GOLD, Where Got Bubble?

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.

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...."

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.

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.

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.

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 ?

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.