying, at the dollar's three-year cycle low next year it will be time to put our bear hats back on and prepare for hard times and the next leg down in the stock market bear.

Good Times Ahead for Gold..AGAIN!

2010-12-08T23:09:00.003+08:00

One of my favorite form of technical analysis: intermarket analysis. Intermarket analysis takes traditional technical analysis much further. Normally, I would look at a market by itself. I'll look at its price action, its potential patterns, and its momentum. Intermarket analysis takes this a step beyond by comparing the market at hand to various other markets. It gives us an idea of what is really going on and where market leadership is.

In regards to gold, intermarket analysis is even more important. Gold is the type of market or asset that thrives when other asset classes are not performing well. Rarely does gold perform well if there is persistent strength in another asset class such as stocks or bonds. We are in a gold bull market, so gold will outperform other asset classes over time. However, it is an important exercise in trying to gauge the near-term outlook for the yellow metal.

Above, I graphed gold against the various asset classes: commodities, bonds and stocks. And also graphed gold against currencies, as it is the currency of last resort.

We can see that gold has already broken out against both corporate and Treasury bonds. The breakout against corporates is very significant as it comes after a two-year base. Meanwhile, gold has just broken out against currencies (ex: US dollar) and a breakout against stocks appears imminent. Commodities are the only group holding up against gold.

The conclusion: In the near future, money will move out of Treasuries, corporates, currencies, and stocks and go into gold and likely commodities. The last time gold looked this strong in relative terms was in the third quarter of 2009 when it began a move to $1,220/oz. With this type of relative strength, it is very likely that gold makes another big move into 2011.

Europe Driving Interest US Rates Higher?

2010-12-04T16:25:00.003+08:00

Interest rates, across the board, have actually been spiking since the announcement of the QE2 program on November 3. Not to anyone surprise, the Fed was more or less powerless to lower rates from prevailing levels. I argued that QE2 was really not designed to drive rates down from prevailing levels but merely to “accommodate” the fiscal deficit and prevent a rise in rates that would otherwise occur due to crowding out and other effects.

The bottom line was that the real risk was that interest rates throughout the US economy would rise after the announcement of QE2. Indeed, I believe that the US is currently in a situation anticipated in QE2 May Not Prevent a Rout in US Bond Markets, in which I asked: “How much panic would it create if quantitative easing (QE2) is announced, the Fed starts purchasing Treasuries, and bond yields actually start to rise?”

10-Year US Treasury yields (TNX) have risen almost 60 basis points since the announcement of QE2, municipal bond yields have spiked, corporate bond yields have risen, and mortgage rates have spiked. Indeed, overall, interest rates across the board are actually higher than they were before financial markets began to discount the prospect of QE2.

Having said that, it's important to note that although rates have risen, they are still well below levels that could jeopardize the economic recovery. The question is what happens next.

In the short term, a few issues need to be monitored. For starters, investors should be aware of the fact that the crisis in Europe is actually “bailing out” the US in some sense. In the global competition for capital, troubles in Europe make the US seem like a relative safe haven thereby facilitating the financing of the US fiscal deficit. Furthermore, troubles in Europe will tend to depress global growth expectations and ease fears of commodity-driven inflation. Thus, the situation in Europe will be a key driver in US interest rate dynamics.

Second, any whiff of accelerating inflation in the US could have a dramatic impact on the bond markets. Again, developments in global commodities markets are key in this regard.

Finally, at some point, investor scrutiny is going to be turned toward congressional and presidential action with respect to the US fiscal deficit and sovereign debt fundamentals. Today’s news of the failure of the presidential deficit commission to garner the necessary votes to issue an official recommendation is a worrisome development in this regard.

Conclusion

US interest rates are supposed to be falling, not rising. At least that's what we were led to believe a few months ago when market consensus was excited about QE2 and the Fed’s power to stimulate the economy.

It's now becoming clear what I had been emphasizing prior to the implementation of QE2: The Fed is not really in control of US interest rates.

This sense that the Fed has lost control of interest rate dynamics could add an important element of uncertainty into financial markets in the coming months.

This is particularly important in a context in which investors generally are over-exposed to bonds.

A long bear market in US bonds has probably already begun. Bad news out of Europe is probably the only factor that will be able to sporadically arrest the upward assent of US interest rates in the coming weeks and months.

I believe that US bond rallies due to instability in Europe should be utilized to initiate short positions in various categories of US bonds.

PIIGS Crisis Is Benefiting Japan.

2010-11-30T22:56:00.002+08:00

Marc Faber's "bowl of liquidity" analogy, showed us how as a result of the European sovereign debt crisis, money could flow out of PIIGS debt and into equities. I wanted to provide a little more color given the events of the past couple weeks as the crisis has moved from Ireland and Portugal to Spain and Italy.

In the chart above, tells a different story. Here, the Euro Stoxx chart is in orange, the S&P 500 is in white, and the Nikkei is in green. And we see that since the Spain/Germany spread bottomed on October 26, the Euro Stoxx is down 6.5%, the S&P 500 is up 0.2%, and the Nikkei is up a whopping 8.0%! Whoa, what's going on?

What I believe to be happening is that with the current crisis being one more of solvency than liquidity (though Spain may have something to say about that), instead of markets being simply "risk on" or "risk off," idiosyncratic factors are coming into play as global asset allocators evaluate their options. Due to the PIIGS crisis, borrowing costs are rising for the European sovereign market -- yesterday was scary because not only did Spanish 10-year yields rise 25bps, but German 10-year yields also rose -- which feeds back into the private market for European borrowers in the form of more expensive credit. Austerity measures impact growth prospects. And allocators, aware of this, are moving money out of Europe -- not just sovereign debt but equities as well. European-focused funds may be experiencing redemptions, and oftentimes portfolio managers are forced to sell their most valuable assets that still have liquidity (equities) instead of the distressed ones they'd like to unload (sovereign debt). And this money is finding its way not just into real safe havens like US, German, and Japanese debt, but the US and Japanese equity markets as well. After being neglected for so long by investors, the smallest trickle of inflows into the Japanese equity market could create a surge along the likes of the commodities market in the earlier part of the last decade.

This is not to say that it's time to load the boat with Japanese and US equities. The crisis has still not passed. If Spain or Italy seizes up it could do untold damage to all asset markets with the liquidity crisis returning for awhile. But I believe that correlations are breaking down as the crisis shifts from one of liquidity to one of solvency, and when solvency crises intermittently create liquidity crises it's time for investors to think about what to own while assets with true value are being treated no differently than ones that truly might go to zero.

The Fed Could Be Wrong This Time.

2010-11-21T00:01:00.003+08:00

Every precious metals investor should be concerned about China, one of the world's fastest growing economies, raising its rates and rising yields. Changes in the rates affect stock prices. China is leading the world and we can see the fears are profound as sell-offs this week were much stronger than any of the relief rallies. If China’s market corrects then the commodity market, which was fueling the equity market, could experience a severe correction. It's a domino effect.

Despite the Fed’s enthusiastic plan to monetize debt and artificially keep interest rates low through bond purchases, yields have risen aggressively for the last 13 weeks. The QE2 program was designed to lower interest rates to improve borrowing and liquidity. Instead the opposite occurred, QE2 is initiating higher borrowing costs. I don’t believe it is coincidence that Ireland’s debt problems surfaced following QE2. China is now on the verge of raising rates to combat imported cheap dollars to bid up Chinese assets, which is putting pressure on markets globally. Rising rates kills equity and commodity markets, which are heavily built on margin borrowing.

The Long Term Treasury ETF (TLT) (above)broke through the trend it had from May until the end of August. This previous trend was largely a result of a deflationary crisis where investors ran from risky assets like the euro to the dollar, and long-term Treasuries were pushing yields to ridiculously low levels. As fear in the markets decreased, due to a temporary stabilization in Europe and the US, investors ran to equities and commodities.

International reaction to QE2 has not been positive. There is an increased risk of emerging markets combating inflation, which may slow down the global recovery. Fears of China and emerging markets raising rates make investors unsure where to turn.

Asset classes have reacted negatively to China’s expected move. Distribution is apparent through many sectors and many international markets. Rising interest rates have a direct influence on corporate profits and prices of commodities and equities.

When studying interest rates it's not the level that is important, it's the rate of change. Interest rates have had a dramatic increase these past two months and we may see that affecting the fundamentals in the economy shortly.

The recent downgrade on US debt from China, signals demand for US debt has been waning. This rise in interest rates puts further pressure on the recovery as the cost of borrowing increases. Economic conditions are worsening in Europe and emerging markets in reaction to quantitative easing and imported inflation. Concerns of sovereign debt issues are weighing in Europe. As yields rise so do defaults and margin calls.

If the 200-day is unable to hold the bond decline and continue to collapse, then rising interest rates could negatively affect the economic recovery. Borrowing costs to insure government debt are reaching record levels internationally. Ireland is expected to take a bailout. Greece, Spain, and Portugal are in danger as well.

Commodities have significantly moved higher along with the equity market for September and October as investors left Treasuries to return to risky assets due to the fear of debt monetization through QE2. Global equity markets have been rising. But the question is, how long? This makes investors reluctant to take on debt, which is the exact opposite of what the Fed’s goals were. Rising yields could lead to a liquidity trap and deflationary pressures.

Bubbles, Signs.. And All Things Nice!

2010-11-16T23:32:00.003+08:00

What other bubbles are lurking out there in the global economy?

1. Gold: The price of gold bullion has risen from $294 an ounce in 1998 to $1,404 last week, an increase of 377%. "It's the biggest, baddest bubble of them all," says Robert Wiedemer, author of Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown. Gold has no intrinsic value. A telltale indicator that gold is a bubble: incessant cocktail party chatter about buying gold and endless investment banks offering to sell gold derivatives. The SPDR Gold Trust ETF (look to your left) is up 28% since the beginning of the year.

2. Real estate in China: Chinese real estate prices are up only 9.1% this year, which may seem more frothy than bubbly. But rising prices are generating rising demand, which is a clear sign of a bubble, says Vikram Mansharamani, whose book, Boombustology: Spotting Financial Bubbles Before They Burst, will be published early next year. The participation of amateur investors like waiters and maids in the property boom is a clear sign of a property bubble in China. The fact that developers are building more apartments than there are buyers is another giveaway.

3. Alternative energy: Solar technology is still uneconomic, yet governments all over the world are subsidizing solar energy firms. "There are plenty of people who shouldn't be in the solar energy industry who are," says Mansharamani. Do we really need 250 venture-capital-backed solar cell companies? The Market Sectors Solar Energy ETF had a 100% gain this year, before dropping back.

4. Commodities: Blame it on the weather, China or the dollar or the Fed, but commodities have shot higher in recent months. Wheat is up 60% this year, and other food commodities like corn have also risen dramatically. "The focus is on the food category for bubbles," says Wiedemer, but industrial metals like copper are also very frothy.

5. Emerging market stocks: As an asset class, these shares have risen 146% in the past two years. "We're only halfway along the way to a gigantic eventual bubble in the emerging markets," says Barton Biggs, the former Morgan Stanley Asset Management chairman who accurately predicted the US stock market bubble in the late 1990s. These countries, such as Indonesia, Australia, Russia and Brazil, are growing wildly even though there's no growth in the world economy. Much of their gains is backed by commodity prices, which are also a bubble (see item No. 4). "I have every reason to believe this will turn into a bubble," says Mansharamani.

6. The US dollar: Although the dollar is down 10% against the euro so far this year, Wiedemer believes the greenback is firmly in bubble territory. He believes it will pop when foreigners stop buying US assets such as stocks and bonds. "Foreigners say, 'I'm worried about inflation -- you're going to pay me back in dollars worth less than when I invested'." While China may hold its dollar bonds forever, he says, pension funds in Japan and insurance companies in Europe will start dumping dollars as US inflation climbs.

7. US government debt: "When this bubble pops you're out of bubbles -- nothing is too big to fail any more," says Wiedemer. The debt bubble is growing very rapidly and will continue to grow, he says. Basically, there's no way the US government can ever pay back the $13.7 trillion it currently owes (mainly to foreigners), and eventually they will stop buying. The bubble pops when the government has trouble selling its debt -- just like Ireland and Greece are experiencing at the moment. Instead of borrowing money, the government starts printing money, which is what's happening now. The Fed's balance sheet has gone from $800 billion in 2008 to $2.2 trillion, and the central bank just announced it was printing another $600 billion. Says Wiedemer: "The medicine starts to become poison." - All these, just when bewildered, lost uncles and aunties are learning from your local research houses' market outlook roadshows about what's QE2!

USD, The Confetti In Wallets After QE 2.

2010-11-06T21:13:00.003+08:00

Forget about fundamentals or technicals: just follow the bouncing buck.

Strategists emphasize that a new theme has emerged in the investment markets, which is that the risk-on/risk-off trade is taking its cue increasingly from the US dollar. The correlations, market pros say, are high, intensifying, and actually now unprecedented.

For example, according to Gluskin Sheff’s David Rosenberg, over the past two months, 90% of the time that the dollar moved in one direction, the S&P 500 moved in the other. The inverse correlation, over the same time period between the dollar and emerging market equities, was 92%; it’s now running at 95% for the CRB index.

Interesting positive correlations are also now firming dramatically. For instance, over the past two months, the dollar and corporate spreads moved in the same direction 80% of the time. The dollar and the VIX, which tracks expected volatility in the stock market, moved in the same direction 80% of the time.

