Who is right?
One of the things we aim to provide is data from opposing viewpoints. In fact, that is how this service started because we followed what we thought was the correct mode of thought but were caught withdata and commentary that only followed that mode of thought.
This is why we recommend not to follow just ONE newsletter, ONE or TWO web sites that complement each other without any contrary opinion. Thus it reinforces a trend if you are correct – making the investor seem smarter then he or she actually is. On the flip side, anything that goes against opinion is basically ‘ a blip’, temporary, ‘manipulated’ etc. Interestingly, when we looked back last year during the height of the gold, commodity frenzy, there were no warnings other than we may be overbought. And none of the commentators fessed up and said they were wrong afterwards.
In this case, take this commentary from Sunshine profits:
“Since the USD Index is generally considered the key driving force for gold prices, the fact that gold is not declining fully and proportionally to the dollar’s upswing, is positive for the entire precious metals sector. It means that the market doesn’t believe the bounce in the USD Index is anything more than a temporary blip. People seem to believe that the dollar’s trajectory is similar that of a hammer dropped from the Empire State Building. They are not willing to sell gold if they think the USD’s rise is short-lived. Since the attitude towards gold is positive, this positive sentiment can only increase if the USD moves lower. The good news is that gold would likely move higher with much greater force than the corresponding decline in the dollar.”
This of course doesn’t mention the COT figures or the fact that sentiment for both gold is very high, and for the dollar very low – which often herald major reversals.
Here is a quote that is a little more realistic:
“The little guy can only prosper by aligning himself as best as possible with Big Money forces. It is very difficult to actually front run Big Money, because they are always at the start of the line – it can be achieved at times, but there is an element of luck involved.”
Don’t believe for an instant that Big Money wont use the charts to fool the technicians that so clearly see the Dollar going lower and gold going higher. There is something wrong if it’s that easy.
From the deflationist standpoint – if there was really massive inflation ahead of us, gold would already be above 1,000. If this obvious inflation is imminent, then why hasn’t it happened? Or can it be because the smaller markets of precious metals are much more subject to big swings, and thus easier fleecing from small investors.
The other issue to take into consideration is in order for inflation to run rampant, we need the money actually to circulate into the economy. Until now, the massive amounts of money created are being used to shore up the finances of banks so they can remain solvent. They are certainly not being used to generate new loans. The commercial real estate sector is just now starting to crumble, and a wave of Alt-A mortages will be reset shortly.
So therefore we can anticipate more debt destruction, debt that is denominated in dollars. Like last year, when these dollars are destroyed, the dollar actually rises in a perverse reaction. If the major bottom of the dollar is indeed at hand, then we may see a protracted rise in the dollar, which at some point will precipitate Wave (C) of the market crash to all time lows.
However there is enough optimism and headlines declaring the end of the recession is nigh that we may have another upward burst of the markets before reality sets in. The Wall Street Journal did mention that, in any recovery the consumer is the first to begin the recovery. Yet the consumer is still working off massive, record debt. With rising unemployment, well – you get the picture. Has the consumer built up enough savings to spur a real recovery? The answer is no.
Finally – will the recovery actually be a recovery in the normal sense. We feel that it will not be, but will be the begin a massive paradigm shift. The supercycle top was in 2000, and the resultant reversals were staved off in 2001 by the Fed’s loose money policy which allowed the real estate sector to inflate. Now with near zero percent interest rates – and the economy not responding in kind, we are no longer able to control the business cycle. Therefore we can expect at the very least a very long, slow drawn out “recovery” which will herald massive societal changes.
COT NUMBERS
Here are the latest Blees COT ratings released on 8/07/09 for some key markets. Remember “100? is the most extreme bullish position on the part of commercial traders (aka the “smart money”) for the last eighteen months. “0? is the most extreme bearish position:
S&P 500 Index: 48
S&P E-mini: 71
Dow Industrials: 44
Nasdaq 100: 42
Nasdaq 100 Mini: 0
Gold: 13
Silver: 68
Crude Oil: 37
Copper: 47
Corn: 88
Soybeans: 49
Sugar: 8
Wheat: 89
Cattle: 22
Hogs: 82
U.S. Dollar: 100
Cocoa: 56
Natural Gas: 78
Comments: After last weeks bigger numbers, the COT gold numbers have dropped significantly, and getting close to their maximum bearish 0 rating. The dollar, on the other hand has been at 100 consistently for the past few weeks.
So from the gold perspective, we should see seasonal weakness, a selloff and rising COT numbers to support the bullish stance. Gold must breach 980 and stay above to negate the negative outlook. Silver looks less bearish on the COT, but the main problem with silver is that it’s previous high is much further away than gold. Realistically can silver get even close to 21?
Natural Gas has been meandering in the COT for a while, and while we don’t see any big price moves to the downside.
Weekend update
We’ll be posting COT numbers as soon as we get them (in the AM on Monday) to see how the previous weeks gold prices have changed in light move up.
We may be adjusting our portfolio (which is almost all cash) in anticipation of several events that may take place:
1 – Dollar may be forming a bottom. Therefore we may go long the dollar during this next phase. This of course should be negative for gold and commodities. However, Gold can go up along with the dollar as it has done in the past. A side note – we’ve been seeing many ’sell your gold commercials’ – note, not buying gold, but taking jewelry and getting cash. In this instance the focus is on getting money, not for investing.
2 – Stock market – time to go short. We will limit the use of leveraged ETF’s, especially those on the short side because of time decay factors. Even if your bet is correct, but your timing is wrong, you may get wiped out by the time decay if your bet is bearish and the index trends up.
A great article on this problem:
http://blog.quantumfading.com/2009/06/25/leveraged-etfs-and-compounding/
The timing of the short will be done by candlestick analysis. We currently are looking at some sort of brief correction and perhaps another final thrust up before wave (C).But we would like to identify the reversal when it happens and implement our plans.
3 – Gold is something to watch as September is traditionally a strong season for gold. On one hand if the market reverses then the gold stocks will get hammered. If gold reverses then the stocks will get hammered. Gold needs to breach the 980 level in order for us to get bullish. If it does rise over 980 along with the stock market, certainly close stops will need to be put in place.
Nearly all of the indexes we track have risen with this summer rally. Therefore when the correction comes, we anticipate this to be the same on the downside. What we want is a determination that we are near the end of Wave 2. Certainly a good time to stay in cash.
More to post this week as we try to hone in on the turning points in front of us.
Adjusting the trend
We’ve been observing increasing amounts of gold bull calls, be it Marketwatch articles or Glenn Beck Advertisements to buy gold. This in conjunction with the record number of dollar bears, max COT dollar levels – all point to a potential sign that we are about to embark on a major an unexpected trend change.
We at Stock toolworks are not adamently inflationists or deflationists. We take the arguments given from both side and adjust our trading strategy based on the evidence. Thus far we are leaning, at least for the time being in the deflation camp should the dollar bounce that is forming becomes reality. As in the movie ‘Battle of the Bulge’ when confronted with evidence of a possible surprise German offensive ‘ When 10 people say your drunk you better sit down’
If inflation is the true threat, then Gold will react past 980 (that will be the warning) and once it exceeds it’s 1038 high from March 08, we know that the inflation scenario is the one winning. However if Gold goes below it’s key support level (we’ll label anything below the cloud (850-820) that deflation is the force to be reckoned with.
The key player will be the dollar which is currently a ’snail on the edge of a knife’.
The current chart shows indeed that the dollar has been dropping fast since April. Now it is beneath the clouds in a bearish situation. At this point, we have not seen the bottoming action indicative of turning point – yet. For the inflation scenario to really take root, we must see the dollar drop all the way back down to 70 and below. It has a bit of a way to go, however a maximum COT value of 100 does not imply this will continue much longer.
Rally continues
We are still waiting for a pullback to this extended Rally in order to enter in some positions. Basically we are nearing key short term limits in all the markets.
Here are the latest Blees COT ratings released on 7/31/09 for some key markets. Remember “100? is the most extreme bullish position on the part of commercial traders (aka the “smart money”) for the last eighteen months. “0? is the most extreme bearish position:
S&P 500 Index: 51
S&P E-mini: 62
Dow Industrials: 44
Nasdaq 100: 47
Nasdaq 100 Mini: 3
Gold: 73
Silver: 74
Crude Oil: 58
Copper: 58
Corn: 94
Soybeans: 64
Sugar: 14
Wheat: 97
Cattle: 21
Hogs: 81
U.S. Dollar: 100
Cocoa: 57
Natural Gas: 79
The gold number jumped up considerably, which bears watching. What concerns us is the dollar number. We are looking for the dollar to possibly bottom soon. Gold continues to rise as well, which puts us in a conundrum.
Dollar loses = market, gold rises
Dollar rises = market, gold falls
This is the formula we’ve been witnessing lately. Keep an eye on the dollar.