In other words, ignore the politics, economic data and technical levels. Maybe right now all money-making traders and investors need to do is follow the dollar. It’s a simple tune whistling through the canyons of lower Manhattan: dollar down, everything else up.

“Hard to believe it’s that easy, but this seems to be the environment that Ben Bernanke have managed to create in their quest to reflate the global economy,” Rosenberg says.

Historically, say strategists, these correlations weren’t this pronounced, but that changed when the Federal Reserve began buying Treasury securities. Last week, the Fed announced that it will print another $600 billion to buy Treasuries through mid-2011. That’s in addition to the roughly $2 trillion it printed to buy Treasuries and mortgage debt during the financial crisis.

The point of the program is to keep long term interest rates low, encouraging borrowing and spending by consumers and companies. The idea, if Bernanke and his FOMC allies are right, is that yields will tumble and people will start buying homes again. Expecting greater inflation ahead, they’ll also buy more stuff at the mall. In turn, companies can start hiring and unemployment will fall.

Of course, investors also know that vastly increasing the supply of dollars means each dollar is worth less when measured against other things. So they’re concerned about the real worth of all that confetti in their wallets, and they’re looking to protect themselves by diversifying into other assets.

Since August 27, when Bernanke suggested that another round of monetary stimulus was on the way, the dollar index (DXY), a measure of the dollar against a basket of currencies, is down 8.4% Gold was up 12.5%.

“This is part of the same trade we’ve seen since March 18, 2009 when Bernanke said he was going to start buying Treasuries,” says Miller Tabak’s Peter Boockvar, as investors look to protect themselves from a lower dollar by loading up on the stocks of big exporters, emerging market equities, hard assets, and foreign currencies. “Maybe now it’s just intensified,” he says.

Critically, says S&P’s Alec Young, the point isn’t just that the Fed is printing another $600 billion, but that central bankers also left the door open to keep printing more money if necessary.

“That was a green light for the risk trade,” he says. “It means an open-ended amount of dollar printing. So the dollar is tanking and commodities, gold, bonds and stocks go up. It reinforces all those trades.”

At some point a few months from now, Young says, investors will want to see real evidence that all this monetary experimentation worked. If they don’t see the economic benefits then they could sell stocks and commodities in anticipation of another leg down. But, for now, he argues, it’s unwise to violate the first rule of Investing 101: Don’t fight the Fed.

“There could be a correction next year when people are disappointed at what this actually accomplished,” Young says. “But that’s the next trade. Right now, the Fed gets the benefit of the doubt. You could be right and all this won’t do any economic good but, in the meantime, you could also miss out on the rally.”

But, if the risk-on/risk-off trade is taking its cue increasingly from the U.S. dollar, when might that relationship fade?

That happens, says Young, when we generate a stable, self-sustaining recovery. “It breaks when the U.S. economy finally gets on its feet and doesn’t need the Fed to keep printing a ton of money,” he says. “If QE2 works then that marks some kind of bottom for the dollar.”

The Dollar Correlation Myth.

2010-10-31T16:35:00.003+08:00

Last Friday, is year-end for many funds. Monday they can "legally" sell.

Monday also begins the first week of November when the three-week bias we mentioned at the beginning of the month culminates. While the market has held up into month-end, fiscal-year end, it hasn't blown off. It’s been choppy and mixed with earnings providing more than the usual Gapism.

Once again, Friday’s early strength was faded but longs came in with a late-day buy program to rescue the session as the S&P was magnetized to the pivotal point of 1184 on the close. Remember 1184 is opposite the time of the late August low and squares the important January high to open the year as it's 90 degrees from that price high of 1150. It's also roughly 90 degrees from the 1220 April high, which is by definition then opposite the end of October.

These squares may be playing out in a six-month top-to-top cycle.

In addition, 1184 is opposite 1115, which is the midpoint of this year’s range.

The March ’09 S&P low at 666 was a 75-point "undercut" of the November 21 low of 741. A 75-point "overthrow" of the midpoint or balance point of the year is 1190. The S&P has been oscillating around 1180 to 1190 all week.

Previous Friday’s close was 1183. Last Friday’s close was 1184.

If gold itself doesn’t start back up strongly by Monday, it suggests it will pullback for another three weeks or so possibly testing the 1230ish level.

The dollar seems to dictate the direction of everything lately. But is this inverse correlation to a declining dollar and rising equity prices overcrowded? Is the notion even true? Does the notion of the dollar devaluation/asset inflation trade always hold true to form?

Let’s look at a weekly chart (above) of the dollar from 2008 versus a weekly chart of the S&P from 2008.

The dollar declined into March/April 2008 in concert with stocks (A).

Notable is the marginal overthrow by the dollar in the first week in March 2009 that marked the precise low tick in stocks. The high tick in the dollar corresponded to the low tick in the S&P (D).

The November 2009 low in the dollar preceded the January high in stocks (E).

Note that the April high in stocks (F) didn't coincide with a top in the dollar. The dollar continued higher to challenge the 2008/2009 highs. The dollar/stocks correlation broke down April to June as the euro got smashed. There were other concerns. "Other" concerns could cause an unwinding again. It is interesting that the decoupling in question this past spring covered the period when the flash crash occurred. Happenstance?

From point E to point F the stocks and dollar advance is positively correlated. Both rose in unison. However, the dollar accelerated strongly in April as stocks topped and declined. Both the dollar and stocks topped in unison (G) in April and declined into the summer.

From the summer into October this year the dollar turned down again while stocks turned decidedly higher: The inverse correlation resumed.

While the market has essentially advanced from March 2009, the dollar has made two round trips.

The tip-off that March 2009 was a low in stocks was the marginal overthrow by the dollar that month over the prior swing high at 88.46 and the outside down week in March 2009.

If there's anything I've learned in my trading career it's that correlations come and correlations go and when they become too popular, they can get unwound violently.

It may be that the inverse correlation resumes here with the dollar staging a rally and stocks going lower, but they could just as easily go their separate ways.

With the election, FOMC, and G-20 in November where leaders will tackle the race to debase their respective currencies, volatility could explode.

Moreover, it's the two-year anniversary of the November 2008 crash low. We got a spring 2009 undercut of the November 2008 spike low. Is it possible we're getting a November spike high to a spring pivot in 2010.

Checking the weekly chart of the S&P and drawing a live angle up from the "true" low of November 2008 and tagging the important July 2009 low shows what may be a bearish backtest. In other words, following the break of this live angle in the summer, the S&P has snapped back to kiss the underbelly of this angle. However, the first "kiss" was rejected in early August while the jury is still out on the second "kiss." Will the second "kiss" get the cheese or the prize?

This may be at the mother of all inflection points. Either the market could extend from here substantially in time and price or it's headed meaningfully lower. And by substantially higher, as you know, I'm not referring to the possibility of a tag and inverse head-and-shoulders projection to 1250 S&P being satisfied going into January. This could play out and still be an overthrow of this live angle. Substantial, in this case, refers to a revisit of the prior all-time highs. This period here in November and then again in January will give us indications as to which way the pendulum will swing.

Money Flowing Into GOLD.

2010-10-28T22:38:00.003+08:00

Since the financial crisis in 2008, it's undeniable that precious metals have been the best performer. One would assume that market participants have been piling into precious metals. Certainly some money has moved into the sector, smartly anticipating the continuance of a major bull market and looming severe inflation in the next several years. Yet, most funds have moved into fixed income.

Corporate bonds have been an even better performer than treasuries and rightly so. Not now, but a year or two years ago one could find great yield with the bonds of blue-chip companies, which will be in business for the years to come. Meanwhile, Uncle Sam has taken on the losses of the private sector amid a worsening economy. To begin with, Uncle Sam's balance sheet was a mess.

How does this all relate to gold? Another way to track fund flows is to compare markets via intermarket analysis. Gold has performed very well but most money has moved into fixed income. Gold will begin to accelerate when money starts moving out of bonds and into gold. The chart above shows gold versus the total return of corporate bonds.

This ratio just broke out from a 31-month base! Since the crisis, gold and corporate bonds were performing about equally. Now gold has gained the upper hand. This breakout could be the start of a new trend in fund flows over the next several years. Look for money to favor gold and other commodities, as inflation becomes a major concern. Ignore those who are promoting stocks as a way of beating inflation. Their interests aren't aligned with yours.

How does this affect gold right now? Gold is in a correction. I have upside targets of $1450-$1500 with a downside target of $1280-$1290. No one can predict the future but we can assess probabilities and manage risk. If this breakout holds then it means money in fixed income is starting to worry about inflation. After all, the above chart is providing an early indication. Ship'it out shagg !

The Recent Surge In Indonesia And Malaysia ETFs.

2010-10-23T16:17:00.003+08:00

The Market Vectors Indonesia ETF is up 40% year to date while the iShares MSCI Malaysia Index Fund is up 30% over the same time frame.

For anyone that follows emerging markets ETFs, this won't come as a surprise, but inflows to funds tracking Indonesia and Malaysia have surged this year.

BlackRock, parent company of iShares, the largest ETF issuer in the world, said inflows to Indonesia ETFs have more than doubled to $469.2 million through the first nine months of this year compared to $167.5 million for all of 2009.

Malaysian ETFs have garnered $346.1 million in new investments, compared with $71.1 million in 2009.

Specifically, IDX has attracted $340 million in new cash this year and the iShares MSCI Indonesia Investable Market Index Fund (EIDO) has landed more than $200 million assets and that fund made its debut less than six months ago.

EWM has landed $268 million in new cash through the first nine months of 2010.

The inflows may not be stopping, either.

Indonesia's stock market is forecast to see annual earnings growth of 18.5% in 2010 rising to 21.5% next year, according to Citigroup, while Malaysian earnings are projected to increase 24.9% this year before slowing to 12.9% in 2011, according to the Financial Times.

Wat Ben Said, and Wat It All Means For The Markets.

2010-10-17T14:41:00.002+08:00

Ben: "The near-term pace of recovery to be 'fairly modest'."
Translation: Despite the first trillion dollars, the disconnect between the stock market and the economy persists.

Ben: "2011 growth is unlikely to be much above long-term trend."
Translation: Even with historic stimuli, we'll be lucky to get back to what was previously considered a normal recovery.

Ben: "Measures of underlying inflation are 'trending downward'."
Translation: We don't wanna say "deflation" -- it’s an admission of defeat -- so we'll dance around the topic and vaguely allude to it.

Ben: "Fed is ready to provide more accommodation if needed."
Translation: Engine room, more steam! We'll print moew money.

Ben: "Bulk of increase in unemployment is due to contraction."
Translation: Hey, it wasn't me!

Ben: "Inflation trends will be subdued for some time."
Translation: It's gonna be a long hard road.

Ben: "Pace of growth is less vigorous than we would like."
Translation: What’s the definition of hyper-inflation? Spend one trillion dollars while running to stand still.

Ben: "Labor market recovery is 'painfully slow'."
Translation: The velocity of money was critically damaged with the collapse of Fannie Mae and Freddie Mac.We are screwed!

Ben: "Risk of deflation is higher than desirable."
Translation: DAMN! Who let that word slip through the censors?

Ben: "Fed has less experience on the impact of asset purchases."
Translation: Your guess is as good as ours!

Ben: "FOMC will be able to tighten policy 'when warranted'."
Translation: Sorta like a slow pick-off toss to first base; you won't catch the runner, you just wanna keep him honest.

Ben: "See a case for 'further action' with too low inflation."
Translation: Don't push me 'cause I'm close to the... button.

Ben: "Fed could buy assets."
Translation: A classic case of post-rationalization but now I said it, so there!

The Light At The End Of The Tunnel, Is An Oncoming Train!

2010-10-09T17:20:00.003+08:00

Peak Oil, sovereign insolvency, and currency debasement will permanently transform the economic landscape.

The US isn't yet on the final path to recovery, and there are one or more financial "breaks" coming. Underlying structural weaknesses haven't been resolved, and the kick-the-can-down-the-road plan is going to encounter a hard wall in the not-too-distant future. When the next moment of discontinuity finally arrives, events will unfold much more rapidly than most people expect.

I am figuring out which macro trends are in play and then helping people adjust accordingly. Based on trends in fiscal and monetary policy, I favoured accumulation of gold and silver in 2007. These weren't "great" calls; they were simply spotting trends in play, one beginning and one certain to end, and then taking appropriate actions based on those trends.

We happen to live in a non-linear world, a core concept of the Crash Course. But far too many people expect events to unfold in a more or less orderly manner, with plenty of time to adjust along the way. In other words, linearly. The world doesn't always cooperate, and my concern rests on the observation that the world economy still face the convergence of multiple trends, each of which alone has the power to permanently transform our economic landscape and standards of living.

Three such trends (out of the many I track) that will shape our immediate future are:

-Peak Oil
-Sovereign Insolvency
-Currency Debasement

Individually, these worry me quite a bit; collectively, they have my full attention.

History suggests that instead of a nice smooth line heading either up or down, markets have a pronounced habit of jolting rather suddenly into a new orbit, either higher or lower. Social moods are steady for long periods, and then they shift. This is what we should train ourselves to expect.

No smooth lines between points A and B; instead, long periods of quiet, followed by short bursts of reformation and volatility. Periods of market equilibrium, followed by Minsky moments. In the language of the evolutionary biologist Stephen Jay Gould, we live in a system governed by the rules of "punctuated equilibrium."

Accepting "What Is"

The most important part of this story is getting our minds to accept reality without our passionate beliefs interfering. By "beliefs" I mean statements like these:

“Things always get better and are never as bad as they seem.”

“If Peak Oil were ‘real,’ I'd be hearing about it from my trusted sources.”

“Dwelling on the negative is self-fulfilling.”

Peak Oil

Peak Oil is now a matter of open inquiry and debate at the highest levels of industry and government. Recent reports by Lloyd's of London, the US Department of Defense, the UK industry taskforce on Peak Oil, Honda (HMC), and the German military are evidence of this. But when I say “debate,” I'm not referring to disagreement over whether or not Peak Oil is real, only when it will finally arrive. The emerging consensus is that oil demand will outstrip supplies “soon,” within the next five years and maybe as soon as two. So the correct questions are no longer, "Is Peak Oil real?" and "Are governments aware?” but instead, "When will demand outstrip supply?" and “What implications does this have for me?”

It doesn't really matter when the actual peak arrives; we can leave that to the ivory-tower types and those with a bent for analytical precision. What matters is when we hit “peak exports.” My expectation is that once it becomes fashionable among nation-states to finally admit that Peak Oil is real and here to stay, one or more exporters will withhold some or all of their product "for future generations" or some other rationale (such as, "get a higher price"), which will rather suddenly create a price spiral the likes of which we haven't yet seen.

What matters is an equal mixture of actual oil availability and market perception. As soon as the scarcity meme gets going, things will change very rapidly.

In short, it's time to accept that Peak Oil is real -- and plan accordingly.

Sovereign Insolvency

Once we accept the imminent arrival of Peak Oil, then the issue of sovereign insolvency jumps into the limelight. Why? Because the hopes and dreams of the architects of the financial rescue entirely rest upon the assumption that economic growth will resume. Without additional supplies of oil, such growth won't be possible; in fact, we’ll be doing really, really well if we can prevent the economy from backsliding.

Virtually every single OECD country, due to outlandish pension and entitlement programs, has total debt and liability loads that Arnaud Mares (of Morgan Stanley) pointed out have resulted in a negative net worth for the governments of Germany, France, Portugal, the US, the UK, Spain, Ireland, and Greece. And not by just a little bit, but exceptionally so, ranging from more than 450% of GDP in the case of Germany on the "low" end to well over 1,500% of GDP for Greece.

Such shortfalls can't possibly be funded out of anything other than a very, very bright economic future. Something on the order of Industrial Age 2.0, fueled by some amazing new source of wealth. Logically, how likely is that? Even if we could magically remove the overhang of debt, what new technologies are on the horizon that could offer the prospect of a brand new economic revival of this magnitude? None that I'm aware of.

In the US, the largest capital market and borrower, even the most optimistic budget estimates foresee another decade of crushing deficits that will grow the official deficit by some $9 trillion and the real (i.e., “accrual” or “unofficial”) deficit by perhaps another $20 trillion to $30 trillion, once we account for growth in liabilities. This is, without question, an unsustainable trend.

It’s time to admit the obvious: Debts of these sorts can't be serviced, now or in the future. Expanding them further with fingers firmly crossed in hopes of an enormous economic boom that will bail out the system is a fool’s game. It's little different than doubling down after receiving a bad hand in poker.

The unpleasant implication of various governments going deeper into debt is that a string of sovereign defaults lies in the future. Due to their interconnected borrowings and lendings, one may topple the next like dominoes.

Currency Wars

The currency wars have begun, and the implications to world stability and wealth could not be more profound.

When pressed, the most predictable decision in all of history is to print, print, print. So I can't take credit for a "prediction" that was just slightly bolder than "predicting" which way a dropped anvil will travel; down or up?

The only problem is, widespread currency debasements will further destabilize an already rickety global financial system where tens of trillions of fiat dollars flow daily on the currency exchanges.

You can be nearly certain that every single country is seeking a path to a weaker relative currency. The problem is obvious: Everybody can't simultaneously have a weaker currency. Nor can everybody have a positive trade balance.

If a country or government can't grow its way out from under its obligations, then printing (a.k.a. currency debasement) takes on additional allure. It's the "easy way out" and has lots of political support in the home country. Besides the fact that it's already started, we should consider a global program of currency debasement to be a guaranteed feature of the US economic future.

Conclusion

Three unsustainable trends or events have been identified here. They aren't independent, but they're interlocked to a very high degree. At present I can find no support for the idea that the economy can expand like it has in the past without increasing energy flows, especially oil. All of the indications point to Peak Oil, or at least "peak exports," happening within five years.

At that point it will become widely recognized that most sovereign debts and liabilities won't be able to be serviced by the miracle of economic growth. Pressures to ease the pain of the resulting financial turmoil and economic stagnation will grow, and currency debasement will prove to be the preferred policy tool of choice.

Instead of unfolding in a nice, linear, straightforward manner, these colliding events will happen quite rapidly and chaotically.

By mentally accepting that this proposition isn't only possible, but probable, we're free to make different choices and take actions that can preserve and protect our wealth and mitigate our risks.

What changes in our actions and investment stances are prudent if we assume that Peak Oil, sovereign insolvency, and currency debasement are "locks" for the future?

When it comes to markets riding on a flawed fundamental premise, perception is everything.

Consider that in December of 2007, the world had plenty of food, but by February of 2008, we saw food riots and the international perception of food scarcity. Almost nothing had changed with respect to the fundamental quantities of food stocks between December and February, and that's the point.

Or consider that one month Iceland was in fine shape and the next month desperately broke. Ditto for Greece. Again, there was nothing that had fundamentally changed from one month to the next, in terms of cash flows or debt levels, that would justify the size of the adjustments, but they happened nonetheless, and they happened quickly.
However, it's when we consider the impact of the widespread realization of Peak Oil on the story of growth that the whole idea of sovereign insolvency really assumes a much higher level of probability. More on that later.

For now we should accept that there's almost no chance of growing out from under these mountains of debts and other obligations. We must move our attention to the shape, timing, and the severity of the aftermath of the economic wreckage that will result from a series of sovereign defaults.

Greed Is Now Being Compared To Cancer.

2010-09-26T17:08:00.006+08:00

No fewer than three of the season's new films are focused on Wall Street and its players, each with its own moral message about the way markets are run and who's pulling the strings.

Here,the much awaited Wall Street sequel - Money Never Sleeps looks at the lessons about Wall Street, from the classics of years past to this year's latest offerings.

The Lesson: Beware of bubbles, figurative and literal.

At President Obama's recent town hall meeting a broker asked: Isn't it time to stop treating Wall Street like a piñata? Oliver Stone's answer: Not yet, punk. And now the controversial director has a brand new stick. Wall Street: Money Never Sleeps is the 23-years-in-the-making sequel to Wall Street, the movie that introduced us to trader Gordon Gekko (Michael Douglas) and his catchy slogan, “Greed is good.” Hollywood has always agreed with Wall Street on that point -- that's why they make sequels.

While Douglas returns as Gekko, this year's Charlie Sheen is Shia LaBeouf (the hot Transformer kid), playing a young hotshot with designs on the big score, and also on Gekko's daughter Winnie (Carey Mulligan).

Stone is the kind of director who makes Michael Moore look subtle and here he's at his bludgeoning best, aka worst. More than once he includes shots of actual soap bubbles. For those who have come straight from a screening of Resident Evil: Afterlife, that's known as a visual metaphor. It's what some movies have instead of zombies. As befits the sequel to a 1987 movie, there's a retro feel to the whole thing -- a little bit of '80s flash, but now with derivatives.

My favorite part of the film is the lesson that in the darkest days of any financial tragedy what matters most are love and family. Life goes on," says Lawrence McDonald, author of A Colossal Failure of Common Sense -- The Inside Story of the Collapse of Lehman Brothers, former Lehman Brothers VP of Distressed Debt. " My second favorite part was Michael Douglas' vintage speech on his fictional book lecture tour. He emerges from prison, after collecting his brick-size Motorola cell from the warden, writes a best-selling book and is on stage at a university in New York. In about two minutes and 25 seconds he (and Oliver Stone) do a masterful job describing and explaining the financial crisis."

Despite being flattered by how many lines from his book are used in the movie, McDonald ultimately gives it a mixed review. "I noticed early on there was lots of excitement, applause, and laughter dancing around the theater, but at the end of the film everyone got up and left a little confused, with zero emotion," he says.

The movie, which opens last week, also compares greed to a cancer. Stone can't be blamed for the wincing that will accompany that speech in light of Douglas' recent diagnosis. But at least the actor's feisty performance will remind us why we need to pray for his speedy recovery.

This Is Dollar Crisis.

2010-09-22T23:19:00.002+08:00

Ben Bernanke's monetary policy has eventually created a currency crisis in the world’s reserve currency.

This crisis has became apparent that the dollar was caught in the grip of the 3-year cycle decline.

There are three conditions that had to be met before I am willing to call the beginning of the end.

-The first condition was for the dollar to move below 82. That was the warning shot that problems were developing.

-The second and third conditions were a move below long-term support (80) and a failed intermediate cycle.

The drop below 80 today has now completed the final two conditions.

I've marked the last three intermediate cycles with the blue arrows (chart above). The move below the last intermediate cycle low today initiates a failed intermediate cycle. This is also an extremely left-translated cycle. Left-translated cycles tend to produce the worst losses as they have a long time to move down. The ongoing cycle shouldn't bottom until it puts in a larger degree yearly cycle low in November or December. I expect that low to test the ‘08 bottom at 71.

Finally we should see a full-on mini crisis by the time the dollar drops into the major 3-year cycle low next spring or early summer.

US deflation just isn't a possibility in a purely fiat monetary system. A determined government can create inflation any time it wants as long as it’s willing to sacrifice the currency. I think it's safe to say the United States has no compunction against destroying the dollar.

The US economy is now heading into an inflationary storm that will expose deflation theory as the pure nonsense that it is.

Japan's YEN Selling Is Boosting Precious Metals.

2010-09-16T12:34:00.004+08:00

Gold broke out of a classic cup-and-handle pattern yesterday right before the Bank of Japan announced it was buying dollars in a bid to weaken the yen. The yen has strengthened significantly since June making life extremely difficult for Japanese export companies. The economy in Japan is weakening and they’re also facing their own sovereign debt issues, which haven't yet surfaced. However, more important is how the markets are reacting. This reaction in the yen will likely be short-lived. Although it may be an immediate Band-Aid, the intervention efforts may be too little for the global forces of supply and demand.

This yen selling didn't transfer to purchasing US dollars. Yesterday and the past several weeks there's been a major rush into precious metals. The dollar’s chart is giving warning signs of an imminent collapse. Certainly the dollar hasn't reacted positively to this announcement.(This will translate into renewed weakness in in Crude Palm Oil as the Ringgit pops.)

The dollar is slicing through its 200-day moving average and the 50-day clearly has acted as resistance. I believe a major transfer of dollars into precious metals is occurring. A death cross is imminent on the dollar and this is occurring simultaneously to new high breakouts on silver and gold.

Usually a weak dollar has been bullish for stock markets as it meant investors were less risk-averse. This isn't the case now. Even though the dollar has fallen since June the markets have failed to rally significantly. Instead, precious metals and mining companies have broken out of key resistance.

The S&P 500 has been in a sloppy and volatile base for four and half months and the poor price volume action tells me a breakout above $114 is highly unlikely. A third failure may be imminent as overbought conditions are combining with previous resistance.

This cup-and-handle pattern in gold is extremely bullish and could be the beginning of a next leg higher. It's a sign of a major consolidation and this recent breakout may bring in more investment interest by institutions who are concerned about currency and sovereign debt issues. SPDR Gold Share’s (GLD) pattern is very rare and this setup tends to indicate a major move into hard assets.

If we see a decoupling of the dollar versus gold continuing, expect to see more buyouts of resource companies from Asia. Right now we're witnessing a massive transition of wealth in the form of currencies (in particular the dollar), bonds, and equities into silver and gold.

9,Nine,9....

2010-09-11T14:02:00.004+08:00

“God does not care about our mathematical difficulties. He integrates empirically.” -- Albert Einstein

“I figure things by mathematics. There is nothing mysterious about any of my predictions. If I have the data I can use algebra and geometry and tell exactly by the theory of cycles when a certain thing is going to occur again.” -- W.D. Gann

Einstein equated gravity to an accelerating rocket. In such a rocket there will be weight and falling. The rocket floor will move upward to meet something that is “dropped.” That's the equivalence principle. Einstein’s ideas revolved around accelerated motion and its effects. He detailed what's equivalent to gravity, explaining that actual gravity though is curved space. That's Einstein’s understanding of real gravity. Space isn’t curved for the accelerating rocket. They are two different things. Einstein, through curved space-time geometry, explained the curvilinear paths of falling objects; why they follow curves.

There's a difference for an accelerating rocket and one just sitting on the earth’s surface. One's moving and experiences weight and the other isn't but still experiences weight. Weight for the accelerating rocket can be calculated by its rate of change velocity. But there's no rate of change of something that isn't moving. Without motion there can be no rate of change.

If one of the foundations for Einstein’s theories is that time isn't a straight line, but curvilinear, then it begs the question: Do cycles repeat?

If space-time is curved in general relativity in both acceleration and gravity, are space and time the same thing? In other words, in relation to the market, are time and price one in the same and when they "meet" does change or the possibility of change take place?

If space-time is curved in general relativity in both acceleration and gravity, hence, the equivalence principle, both gravity and acceleration are the bending of space-time.

In other words, the larger the acceleration, the momentum, the larger the dislocation in places like the market place?

More recently, Bernanke warned that “the recent pace of growth is less vigorous than we expected” and that the economy “remains vulnerable to unexpected developments.”

The confidence associated with the stimulus and that the government "is in charge here" is in jeopardy of becoming a con.

The burst of stock market strength is in danger of becoming a bust.

And, the timing is fascinating, as the first real week of trading in September comes to a close. Walking through all the major S&P swings from 1941. It's apparent that 540-degree moves in time and in price are countertrend or corrective moves of a major degree.

September 9, 2010, is 540 degrees in time from the March 6, 2009 low. The 1104 close on the S&P is 540 degrees down from the August S&P pivot high of 1313/1314 in August 2008, the pivot high just prior to the Lehman Waterfall.

Moreover, the price of 1110 aligns with September 9 as shown on the Square of 9 Chart below. By definition then, since September 9 is opposite March 6, the date of the low is opposite 1110 as well. More importantly, remember that the March 6 low was 90 degrees of 666/667, the price of the low on March 6. Time and price "squared out" at the low.

By definition then, September 9 must square 666/667 as well since it's opposite March 6.

nterestingly, yesterday the S&P gapped up to 1110, precisely making an opening high. At the same time the SPDR S&P 500 (SPY) tagged its overhead 200-day moving average (the SPX marginally missed kissing its 200-dma), with the SPX "Pinocchioing" a declining trendline from this year’s April high and August high.

The normal expectation would be for the longs to take some profits and the SPY to pause at the 200-dma, especially on a gap open following a seven-day run. You can’t get too bearish on that alone. However, despite an up day in the S&P, many of the usual suspects tailed off from the opening and stayed in the red.

What's also interesting about September 9 is the pattern from 1930. I’ve shown the chart of 1930 (above) a few times this year as April marked the retrace high after the November 1929 crash low. But a friend reminded me last night that the second important pivot high in 1930 occurred on September 10.

So in 1930, there was an April high, the high for the year, like 2010 so far. There was a sharp sell-off into early May, like 2010. There was a sharp decline into late June/early July, like 2010. Then there was a last burst of strength off an August low. Like 2010?

Do cycles repeat? Do patterns repeat?

Time is the most important factor in determining market movements, and by studying the past records of the averages or individual stocks you will be able to prove for yourself that history does repeat and that by knowing the past you can tell the future. There is a definite relation between time and price. Now, by a study of the time periods and time cycles you will learn why tops and bottoms are found at certain times and why Resistance Levels are so strong at certain times and bottoms and tops hold around them. The most money is made when fast moves and extreme fluctuations occur at the end of major cycles.

-- W.D. Gann

After the crash into November 21, 2008, there were many on the Street concerned about a repeat of a 50% retracement rally into April 2009 like April 1930. Remember that Bernanke is the preeminent scholar of The Great Depression. Needless to say this fact was not lost on him. The Fed has the same charts we do. Remember that a new president had just been sworn in during the first quarter of 2009.

What better way to "abort a repeat" of the psychology of the cycle from 1930 than "allowing" the market to flush out into March/April 2009?

There's an often used quote of Mark Twain’s as pertains to the market that history, while it may not repeat exactly, often rhymes. It may have become a Street cliché at this point. Be that as it may, clichés are often so called because they are so true.

I can’t help but wonder if the market "skipped a beat" and the April high in 2010 rhymes with the April high in 1930. As traders like to say, “plus or minus one.” What’s one iteration on a yearly time frame?

The bottom line is that the price action following the test of the declining trendline yesterday must be carefully observed. Either the market is on a precipice or a platform. If 1110 can be captured, especially on the important weekly closing basis today, the implication is an extension higher, as offered in yesterday’s piece.

Do cycles repeat? Yesterday I saw a piece on the news that the first time the US was attacked wasn't 9/11 in 2001 but September 10, 1942, when a Japanese bomber dropped two bombs over Oregon. One bomb started a forest fire. The other -- no one knows. September 10, September 11?

It's remarkable that the attack in 2001 came 60 years after Pearl Harbor -- the Master 60-Year Cycle according to Gann (and the Mayans).

I can’t help but wonder how short the fuse is on the situation regarding the move to burn the Koran on the ninth anniversary of 9/11. Nine years, as in Square of 9 charts? The chart is so called because the first square ends with the number 9.

Conclusion: From March 6, 2009, to the April 26, 2010 top is 416 calendar days. On the Square of 9 Chart, 416 aligns with August 30. The market exploded up from the key 1040 level on August 30. The market is respecting this vibration. It could indicate an important low, but momentum and velocity need to confirm the idea of higher prices. Moreover, the message of the 416/August 30 vibration is also that any break of that day's low should see a powerful decline. In other words, the importance of 1040 is underscored, as if we needed one more piece of evidence to tell us that 1040 was the Maginot Line.

At the same time there are a number of good reasons, as you know, cyclically, and otherwise, enumerated in this space that indicate a top of significance anywhere between here and September 22. Add to these cycles and patterns the VIX Compression Sell Signal shown this week and multiple Hindenburg Omen signals, and caution is warranted.

Double Dip, Anyone?

2010-09-04T22:37:00.002+08:00

Federal Reserve Chairman Ben Bernanke said the Fed "will do all it can" to avert a recession and deflation. Bernanke then laid out the four things the Federal Reserve can do to support the economy.

1. First, the Fed can expand quantitative easing (QE). This would most likely come in the form of the Fed expanding its already bloated balance sheet even more.

2. Next, the Fed could extend the zero interest rate policy (ZIRP) even longer. The bond market already expects this to happen which is most likely a reason for the drop in yields this past month as the market is basically signaling there will be no rate cuts until 2014-2015.

3. The Federal Reserve could drop interest rates on reserves (IROR). Lowering this rate would be an attempt to get banks to lend again. I would note, though, that the rate is currently 0.25%. Cutting the IROR down by half or all the way down to zero most likely won't do much.

4. Finally, the Fed chairman notes the Fed could raise the official inflation target. The goal of this final maneuver would be to discourage banks from sitting on their cash.

These options are fine and Mr. Bernanke believes that these tools will help the US keep deflation at rest. In my opinion, the only real option Bernanke has is to keep printing dollars. But as Dr. Ed Yardeni of Yardeni research notes, Bernanke didn't mention this as an option at Jackson Hole.

Nevertheless, here's a quote from Bernanke's 2002 speech on deflation: "By increasing the number of US dollars in circulation, or even by credibly threatening to do so, the US government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services."

Even though Bernanke didn't mention his printing press, I still think this is the most likely option and one that the equity markets truly enjoy. Professor Jon Markman did some research and he found that after the Bank of Japan (BOJ) started QE in 2001, the Nikkei went from 8,000 to 18,000. When the BOJ ended QE in 2008, the Nikkei declined all the way back to 8,000. Then here, the Fed started QE in 2009 and the S&P 500 went from 700 to 1,200; since the Fed stopped QE in March of this year, the S&P is down some 12%.

Even though the market has had a rough ride this year, some stocks are performing well, they just aren't conventional ones. A recent Wall Street Journal piece looked at "bunker stocks." The Journal found that companies that supply the essentials for a respectable fallout shelter were trading at or near 52-week highs. Some of the companies the journal featured were Dr. Pepper Snapple (DPS), Cummins (CMI), JM Smucker (SJM), and Hormel (HRL). These companies produce bottled water, canned food, and power generators.

I think more QE is right around the corner; the economy is weak and a double-dip is not a possibility, it's a reality. As Markman said, "I've seen estimates it could amount to as much as $1 trillion this time -- yes, that's with a T -- and do not doubt for a minute that it could happen."

Anymore Appetite Left For Robert Prechter?

2010-08-28T17:12:00.004+08:00

The master of the Elliott wave theory has proven himself time and time again. This time he warns of a massive decline.

No one has tried harder to legitimize technical analysis than modern technical Guru-Supremo Robert Prechter, and over the years he hasn't wavered one iota from his steadfast belief in its predictive power. Launching his career in the early 1970s at the outset of the EMH/Random Walk dynasty and academic-imposed dark ages of technical analysis, he was eager to fight fire with fire and apply scientific methodology to his work.

He slammed a home run in 1978 with his book Elliott Wave Principle that he wrote with A.J. Frost. The book outlined a theory of stock market behavior replete with compelling historical evidence and a bold future forecast based on patterns originating in the past.

Against a rising tide of doom and gloom, Prechter called for a powerful 1980s bull market due to resumption of a wave pattern that started in 1932. This pattern, originally identified by Ralph Nelson Elliott, had been tracked and used to make extremely accurate market predictions in the 1960s by obscure market newsletter writer Hamilton Bolton and Elliott Wave Principle co-author A.J. Frost. Prechter was convinced of the accuracy of the wave principle, and wanted to reveal it to the general public

He virtually stood alone as a stock market bull in 1982. The Dow was at 800 and he was calling for a rise to 3500-4000 and proclaiming the greatest bull market in history was coming. When the rise got underway, the bull market became synonymous with Robert Prechter. He enjoyed celebrity stock market guru status and was a frequent talking head on TV. At least one market pundit even referred to it as Prechter’s bull market. His celebrity status surged even more when he won the US Trading Championship in 1984.

Fame is fleeting however; or, as Robert Prechter believes, it comes in waves. Since he'd plotted his subscription numbers in terms of the same wave pattern that he'd used for his bull market prediction and identified a subscriber peak in late 1987, he was expecting a fall from grace.

He was correct. His stock market guru status was obliterated in the October 1987 stock market crash along with the investing public’s newfound fortunes. Even though he told his newsletter subscribers to get out of the market a few weeks before the 1987 crash, the investing public at large had embraced his higher price targets and the pundits who promoted him as a guru now turned on him.

If there's anything that Paul, the 2010 World Cup octopus oracle, taught us, it's that most people don’t care about the source of good fortune as long as it keeps coming. While Prechter’s goal was to spotlight the methodology behind his accomplishments, few outside of technical analysis professionals and Wall Street firms paid attention or even cared. Main Street was engorged and engaged as the baby boomer generation entered into peak earning years heralding in an era of bigger and better everything, and academia was busy bowing to the golden calf of random price structure.

In addition to the wave pattern Elliott Wave Principle identified up from 1932, which Prechter called the Super Cycle, it identified two larger patterns that it fit into like Russian nesting dolls called the Grand Super Cycle and the Millennium Cycle. Together they represented the three largest Elliott wave structures dating back to the dark ages.

The original version of the book called for the impulse portion (five advancing waves) of the three largest cycles to end in the late 1980s, but when the market recovered from 1987, an alternate count was introduced in 1995, which included a revision stating that the Grand Super Cycle was likely the largest pattern in the confluence of terminating impulse waves, and it was likely to peak that year. Well, that didn’t happen, and Prechter called the top again for 1996, and then in 1996 revised it to 2000.

You can imagine the fun critics of the Elliott wave principle had with all the bad calls. Prechter’s days as a market caller, as far as the general population and critics were concerned, were over.

However, a funny thing happened; all those Whos down in Whoville kept singing. Prechter’s personal newsletter and publishing house, Elliott Wave International (abbreviated EWI), continued to do well through the 1990s right up through today. In a mostly cottage industry where individuals or a handful of employees run market newsletters, Elliott Wave International has 90 employees. While EWI won't reveal its actual number of subscribers, it will say it has subscribers in more than 100 countries.

The bottom line is that serious Elliott wave watchers, though disappointed, weren't dissuaded by the failed projections in the 1990s. Although the five-wave impulse portion of these large-degree cycles extended beyond the ideal Fibonacci targets based on the historical norms of smaller wave sets, the failures were within the rules and guidelines of the wave principle and continued to adhere to Fibonacci proportion.

Above chart shows clear five-wave impulse structure rising through time from 1784 to 2000 (Grand Super Cycle), encompassing another clear five-wave structure up from 1932 (Super Cycle), which nested yet another structure up from 1974 (Cycle), continued to present within acceptable ranges.

But the most compelling evidence is the extremely well-documented Super Cycle run up from 1932 for which key pivots and waves were successfully identified in advance by R.N. Elliott from 1938-1942, Hamilton Bolton in 1960, Charles Collins in 1966, A.J. Frost in 1974, and Robert Prechter in 1982.

Imagine for a moment if these Elliotticians were geologists who predicted earthquakes instead of market pivots with the same accuracy.

However, there's that elusive impulse wave endgame that terminates the advancing portion of the three large cycles that Prechter has been calling for since 1987. One could point out that a lost decade in projecting the termination of a Grand Super Cycle wave (and all nested structures) up from 1784 is still accurate within 95% if it truly ended in 2000. But most people roll their eyes at Chicken Little Prechter’s latest and most dire warning published in a New York Times interview last month.

I think it's more illuminating to ask a question. What impact do the failed projections in the 1990s have on the current interpretation of these large Elliott wave cycles today? The answer is very intriguing. Remember how I explained that sometimes an Elliott wave interpretation can be fine-tuned to one theoretical outcome, or several outcomes that point in the same direction? Well, the answer to my question is that theoretically there are absolutely no Elliott wave options left for price to go higher than the 2007 high at every Elliott cycle level of degree from Grand Super Cycle (1784) to Cycle (1974) without experiencing a decline in magnitude described by Robert Prechter in the New York Times interview.

In other words, Robert Prechter’s lifelong pursuit to prove the validity of the Elliott wave principle is all in, right here, right now. ( check it out now..funk soul brudder..)

Oh, did I mention that he's the author of 14 books on the subject containing thousands of explicit examples of eight-wave cycle structures and Fibonacci proportion in the markets? What is that you say, why didn’t you learn about the Elliott wave principle in college? Good question. I'll just say that I'm pretty sure your grandchildren will.

In March 2008 I expressed my belief in the Elliott wave principle but stopped short of conviction. In 2010, I'm right there with you Robert Prechter. All In Baby.

The Pattern Day Trader.

2010-08-22T00:29:00.003+08:00

In the past, day trading represented the Wild West of the market. It was possible for day traders to move in and out of positions within the trading day and end up with no open positions. This meant it was possible to trade on large volume with little or no cash at risk, meaning no margin requirements. It also meant huge risks for brokers.

For some traders, the whole idea of day trading was a path to easy riches with no risk. It was the fad of the day and it worked -- until the market turned and fell, meaning a lot of portfolios based on accumulated day trades collapsed. And as most traders know, market prices tend to fall more rapidly than they rise.

Trading on such extreme leverage is an attractive idea, but it's not the only motive for day trading. Many traders believe that the risk of price gaps between today’s close and tomorrow’s open are simply too great; day trading enables traders to close out positions during the trading day, avoiding this risk altogether. Even so, if you want to day trade, you could fall into the definition of a “pattern day trader.”

Day trading relies on a high frequency of trades in very short timeframes measured not in days but in seconds. The entry/exit decision is based on momentum, chart patterns, and other technical strategies. Whichever strategy employed, the theme to day trading is that positions close before the trading day’s end. Margin requirements are calculated based on open positions at the end of the day; so day traders following the system end up with no open positions and no margin calls.

This problem, at times representing unacceptable risks to brokers as well as to traders, is what led to the need for enactment of new rules concerning so-called pattern day traders. By definition, you're a pattern day trader if you buy or sell a security within the same day, and follow this pattern four or more times within five consecutive trading days. If you do fall into this definition, you must maintain high margins in equity balances (cash and securities) in your margin account. This balance has to be on hand before you can continue any day trading, once you reach that threshold.

Dead Cross Is Confirmed.

2010-08-14T18:34:00.002+08:00

Several weeks ago I wrote about the death-cross phenomenon in The Death Cross Sell Signal Analyzed. The death cross occurs when the 50-day moving average crosses the 200-day moving average on the downside. These patterns, when combined with other technical indicators, can predict major market downturns. You may have read articles from the bullish camp and from many technicians contending that the death cross isn't a proven or a contrary indicator. I, however, assert that this warning indicator prevented many wise investors who heeded its signal from losing their life savings in 2008.

The recent post-Fed free-fall is confirming the death cross as this will be the third major failure of the 200-day moving average. When a technician starts seeing bearish signs, it's important to look for subtle clues in chart patterns. In this case, the clue was the bearish rising wedge: It's a rally that trades up on decreasing volume. This bearish rising wedge took place concurrently with the right shoulder formation of a head-and-shoulders pattern. This breakdown coupled with bearish price-volume action confirms that selling pressure far exceeds buying. When all these signals happen at the same time, you can expect a rapid downturn to follow. This correction is putting pressure on the 200-day moving average slope. If that moving average begins to slope down, it becomes a heavy area of resistance and will confirm the death cross from early July. The odds of a long-term downtrend are becoming highly probable. These signals could possibly indicate the start of a 12- to 18-month down cycle.

Gold, on the other hand, has shown great relative strength despite the general markets correcting and negative sentiment about the economy from Washington. On July 28, I wrote that gold was reaching major long term trend support and when everyone was selling, it was exactly the time to be buying. That day proved to be a pivot day for gold.

Gold is breaking out compared to the general markets and especially to the euro. It's significantly rallied over the past couple of weeks and has broken above its 50-day moving average, which showed little resistance. Now that 50-day has been broken to the upside, it should act as support as it builds a base to challenge new highs.

The Fed will continue to ease and print money, which should be excellent for gold and silver stocks.

The World's Most Unusual Market - The Pirate's " Stock Market".

2010-08-08T15:51:00.003+08:00

The Syrian-crewed MV Syria Star, flagged in Saint Vincent and Grenadines and transporting an estimated 23,755 cubic meters of sugar, was seized by Somali pirates in the Gulf of Aden yesterday.

The pirates seem to have timed the market fairly well, after raw sugar futures for October delivery on the ICE (ICE) exchange hit a four-month high of 18.52 cents/lb. this week. Apparently, it's due to a logjam at Brazil’s ports (Brazil is the world’s largest sugar exporter), where ships are waiting up to a month and a half to load supplies and set sail (the usual time is about two weeks).

Usually, pirates are after ransom, not cargo—but they tend to target high-value shipments. This time, they’re headed back to shore with 23,755 cubic meters of deliverable sugar, currently trading at a spot price of 24.37 cents/lb. A quick back-of-the-envelope estimate shows that 23,755 cubic meters would accommodate approximately 53,247,825 lbs of sugar—with the right broker, they could do quite well.

The probability of the pirates’ purloined sugar entering the market is low, to say the least. However, even if they were able to sell it, money manager Shawn Hackett, founder and CEO of Hackett Financial Advisors, a firm with a focus on agricultural commodities, contends they got in too late.

“There’s no scarcity of sugar”. “This is just a temporary, short-term rise in sugar prices because of the transport problems Brazil is having. That’ll get resolved quickly, and besides, India, the other sugar-producing country the world relies on, just came in with a record-setting crop.”

So, the pirates may have been better off just going the ransom route, as is their usual MO.

Container vessels generally sail too high off the water for Somali pirates and are relatively fast. Thus, tankers and dry bulk ships that carry oil, chemicals, coal, wheat, and other commodities are more desirable targets.

The Saudi-owned Sirius Star, was hijacked in November, 2008. It was carrying two million barrels of oil worth $100 million, and was finally released on January 11, 2009, after $3 million in cash was dropped to the pirates from an aircraft. It was the highest-ever ransom paid, at the time.

Then, about a year later, pirates hijacked the New Orleans-bound tanker Maran Centaurus, which was carrying 2 million barrels -- $150 million worth -- owned by Valero Energy (VLO). In January, a ransom estimated to have been between $5.5 and $7 million dollars was paid, again, dropped by parachute from a helicopter.

Pirates know that the value of the ship and its cargo are usually worth far more than their ransom demand, and a few million dollars is a drop in the bucket (barrel?) in relative terms.

So, how does it work?

Let’s say you own a tanker or the cargo it’s carrying. In the event of a pirate attack, the vessel’s crew contacts company headquarters, which in turn, contacts its insurance company, which in turn, contacts a security firm like London’s Control Risks, which begins negotiations with the hijackers.

"Paying ransoms is not illegal," Guillaume Bonnissent, a special risks underwriter for Hiscox Insurance Co. Ltd, which writes about two-thirds of the world's kidnap-and-ransom insurance policies, told Time magazine. It is, however, illegal for insurance companies themselves to pay ransoms, which is why Control Risks and others make the payments. "K&R is really reimbursement," Bonnissent said. "We reimburse clients for ransoms paid."

"The money is concealed in large floating plastic containers, and flown by air and dropped," says Mike Regester, an insurance broker for Cooper Gay. "Then the pirates go out and pick it up," he says.

As the pirates know ships are generally required to carry K&R coverage for navigating through Somali waters, they know they'll be paid -- unless they're caught first by the international naval fleet protecting the shipping lanes. But last year, 68 successful hijackings were carried out in 200 attacks, netting total ransoms believed to exceed $50 million.

Somali pirate hijackings are financed by what may well be the world’s most unusual “stock market.”

A pirate named “Mohammed” said that, in Haradheere, 250 miles northeast of Mogadishu, brigands set up an exchange of sorts to fund their activities.

"Four months ago, during the monsoon rains, we decided to set up this stock exchange. We started with 15 'maritime companies' and now we are hosting 72. Ten of them have so far been successful at hijacking.”

He explained that, "The shares are open to all and everybody can take part, whether personally at sea or on land by providing cash, weapons or useful materials."

After a ransom payout for releasing a Spanish vessel, “investor” Sahra Ibrahim, was lined up outside the exchange waiting for her cut.

"I am waiting for my share after I contributed a rocket-propelled grenade for the operation," she said.

"I am really happy and lucky. I have made $75,000 in only 38 days since I joined the 'company.'"

Too Crowded With Bulls.

2010-08-07T17:58:00.004+08:00

Judging by some analysts comments, the bullish talking-heads on CNBC, and fearless bulls, we have to continue to question whether this is a "corrective" rally up in the markets working off oversold indicators and sentiment in late June, or the start of a major third Elliott wave structure off the 2009 bottoms that takes the markets to new all-time highs.

In the interim, evidence mounts that the bull trade is getting pretty crowded now just 30-odd days since there were nothing but bears on CNBC and headlines were pretty negative. I scan CNBC here and there, mostly to see how many talking-heads and pundits are bearish versus bullish. Near the July 1 lows, there were all kinds of calls to raise cash and for markets to move much lower, indicating a bottom was probably nigh. Now, nobody is willing to be bearish after this rally, indicating a near-term top is nigh as well.

The Elliott wave patterns still appear to be an intermediate upward correction or a Wave 2 or Wave B up in sentiment off the 1,011 S&P 500 Index lows on July 1. Often bottoms come out of nowhere, as do tops. They don't tend to ring bells at either bottoms or tops, do they? I don't remember getting a phone call on July 1, but I did indicate a pivot low around 1,008 on the S&P 500 would be normal. What I didn't fathom was the extent of the rise since that low, and this has forced me to go back and re-draw charts and find my old Fibonacci calculator.

Right now, the area between 1,131 and 1,140 on the S&P 500 fits several Fibonacci upward targets over various time zones. In addition, the current pattern looks and walks not like a duck, but like an "ending diagonal" triangle. These are terminal patterns and serve to stop sentiment in its tracks when read correctly.I remenbered our KLCI was having the similar patterm in 1996.

Will we have a terminal top or a throw-over top in the next few days on this rally followed by a substantial correction? The probabilities say it’s likely, and above is a chart showing a sample of an "ending diagonal" pattern, and then the actual S&P 500 pattern right now. They look nearly the same. We'll soon see if this "3-3-5" corrective pattern was the right read I made, or if we're off to the races. Evidence suggests a lot of racing from here will be difficult for the bulls to pull off, but we shall see. The lows at 1,011 in terms of the pattern itself just don't seem that they completed to me, hence my stubborn views that we need a re-test of those lows. Time will tell. Sometimes forecasting is like predicting the weather three days in advance -- we'll have to see how the radar is tuned in shortly.

3 Reasons For Silver.

2010-07-31T14:26:00.002+08:00

Although gold continues to grab most of the attention in the precious metal world, its less glamorous sister, silver, may be more appealing, and for good reason.

First off, silver has many more uses than gold. It's used for numerous industrial purposes and nearly 55% of total silver fabrication is used for industrial purposes. Silver is commonly used in the electronics space and can be found in plasma display panels and printed circuit boards, as well as in the lining of refrigerators, for food storage containers, and for water purification. Additionally, the metal can be used as an antimicrobial to fight bacteria and as an antiseptic to treat fungal infections. Silver’s industrial uses even span to the solar energy industry. As economies around the world continue to expand, the industrial demand for silver will likely follow.

Another force that's likely to support silver is that valuations appear to be strong. In a nutshell, silver is cheap and depressed on a historical basis, when compared to its sister metal, gold. Gold is trading much higher than its long-term ratio of 16 times the price of silver, indicating that there's plenty of room for silver prices to run. Additionally, silver is nearly 70% below its all-time high witnessed in 1980 and well below its near-term high of $21 per ounce seen in 2008.

Lastly, diminishing supply is likely to bolster the metal. According to a study conducted by the United States Geological Survey, silver is nearly twice as rare as gold in the long term because it's not recycled at the same rates as gold and at current consumption rates all of the silver that's in the Earth’s crust will diminish away in the next 25 years.

When investing Silver ETFs, it's important to consider factors that could potentially hinder the price of silver like an unexpected surge in the dollar. A good to way to protect against these factors, as well as against the inherent risks involved with investing in equities, is through the use and implementation of an exit strategy that triggers price points at which an upward trend in gold could potentially be coming to an end.

Talking About S&P 840.

2010-07-01T22:46:00.004+08:00

With the magical 1040 level being tested in the S&P 500, many technicians and talking heads are looking at this level as the final step before Armageddon. Running through the various newsletters and blogs, a common theme seems to be that if 1040 doesn't hold, then the 960 level is the last stand before traders get a one-way ticket to test the March 2009 lows of 666. From that point, it's death and destruction to the American economic system as we know it, or so the naysayers would have you believe.

From my perch,I agree that 1040 holds a lot of psychological weight. If a break of this level holds, it should turn many market participants fully bearish and cause a downward cascade that will be difficult to stop. The proverbial line in the sand has been drawn,and the S&P is clawing and scraping at this very moment to remain with its head above this low water mark.

Trying to stay two steps ahead of the action, I roll out the weekly charts to anticipate the next areas of support. I've marked several areas on the weekly chart above that have been battlegrounds in the past. No, these aren't Fibonacci retracements but merely areas where the action stalled as traders, investors, and mutual funds jockeyed for position.

While I've included all of the usual suspects on the weekly chart, it's my belief that the 840 area is often overlooked by the majority of market participants as a battleground. In fact, just looking at the weekly chart, there's not enough information to even cause a trader to pause and consider that level. So let’s roll into the daily charts of that time period and see what we can make of this potential support.

On the daily chart of September 2008 through July 2009. All congestion are right around the 840 level. The truly interesting aspect of this to me is that 840 didn't offer a crisp “one and done” reversal point but instead found itself in the middle of the action for weeks upon weeks. Throughout October 2008, 840 was hit and held several days. Of course, as is the case at the start of any new support levels, there was no way for a trader to even begin to imagine the significance of this level. And even as 2008 came to a close, 840 was bantered around on both sides but was only just beginning to firm up as a key level.

The first two months of 2009 would have been the first time traders might have taken note of how much air time 840 was receiving. Prices seemed to be drawn back to this area like sheet metal to a magnet. When selling pressure resumed and the S&P hit its eventual bottom at 666, 840 was the last area of consolidation. In textbook fashion, 840 once again was an area of consternation and tight play as the S&P bounced off the lows. From there, there was no turning back as the S&P raced to 1200.

Now turn your eyes back to the weekly chart for a bigger-picture view. 840 and 960 may never come into play as the markets could catch a second wind and be off like a racehorse. But if 1040 does relinquish control to the bears, then all eyes will be fixated on the next levels of support. It's my opinion that 840 should be added to the discussion, and that 666 isn't inevitable as we struggle for footing. 960 to 666 is a long step off the end of the plank, but my bet is on 840 being a safety net. So yes, I’d be a buyer of the S&P… at 840.

Momentum Of GOLD.

2010-06-19T16:56:00.003+08:00

The True Strength Index is a low lag-time momentum indicator that can be used at www.FreeStockCharts.com. Generally, it's bullish when the indicator is above zero and bearish when it's below zero. As the indicator is very sensitive and responsive to movements of price, it can be effectively interpreted for buy and sell decisions.

SPDR Gold Shares (GLD) is making new all-time highs last night. So let’s see what the momentum indicator is telling us. Above is a chart of the hourly price action of GLD.

A couple of things are obvious. First, the price performance of GLD has been steadily accelerating for the past six trading sessions. This is significant because it means that as the acceleration begins to slow, price could still continue higher -- but climbing at a slower rate. As the current reading is .45, which is relatively high, I think it's likely that gold will continue to rise while the TSI momentum indicator will begin to diverge (trend lower).

There are a couple of techniques for making a sell decision with this setup. One could simply wait for the TSI indicator to finally cross below zero -- which will be some time from now, or sell when the indicator makes it first divergence (a lower high if price is still going higher). A third technique, and one that you should be forewarned of whipsaw, is to buy/sell when the indicator crosses the moving average (purple line).

For the past four months, Market Vectors Gold Miners ETF (GDX) has been advancing in a pattern of three momentum waves followed by a correction. While there's no guarantee that this particular pattern will continue, it's encouraging to note that we've recently been through both a correction and a consolidation phase and are just beginning a new first wave.

It would surprise me if GDX doesn't ultimately take out the previous all-time high of $54.63. Presently, we observe open gaps in daily trade that may be revisited on a future date. But for now, this looks like a powerful first wave that should logically be followed by others.

Italy, You Are NEXT !

2010-06-04T23:43:00.002+08:00

A combination of massive debt, a lack of competitiveness, and a feeble outlook on economic growth may be the reasons that Italy will be the next eurozone nation to fall.

On the debt forefront, Italy’s debt is expected to balloon up to 117.8% of GDP by next year. Although its debt isn't rising as rapidly as that of Spain or Ireland, it's still at an alarming rate. To further add to the nation’s problems, yield spreads between 10-Year Italian and German government bonds widened to 1.58 percentage points, wider than before the bailout rescue plan was put in place. The widening in this yield spread means that investors judge it riskier to buy the debt of Italy than that of Germany and implies that investors aren't confident in the economic health of Italy.

Additionally, credit default swaps on Italian government debt are at record levels, with $10 million of insurance costing nearly $248,000 per year, indicating that elevated risk is present. Lastly, Italy has nearly €1.5 trillion of debt outstanding, making it the third largest debt market in the world behind the US and Japan.

To put Italy’s debt problems into perspective, at current debt levels and interest rates, the nation must spend nearly 4.5% of its GDP per year just to cover interest payments and will likely continue to increase.

To make things even more challenging for Italy, the nation’s competitiveness has been deteriorating. A study conducted by the European Commission concluded that over a 10-year time span from 1998 to 2008, exports of goods and services grew more slowly in Italy than any other country that was a member of the European Union. This decline in competitiveness, caused primarily by falling factory production, has further led to tepid economic growth. With no real policies and procedures to ameliorate this predicament, Italy’s economic growth future appears grim.

In a nutshell, unless Italy’s debt issues are resolved and it figures out a way to boost productivity, its outlook remains bleak.

Are You Bleeding With Passion?

2010-05-29T23:05:00.003+08:00

"To everything there is a season and a time for every purpose under the heavens..."
-- Ecclesiastes 3:1-8
Got this from reading some of the Gann books once.

Seasons come and go, markets change and evolve, but human behavior hardwired into the brain hasn't really changed much since the time of the Neanderthal.

Every one of you reading this wants to make money in the markets. The principles are simple, but not easy: Take personal responsibility for your trades, execute ruthlessly, cut losses quickly, stay healthy in body, mind and spirit, practice good risk management, plan your trade and trade your plan, master your emotions, practice patience, do more of what's working, and take profits on a regular basis.

This sounds easy, but the majority of you struggle daily to do these things. You search continually for something or someone -- an indicator, a method, a newsletter, a guru, Grand Pine. You're looking for answers in all the wrong places.

There is one immutable fact that underlies all successful trading: The answer is within you. It's not out there somewhere. It's about your brain and how, not what you think. Traders, with few exceptions, are made not born. Anyone, given the passion, determination, and willingness to work hard, lose, fall down, and keep getting up, can learn to trade successfully.

How? You must believe totally that you are called to trading, that it is the one thing about which you are completely passionate and that you are willing to forego everything else in order to succeed.

I have stopped counting the number of times people laughed and ridiculed me when I talk about commitment to trading - this includes my mom. You know you're committed when something epiphanous happens to you. One of the definitions of epiphany is a sudden, intuitive perception or insight into the reality or essential meaning of something.

I have had several people tell me that their trading epiphany came in the form of actually feeling the earth move. A Carole King moment for those of you old enough to remember! Are you laughing yet?

Okay. Now that the earth is moving, the real work begins. You must learn to think in probabilities and entrain the qualities of being counterintuitive and peripatetic. You must become a chameleon, a great actor and acrobat on the largest and most intimidating stage in the world. Most of all, you must be absolutely determined and passionate about it. If you can take these steps -- slowly and one at a time -- you have a chance to make it.

Is 2010 the year you'll find the courage to follow your passion and do what it takes to become a successful trader? If so, then see yourself as the most brilliant firework lighting up the sky. Settle for nothing less than your personal best. Let 2010 be your year to shine like the brightest star in the universe. Is this your time? If now not, then when? After all, we are living in the greatest time of all times!

"Courage is more exhilarating than fear, and in the long run it is easier. We do not have to become heroes overnight... just one step at a time, meeting each new thing that comes up, seeing it not as dreadful as it appeared, and discovering we have the strength to stare it down..."
- Eleanor Roosevelt

Will The Market Rollover Again?

2010-05-29T00:06:00.003+08:00

I’ve been in the markets for 25 years and I’ve never seen anything like this. And there’s a reason: there’s never been anything quite like this.

The price action both up and down has been astonishing.

Market is doing a good job at getting traders used to the idea that 30 handles on the S&P is the “New Normal” -- that a 30-handlebar bike can be ridden. You don’t ride this kind of risk any more than a frog fantasizes he's "adapting" in a pot of water where the heat gets turned up and up until it’s too late.

On the other end of the spectrum, hope and holder investors who haven’t been driven out of the market by a decade of financial schizophrenia convince themselves they're in it for the long term. The truth is, if you lose your money in the short term, there is no long term.

On Wednesday the market reversed to sell off 25 S&P points on a rumor that China was "reconsidering" its eurozone debt. Reconsidering may be the mother of all euphemisms in this particular case. Then on Thursday the S&P gapped up 30 handles on plausible deniability of that rumor. China certainly figures in lately, doesn’t it? Seems like China carries a big stick, but isn't speaking especially softly.

This is because the two biggest currencies in the world are dependent on the kindness of strangers. Money makes power. When you depend on the kindness of strangers to keep the wolves of debt from your door, it's at the peril of becoming ineffectual. Is this the case currently with the US in our talks with China regarding North Korea and Iran? Does America risk becoming a paper eagle at a time when former paper tigers have sharpened their geopolitical teeth and are threatening more than just paper cuts? My, what big teeth you have, China.

When a nation is indebted beyond the scope of its own control, it loses manifest destiny. This is currently the spectacle in Europe. When multiple sovereigns lose the right to rule, there's systemic risk. Particularly since fiat finance is faith-based.

Volatility precedes price and volatility has begun to cast a long and ragged shadow over the land.

The market may mask risk with the phantom of opportunity, but when the market trades "in the air" and gaps to where it's going from one day to the next, there's more danger than opportunity. The notion that the Chinese word for crisis represents danger and opportunity is fallacious. Even in the land where communism has co-opted capitalism, crisis is crisis. Sometimes risk is just risk. As the financial markets presumably learned over the last few years of crisis, sometimes risk is just risk and can’t be hedged away. Danger is as danger does.

I say financial markets presumably learned that risk can’t always be hedged away because going into the April top, once again, the VIX was priced as if stocks were discounting the hereafter. It was as if Mr. Market looked risk straight in the eye, saying, “We don’t need no stinkin’ insurance.”

So what was so good about Wednesday morning? What happened that the market should explode up 30 S&P points overnight? Nothing fundamentally bullish happened. The issues haven’t changed. The only "good" thing is that China intentionally or otherwise showed how they can move world markets, and that’s a bad thing.

Going into the down draft on Wednesday, I sent out an alert wherein I reckoned that 1066 should be a bullish inflection point. Why? The pattern suggested that the S&P bounce had an agenda with higher prices over to perhaps a gap near 1115 on a backtest of the 200-day moving average. Since the S&P was rejected on Wednesday from a test of 1090 and the first move up was 50 S&P points, then from what level would an ABC or two-step measured move play out? A symmetrical 50-point rally from 1065 to 1066 would satisfy such a pattern. To wit, the S&P stopped in its tracks at 1065/1066on the sharp sell-off into Wednesday’s close.

Thursday’s 30-point gap up mirrored the 30-point gap down on Monday. What a week. Shorts were on the hook, bulls were left at the station as the train took off. The shorts had already taken the heat on the open and there was little to do other than observe the behavior of the first little morning pullback which proved to be meager. Some shorts likely even faded the open. When the market held up, the stage was set for a trajectory into the close as the full moon yesterday magnetized the market to a close at the high of the day. The S&P was drawn to a test of its 200-day moving average right on the bell. The notion of alternation suggested an ABC-type pattern if a multi-day rally was going to play out with a stab at 1115ish in contrast to the line drive, straight up move off the flash dance May 6 crash lows.

With the futures closing on their high without the "arbs" getting out, it suggests an up open before they cut and run, or at least hedging in front of the long weekend. Short-side scalps today set up better than long-side tries with the S&P up a quick 180 degrees from the 1040 low and down 180 degrees from the last swing high at 1174. The day may just go flat and choppy in a narrow range after yesterday’s thrust.

Basically, the market did as predicted, turning down the Quarterly Swing Chart on a break of the February low and then snapping back powerfully in keeping with the Principle of Reflexivity when a big wheel of time turns.

While the market is closed on Monday, foreign markets are open and you never know if the mice could play while the cat's away and the "rally is raided." Be that as it may, the Weekly Swing Chart should turn up early next week on trade above whatever this week’s high proves to be. There are a tight cluster of turning points due in the first week of June that are reminiscent of the cluster of time/price harmonics that called the April turn.

For example, one of those harmonics is that June 4 is 666 trading days from the all-time high on October 11, 2007; 666, of course, was the price of the S&P at the March ’09 low. Moreover, 666 vibrates or aligns with the date of June 6. In addition, the 2007 to 2009 bear market decline was 512 days. The "center" of the decline or the 50% point is level of the January 6, 2009 high near 940/950; 512 days from this "center" gives June 6, 2010.

With a consensus in place that the market will extend on the heels of a double bottom that's been carved out in the S&P, will the SPY backtest its 50-period moving average near 109 before a stab higher leaving a third step up between 1107 and 1120? Why do I say 1107? The range of the last swing from 1174 to 1040 is 134 points. One-half that range is 67 points, giving 1107. It's interesting that this vibration ties to the 666/667 low.

Conclusion: I don’t think I can ever remember a time where so many traders have pointed to a particular pattern, an inverse head & shoulders (bullish) pattern in the S&P which presumably projects to 1140. It may, of course, play out that way, but typically what's obvious in the markets is obviously not worth knowing. At the same time, I hear few voices suggesting that this current move up could be a "droop" right shoulder, shy of 1121, which is the mid-point of the prior bear market. I've been focusing on the first week of June since the top was confirmed as a possible low. Now it appears a three-step pattern will play out to the upside into next week. The bottom line is another lower high on the S&P will trace out a potentially ominous third lower high. Often times waterfall moves come from third lower highs.

As it happens, analogue from the waterfalls in 1929 and 1987 saw the market make lower highs around 40 calendar days from their peaks just before crashing. If the "double bottom" or neck line at 1040 breaks, the projection is to 860ish S&P. If may not play out this way of course, but given the cyclical, financial, political, and geopolitical backdrop, extreme caution is warranted at least until this period passes to see what we’re dealing with.

Strategy: As offered in mid-May, if the S&P is above 1100 and especially 1120 by the end of May it may compel a squeeze by money managers forced to chase stocks toward quarter end. However, if the market rolls over again, it's just as likely that these same money managers panic in front of quarter end, rather than lose all their gains from March ’09.

Capital Markets, Are The Enemy of the State.

2010-05-23T01:20:00.002+08:00

Governments have tried to hold back the forces of a primary bear market.

The powers that be planned to do “whatever it took” to prevent the analogue from the five to six month bounce into April 1930 playing out to prevent an absolute loss of confidence.

But absolute power corrupts absolutely free markets.

In so doing, the market was stretched and the spring and elasticity has snapped.

It’s not nice to fool Mother Nature.

The bear has been made angry and is exacting his revenge.

Consequently, downside may be more swift and quicker that one could contemplate.

While the 2008 crisis unfolded like a slow-motion train wreck, the rule of alternation implies that this decline may start out like a train wreck, with a crescendo and climatic decline at the beginning of the leg down rather than a capitulation at the end.

A waterfall from the top rather than a climatic catharsis at the tail end.

And, you're correct: Crashes don’t occur off highs. But April wasn't a high, but a lower high in the larger scheme of things.

Below the "flash crash" lows, it won’t be a flash in the pan, and panic would prevail.

Note that the New York Composite Index has just violated its May 6 low.

Capitalism is fine until you run out of other people's debt.

Enemy of the sated? Enema of the state?

North Korea, Thailand,the tenfold heavier Icelandic sister volcano rumbling.

Mood makes the market.

S&P To Hit 956 - Near June 6th, 2010.

2010-05-20T22:22:00.002+08:00

I begain to believe that on the heels of Monday’s upside reversal from near 1111 Gapfill on the S&P, that Tuesday should have some kick. Monday’s "tail" to the upside suggested a trend day up.

And, Monday left a potentially bullish Plus One, Minus Two Buy setup on the daily S&P/SPY. Why?

The 3-Day Chart had turned up with the rally of three consecutive higher daily highs into last week scoring the Plus One part of the setup while Monday’s lows traced out two consecutive lower daily lows for the Minus Two part of the equation. As you know the decidedly bullish set up at the February lows was a Monthly Plus One, Minus Two buy set up, the first such setup since the March ’09 low.

Monday’s 10-minute chart had traced out a short-term Inverse Head & Shoulders which projected to 1049/1050. Tuesday started out like gangbusters but the bulls squandered the promise of that momentum as the S&P scored a first hour high of 1148.65. A normal pullback from the strong open should have held green, and held the level of the gap up. However, after a first snapback after filling the gap, the market accelerated into the red. It was all downhill from there with the S&P settling on the important 1121 bull/bear pivot, the mid-point of the 2007/2009 bear market.

With the failure yesterday from near our old friend 1150, the January high, the bulls snatched defeat from the jaws of the bear.

Checking back to the pattern of the 1987 chart reveals that after a sigh of relief from what looked like a successful test, the first turn up in the Daily Swing Chart defined a high which marked the beginning of a crash.

I don’t know if history is going to repeat of course; however, yesterday the Daily Swing Chart turned up on trade over Monday’s high and bearishly that turn up defined a high at a key level. Moreover, instead of capitalizing on the potential of a bullish Plus One, minus two set up, and what looked like a successful test of Friday’s close at 1111 S&P (1110.90), the market collapsed.

Fast moves are often times derived from failed setups. Crashes often times come from false moves. I don’t know if the market is going to crash right here right now but the pattern leaves it in a very vulnerable position, while we know the cycles are exerting downside pressure. If the market is going to crash, again, the SET UP IS THERE. The psychology is fragile with hysteria flying from a Pandora’s Box of problems pried open in the eurozone

For the Gann fans, the decline from the April 26 high of 1220 to the May 6 1065 low is a range of 155 points. The low close for the move occurred on May 7 at 1111 S&P. A measured move of 155 points from 1111 gives 956. 956 was the June 2009 high of the first advance up from the June ’09 low. Is the S&P poised to return to the scene at/near the one year anniversary? It's interesting that counting from the April 26 high, the Gann Death Zone or Panic Zone of 49 to 55 days begins on June 6. It’s hard to make this stuff up.

June 6 is also 120 degrees from the February 5low this year!

June 6 is also a “master date” in the current market as it aligns with 666 the price of the low. 666 ties to 6/6. 950 (which ties to the June ’09 high) is opposite the date of June 6.

360 degrees in price down from 1220 gives 1084. With the bears in control and running the gap at 1111, will the S&P test 1084 this week? 720 degrees in price (or two full revolutions of 360 degrees) down from the 1220 high gives 956!

Isn’t it interesting that the closing high of the first rally up in June ’09 (which coincided as the high of the pivot high in January 2009, the high prior to the last leg down, the high before the low) was 943/944 and is 50% of the range from the March ’09 low to the April 2010 high? Even in a bullish scenario would it be so unusual for the market to pullback to test the "fulcrum" and decline to 50% of the range? Would it be an unreasonable premise considering the lack of volatility throughout the advance, considering that the advance occurred without the benefit of a base or a test, considering that the majority of market participants at the end of April and up until recently thought there “was no vulnerability in the market as far as the eye could see” and that the perception was seemingly universally embraced that the market would not give anything more than another "normal" 10% correction IF one should occur?

Conclusion: We'll be following the harmonics of time and price closely going forward to determine their trend and significance.

While it's possible a big seller on Monday lifted a leg late in the day allowing for a snapback and that the same big seller came back in to hit bids early Tuesday and might be "done," providing a first-hour low that holds 1111, I'd be cautious about intraday long tries unless the S&P can recapture 1132. It's interesting that May 17/18 is 180 degrees or opposite the 1220 S&P price high in April for a possible square out but below 1111 the market remains suspect while below 1142 and 1150 the bigger picture trend remains down.

As it happens May 17 is the anniversary of the beginning of the NYSE from 1792.

That was 218 years ago. It's interesting to me that 218 and 23 (23 years ago was the crash in 1987) are numbers that are due north/south on the Square of 9 Chart. They fall on what's referred to as the Cardinal Cross.

Now, It's Time to Worry...!

2010-05-10T23:45:00.002+08:00

The European Union's $1 trillion emergency fund established to "defend" the euro has primarily served to remove any doubt that the currency's viability is in serious jeopardy. And despite an immediate pop in equity markets around the world, the move is much more a dark omen than a shot of much needed confidence.

According to Bloomberg (along with every other news source on the planet) European policy makers convened over the weekend to noodle how best to bolster their battered currency. The meeting took place after a week of rolling crisis roiled global financial markets and served as an eerie reminder of a crisis not nearly far enough in the rearview mirror.

The announcement, for all its jargon and superficial complexities, is pretty simple: The EU is going to solve a problem of too much debt by issuing more debt.

In order to protect member nations that are seeing yields on their sovereign debt soar, the European Central Bank will aggressively purchase both sovereign and private debt. The program aims to prop up markets where investors have been shunning credit issued by the so-called PIIGS (Portugal, Italy, Ireland, Greece, and Spain). European governments are pitching in as well, offering up to 440 billion euros in loans or guarantees alongside the International Monetary Fund, which is contributing up to 250 billion euros.

French Finance Minister Christine Lagarde nicely summed up the weekend's actions: "The euro zone will defend its money."

Not one to sit idly by when a crisis caused by too much debt is being fixed by creating more debt out of thin air, the US Federal Reserve announced plans to reopen a currency swapping program set up during the financial crisis in 2008. The scheme allows the Fed to funnel dollars into other coffers of other central banks to ensure that markets remain liquid.

So let's recap: Certain European nations got a little too wild and crazy during the good times, spending too much, saving too little, and relying on cheap debt to fund bloated domestic programs. Then, when the global economy spun out of control, mounting debt service obligations began to overwhelm shrinking tax receipts. Governments started to run out of money, investors got worried they wouldn't be able to make good on obligations, then all hell broke loose. Sound familiar?

I have seen this staged out before, traded through many European crisis in the 90's. It's nothing new, but a perfect opportunity to SHORT on a technical-recoil!

Cyclical Bull On Its Last Legs?

2010-05-08T01:28:00.002+08:00

Even though one might blame it on a "keyboard malfunction," the charts are now reflecting yesterday’s reality. The oversold conditions have become quite pronounced. That might offer nimble traders opportunities, but the combination of global uncertainties after a significant decline might not bode well for intermediate-term longs.

If I were allowed to voice only one concern, it would be the sudden appearance of four 90% downside days so close to new highs! The last time that occurred in a bull market was in July and August 2007. Even though the markets managed to climb back over the course of the next few weeks (key indexes even made their highs in Oct 2007), the market internals were never really able to recover from that onslaught.

That begs the question: Is the cyclical bull on its last legs?

The clues to look for in the intermediate term: The quality of the bounce becomes very important to monitor. If weakened internals fail to get back in sync with the market, that would give us something to worry about.

The takeaway in the short term: After a major negative event, it's usually very hard for markets (and people) to carry on as if nothing has happened. That can lead to more emotional meltdowns along the way (nothing like yesterday, though). I'd stay away from the most popular individual names. The market indexes usually fare better in choppy declines compared to stocks. If one is looking for an upside edge, then individual names help; if looking for protection and safety, indexes usually provide that. Right after small position size.

Taking A Big Breath Before Heading Lower..

2010-04-26T23:06:00.002+08:00

The charts above are a quick visual of what I'm seeing and thinking:

Gold Exchange Traded Fund (GLD) Trading Chart
The gold ETF trading fund is getting closer to completing its four-month correction and starting another rally if all goes well in the coming week or two. What I'm looking for is gold to hit resistance at $113 and then drop to the $110 level, which is a key support level.

S&P 500 Exchange Traded Fund (SPY) Trading Chart
Stocks have been on fire the past few months but this rally looks to be getting long in the teeth. After a rally this strong without any pullbacks one has to think that when a correction does start it will be a very sharp sell off. I will point out that a few years ago we saw this exact type of price action for the broad market and it continued higher for several more months before actually putting in a large correction. If we don’t see a large correction, then we'd see similar price movement, which we saw last November and December with the sideways choppy price action and slow rally higher.

In short, I think the market is ready to finally take a breather. What I'm looking for is another sell off, which will break the low for gold, silver, oil, and S&P 500 last week. If this happens, it will trigger panic, washing the market of all the traders who have been buying at these high levels (chasing prices).

Stocks have been very strong and new money continues to push prices higher so we could just see a relatively small pullback between 3% and 5% and then the rally could continue. This would work very well with gold, silver, and oil as they would be testing key support levels and should be ready for a another upward surge.

It doesn’t really matter what the market does as there will always be great opportunities. Waiting for quality setups requires discipline and focus because it's not very active. I see traders making all kinds of silly trades that chip away at their profits because they can't sit and watch when they should.

During slow times I actually focus on learning more about the markets -- going through charts, comparing inter-market analysis, etc. That kills a ton of time and helps make you a better trader in the long run. So if you don’t see a good trade, get out and do something fun or educational. Don’t just start trading the five-minute charts because you want to trade.

Ελλάδα Role in the Economic Domino Theory.

2010-04-24T17:28:00.003+08:00

I am going to make a prediction: Greece will default unless they see a large portion of their debt forgiven outright. Shocking, right?

Here’s the simple story about Greece:

- They are very unfriendly towards business -- getting one started, keeping it open, the whole nine yards.

- The underground economy is massive (30%) because of the huge taxes they have there (VAT alone is 19+%) making it impossible to collect tax revenues accurately.

- Even if they could collect tax revenues accurately, they don't have the economic firepower to pull themselves out of their debt disaster, especially with an elevated euro.

- Fifty percent of GDP is government spending.

- Entitlements dwarf the current debt, making their situation all the more impossible.

I can hear the rebuttals now --“But Greece is only 2% of the Eurozone economy.”

True.., but let’s look at how that impacts the rest of the Eurozone.

1. Greece is a major importer of German goods.

2. Sixty percent of Greek debt issued in the last few years was bought by other European countries leading to massive mark downs if Greece defaults (mostly the French €73B, Swiss €59B, and Germans €39B; that is 3% of France’s GDP).

3. Fifty-one percent of Portuguese debt is owned by Spanish banks.

4. Thirty-two percent and 25% of Spanish debt is held by German and French banks respectively.

Can you say "economic domino theory"? Write-downs from losses in sovereign debt default will be a big negative for other countries, and investors will aim for Portugal and Spain (they already are if you look at Portugal’s CDSs) as the next stop for the default train.

Right now there are two prevailing scenarios:

1. Greece leaves the euro.

2. Germany leaves the euro.

Greece leaving the euro would actually mean a stronger euro, but it’s also possible that Portugal and Spain follow suit and cause real problems for the currency. Removing multiple Eurozone countries defeats the purpose of a common currency, so they might as well just go back to a free trade zone. On the surface, that doesn’t seem like the answer.

A German departure is much more interesting to me, and the more I look into it, the more I think this may be the best option if the currency is to survive. The Germans may be moving in this direction as well.

The Germans are the only adults in Europe and the people there have been quite loud about their dislike of bailing out the imprudent. If Germany leaves, they're likely to see lower interest rates and, of course, will have total control over their currency. This will leave the rest of Europe to toil with a weaker, less stable euro. But believe it or not, this isn't a bad thing. Many of the remaining nations are highly dependent on tourism as a major piece of their economy (this is especially true in Greece) and a cheaper currency makes it much easier for foreigners to take trips. (The big fix will have to come by creating a common tax system, but that appears to be far too complex with too many stepped-on toes to actually come to fruition.) Also, a weaker euro for Greece (and probably Spain and Portugal), even below parity with the dollar, is far preferable than a return to the drachma which would undoubtedly see a massive devaluation, possibly into the 500-600 drachs per dollar range. It was roughly 350 when Greece entered the euro in 2001. That would be devastating to the people of Greece.

I'll just keep an eye on the EUROs for now.

Rolling Over to Bear Status?

2010-04-21T22:40:00.004+08:00

The support levels on the charts pointed to the possibility of a bounce and the markets obliged us with one.

My main concern is the visible difference in intensity and passion of the reactive buyers. Friday’s sellers seemed to be more driven and intense than the buyers yesterday and today.

Any deterioration in the market coupled with an inability of the markets to reach recent highs would be worrisome technical development!

Over the course of the last week, the markets witnessed several signs of extreme complacency. Put-Call ratio of 0.32 was registered on April 14, which is the lowest since August 2000. Before Friday’s decline, the S&P 500 and Dow had strung together a 40-day streak of consecutive closes above 10-day Simple Moving Average, which is also a historic statistical rarity.

Both these events show the skew of sentiment toward the bullish extreme.

August 2000 doesn’t conjure an optimistic image -- it was, after all, the beginning of the 2000-2002 bear market. So, does this mean this market could be imminently rolling over to a bear status?

It’s usually prudent to see the whole picture and not simply rely on any one point of comparison. In 2000, we had several negative divergences in place such as:

1. S&P 500 was unable to exceed the highs made in April 2000.

2. The Non-confirmation from NASDAQ, Russell 2000, and Semis, which remained dramatically lower in August 2000 compared to April 2000 peak.

3. Divergence in numerous market-health indicators. Currently, we haven’t seen any such important divergences. (I will continue to monitor such divergences).

As the chart above shows, short-term support exists around the 20-day MA (currently 1186) and between 1140 and 1150 (breakout point from lateral consolidation and vicinity of 50-day moving average).

In absence of any major divergence, this market seems to be setting up for a normal correction and I would use any deterioration following a weak bounce as an excuse to trim my positions.

Exsqueeze Me?

2010-04-15T09:51:00.002+08:00

The stock market just keeps walking higher and while it might be taking everyone with it, it certainly seems to be taking remaining shorts and bears out of it.

One of the main forces that has fueled the 18-month-long rally has been liquidity. First there’s the one with the capital “L” of more than a trillion dollars provided by the government in the form stimulus and bailout packages; then there’s the more plebeian kind created by the traditional investment community which comes in two forms -- the (possibly mythical) money that’s waiting on the sidelines or hiding in bond funds, and then all the shares sold short by bears, which represents embedded buyers.

It’s hard to gauge the amount of the former or when or at what velocity it will flow back into equities. As far as the latter, recent data suggests that a lot of embedded buying has been squeezed out of the market. It wasn’t too long ago that the list of hard-to-borrow stocks and even ETFs ran into the triple digits.

But bears can take solace; if you haven’t already been taken out and shot, now may be a good time to peek out of your cave and sniff out some shorting opportunities as the likelihood of a further squeeze has been greatly diminished.

The table above uses data from ShortSqueeze.com to show the current short interest ratio (shares short/float) and the percentage change from 30 days earlier. I looked at some of the most widely traded ETFs, some popular big capitalization stocks, and a few of the favorites among bears that usually carry a large short interest.

My belief is that much of the short selling in the ETFs had been a form of hedging by money managers against their generally long portfolios. The decline in short interest suggests those hedges have now been removed. The reasons might be a combination of complacency in a market that keeps working steadily higher and the need to chase performance by those that have been slow or cautious to fully embrace the bull market.

Whatever the case, if the market does start to drop -- and this is not a prediction -- it means there will a stampede to reduce risk by shedding shares and shorting index products to gain protection and downside exposure. And that could give the bears plenty of fresh juice.

The 10 Ominous Signs.

2010-04-13T23:23:00.003+08:00

Ten warning signs for another correction or even a major top like 2007:

1. Rising oil and gold prices are pressuring bonds and pushing interest rates higher. This could spell trouble for both the economy and the stock market.

2. The Weekly Full Stochastic is topping, warning that prices are high and could reverse at any time.

3. Like 2007, the weekly MACD is curling over from extreme overbought levels.

4. The S&P 500 is fast approaching its declining 200-week moving averages (1225) as well as the 0.618 Fibonacci retracement (1227) of the entire collapse.

5. Cash is at the lowest levels since 1987 and 2007 at 3.5%. This means mutual funds are all in and they will have little ammunition to support the next series of dips or severe market correction.

6. Recent sentiment surveys are showing that bears are becoming an extinct breed on Wall Street. Investors Intelligence showed only 20% bears last week. The bulls are certainly running wild on Wall Street.

7. The Volatility Index (on yr left)is at the very low and dangerous level of 16.78 now and is warning that investor complacency is very high. A low VIX isn't a good timing indicator but simply another warning sign that a significant top could be approaching. We're now at the exact same VIX reading that we had in early October 2007, right at the top.

8. The Dow Jones Industrial Average is forming a possible right shoulder on the monthly chart. This could be the mother of all head-and-shoulder tops. Giant head-and-shoulder tops are also forming in the Russell 2000, the Wilshire 5000, and other global markets on the monthly charts. These are textbook head-and-shoulder tops if completed.

9. The market leading index, NASDAQ, is now at the exact same RSI reading as in early October 2007 of 74.42. The RSI then went to an extreme low reading of 21.95 on the daily chart in October of 2008 and 29.79 at the March 2009 lows. The RSI can go a lot higher and you only have to look at the 86.74 RSI reading in early 2000 for evidence of that. However, this is a high and potentially dangerous level on the RSI just like it was in October of 2007.

10. And finally, the old Wall Street saying may hold up well given all these early warning signs: “Sell in May and go away”. - Tonite, 14/4/2010,may just be the key-reversal day that I've been waiting for!

In summary, there are many additional warning signs of a imminent top. High oil prices have historically led to recessions so prepare for the possibility of a double dip. When the Fed is forced by the bond market to hike short-term rates, tighten up the chin strap on your crash helmet. Put on all your other crash protection gear as stocks will likely reverse violently once the Fed starts jacking up interest rates. Get ready to hedge your long positions as the roller coaster approaches another peak. This next ride down could be the wildest ride since the one from the top in 2007! Strap in bud!

Are We Ignoring Greece ?

2010-04-11T17:56:00.002+08:00

I have been reading many reports, buttressed by personal testimonies, of a major bank run going on in Greece -- domestic banks and even foreign banks domiciled in Greece.

It seems to me that this development increases the likelihood that the crisis has reached a terminal stage.

The loss of funding of banks causes them not only to deny credit but to have to retract/eliminate credit lines. The resulting spike in internal interest rates and monetary astringency can cause a swift collapse in economic activity, which will make it completely impossible for the government to meet its revenue collection targets.

Massive external intervention is now required to salvage the situation. First, the ECB must provide unlimited funding to replace the withdrawn deposits. Second, the EU must provide the necessary loans/guarantees, with a comfortable margin for shortfalls in revenues.

If this doesn't happen very quickly, a severe Greek crisis will be irreversible. The situation may drag on for a while. For example, EU countries may announce loans/guarantees at any moment. But each day that passes, the final outcome is increasingly irreversible.

Again, the key is that the collapse in internal economic activity, if not reversed dramatically and immediately, will make it impossible to meet revenue collection targets.

It is my opinion that financial markets have become complacent about the Greek issue. Most today are saying, “who cares.” This is a mistake.

If Greece goes down, this is a big deal. It'll be Financial Crisis 2.0!

Wake Up To Crude Reality.

2010-04-08T23:07:00.004+08:00

Larger-than-forecast inventory gains caused crude oil to drop two days in a row, however, there are plenty of reasons to suggest that the highly sought-after commodity is likely to appreciate and potentially hit the century mark.

Over the past six months, black gold has been oscillating back and forth in the $70-$85 range and according to an analyst at Lind-Waldock, the commodity is at the uppermost point of its range. To take it a step further, crude’s pattern suggests that it will break away from its high point and could potentially add an additional $15 per barrel.

On the supply side, the recent increases in crude stockpiles will likely dissipate in the coming months. The driving force behind this is relatively flat production. When the global financial meltdown put a damper on demand for crude, OPEC cut production levels to reach an economic equilibrium point. Now that both developing and developed nations have emerged from the Great Recession and expected growth in global GDP is set to reach 4.5%, the demand for crude will likely be bolstered, resulting in a supply-and-demand imbalance that will slowly eat away at excess inventories.

Granted, exploration and production companies have the ability to increase the amount of usable crude, solving the anticipated supply-and-demand imbalance that is expected to be seen later in the year, but the time lag between discovery and delivery to the pump is so large that a short-term impact on prices is likely undisputable.

Lastly, the US dollar is expected to remain weak and unstable, which will likely support the price of crude oil. Crude is traded in dollars, and as the dollar declines in value, it generally becomes more attractive to foreign investors.

Although an opportunity seems to exist in crude oil, it is equally important to consider the volatility and inherent risks involved with investing in commodities. To help mitigate these risks, an exit strategy that identifies a price point at which an upward trend in these equities could come to an end is of utmost importance.

Party's Over..! It's Time To Unload Those YEN.

2010-04-03T22:47:00.006+08:00

Break for a smoke..Although the debt malaise in Greece has (temporarily) been addressed through an EU/IMF agreement of sorts, sovereign debt concerns will remain on center stage for quite a while.

Besides the PIIGS countries (Portugal, Italy, Ireland, Greece, and Spain), the debt situation of Japan is a lingering worry and not without reason as it is the G8 country with the highest debt-to-GDP ratio -- clocking in at more than 200%. Needless to say, 12 consecutive months of deflation are compounding the problem.

Commenting on the difficulty Japan may be facing to fund debt issues in the future, Niels Jensen (Absolute Return Partners) said: “The first country to really feel the pinch could very well be Japan; in the bigger context, Greece is just the appetizer." Japan’s debt-to-GDP ratio has grown from 65% in the early 1990s when their crisis began in earnest to over 200% now. Fortunately for Japan, the high savings rate has allowed shifting governments to finance the deficit internally with about 93% of all JGBs held domestically. This is the key reason why Japan gets away with paying only 1.3% on their 10-year bonds when other large OECD countries must pay 3%-4% to attract investors.

We often hear the argument from the bulls that the Japanese situation is sustainable because they, unlike us, are a nation of savers. Wrong. They were a nation of savers. Looking at the chart above, it is evident that the demographic tsunami has finally hit Japan. The savings rate is in a structural decline and the Ministry of Finance in Tokyo may soon be forced to go to international capital markets to fund their deficits. I very much doubt that non-Japanese investors will be as forgiving as the Japanese, and that could force bond yields in Japan in line with US and German yields. Herein lies the challenge. Japan already spends 35% of its pre-bond issuance revenues on servicing its debt. If the Japanese were forced to fund themselves at 3.5% instead of 1.3%, the game would soon be up.

It therefore came as no surprise when, subsequent to Greece’s lifeline, traders moved their attention from shorting the euro to selling the Japanese yen.

Technically speaking, the Japanese economy should wave goodbye to the recession in the first quarter of this year as the country’s manufacturing PMI indicates the recovery in the manufacturing sector is ongoing. However, economic growth in Japan is likely to be weak. Low consumer confidence, falling incomes, and deflationary expectations should keep consumers’ wallets shut. The strong yen is undermining exporters’ competitiveness and adding to deflationary expectations. With Japan’s strong trade links with China and other Asian countries any slowdown in these countries is likely to impact severely on its exports and therefore the current mainstay of the economy.

In my opinion, Japan’s monetary authorities have little choice but to weaken the yen as this will provide a further boost to exports and eventually the overall economic recovery.

When trying to identify the primary trend of a financial variable I place most emphasis on monthly data. The long-term chart above of the yen/US dollar exchange rate indicates that the three-year uptrend is in danger of being breached, and also conveys an important message when considering the MACD oscillator at the bottom of the chart. This momentum-type indicator has just reversed course (crossing the zero line) for the first time since a buy signal was given in mid-2007, thereby flashing a primary sell signal.

Turning to the shorter-term picture, using daily data, the lower graph above indicates that the yen/US dollar has broken both its 50- and 200-day moving averages, and has also dropped to below its February low. All the indicators in the bottom section are in sell mode, although possibly oversold in the short term, suggesting the yen may find some temporary support at its January low.

It sounds like low-hanging fruit to short the yen, and a number of ETFs are available to do this. One could opt for buying a fund such as the ETFS Short Japanese Yen Long US Dollar ETF (SJPY-LSE) or, for those more aggressively minded, the PowerShares UltraShort Yen ETF (YCS). I would be happy to do this trade on a horizon of a few weeks, but the US dollar doesn't quite instill much longer-term confidence.

Given the recovery and relatively healthy condition of the Australian economy, and therefore wider interest rate differential, my preference will be to sell the yen against the Aussie dollar. However, I'm not aware of an ETF offering this package and one may therefore have to construct the position by buying a combination (in equal money proportions) of a fund such as the CurrencyShares Australian Dollar Trust ETF (FXA) (i.e. long Australian dollar/short US dollar) and a short yen/long US dollar fund. (Of course, those in the UK can simply buy the Australian dollar/yen rate by means of a spread-betting position.) On a tactical implementation note, given the strong decline of the yen over the past few days, it's advisable to build the position in increments whenever the yen bounces back.