Monitoring the reaction
As expected we have seen somewhat of a correction, with the metals being hammered more than most. Our own positions are almost entirely in cash, with the exception of FAZ, UNG and AXAS which have been waffling and trending down. The effect on our overall portfolio is negligible though since we have almost entirely in cash.
Combing through many of our breifings, the scenarios now can be examined more thouroughly. The market is still due to make another upward move. The chartists call for anywhere between 9,000 (which is already met) to 11,500. Therefore we need to leave room for some upside potential. However our candlestick formations, at least on the weekly basis will probably be all cancelled out.
One thing when following candlestick formations, is that they work best when there is a clear cut trend that lasts a few weeks, followed by a change in trend. The elliotwave folks talk about ‘all the same markets’ which has been borne out pretty accurately, as our signals almost switch from these intermediate trend changes all together.
These previous trend lasted about two weeks – too short to commit any cash. The question is if the trend renews itself up, is it time to buy for a short term play. Certainly there is more and more news emerging about the end of the recession, how to position your portfolio for the turnaround, etc. In otherwords, the psycology seems to imply a baked in sense that the recession will end soon (already the longest since great depression).
Yet psychologically speaking, very little has changed, especially the government response. We are seeing more households hording cash, reducing debt, increasing savings. However those pent up savings will unlikely be enough to jump start the economy, which has become structurally warped over the decades by excess credit.At the same time, we are heading down the path of FDR with higher taxes and more government spending which is only going to prolong the ‘great recession’.
Given that, we still may see an eventual recovery and several quarters of positive, but anemic economic growth. Will enough positive psychology spur the markets up one leg higher? We will look very closely. Any additional positions we will take will be cautious to say the least. What we will look for are signs of the C wave down which may be time to exit long positions and go short.
This current 2 week rally has been fast and sharp – and we have stayed on the sidelines thus far. The result is the below point and figure chart which has triggered a long tail up warning. This means a reaction is imminent.
At this point the probability is that soon we’ll see a reaction down. This wave down should provide an ideal entry point for those looking to trade the rest of this rally which may last into fall before the (C) wave decline. The (C) wave may even get pushed out to next year. However we’re set up to get plenty of alarm bells when we enter this period.
The big question remains is how the precious metals will react. Right now a push into the 970’s is the target. If gold can push through this target then the Elliotwave scenario is temporarily negated. The markets all have been closely correlated, so if gold is to go higher then it may well i ndeed follow the general market up into fall.
Here are the latest Blees COT ratings released on 7/24/09 for some key markets. Remember “100? is the most extreme bullish position on the part of commercial traders (aka the “smart money”) for the last eighteen months. “0? is the most extreme bearish position:
S&P 500 Index: 52
S&P E-mini: 77
Dow Industrials: 57
Nasdaq 100: 66
Nasdaq 100 Mini: 20
Gold: 26
Silver: 79
Crude Oil: 60
Copper: 63
Corn: 100
Soybeans: 53
Sugar: 30
Wheat: 94
Cattle: 25
Hogs: 71
U.S. Dollar: 100
Cocoa: 62
Natural Gas: 80
Again, the numbers for gold do not suggest a big push in gold. What we want to see if a nice pullback in gold, followed by much higher COT numbers.
It’s interesting that the dollar is now at 100. We do expect some short term dollar weakness – however the Elliotwave folks anticipate the dollar to rise during the next round of deleveraging.
Psychologically speaking, the media is awash with articles about a pending recovery. When the local papers who have no business giving financial advise start printing articles about how to “prepare your portfolio for recovery” indicates that we will continue to have a hope fueled rally as people almost instinctively think the recession will end very soon, as this is already the longest recession in month terms since the great depression.
There has also been talk about a coming dollar devaluation, which of course would be explosive for gold and commodities. I checked the Elliotwave site and found the answer, which makes sense :
“EWI’s earliest forecast for the bottom in the global economy is in or around 2012, and the US dollar should generally remain buoyant until then. Any transition to a new reserve currency is likely to take place after the bottom, because only AFTER the collapse will global governments attempt to come together to prevent the collapse, in typical ‘after the horse has left the barn’ fashion. One of the potential ‘culprits’ in their minds may be the reserve currency system, which leaves the US dollar’s status in a vulnerable position”
So while the dollar is vulnerable, the probability of a overnight devaluation at this point is low. And as we have seen from all the government responses – it is always reactionary. TARP, Stimulus I, TALF, etc. All these government measures came in the middle of the crisis, not the end.
Our watchlist program is currently malfunctioning, so we hope to have everything fixed soon. However nearly all the symbols were converted to full fledged buys this past week, as expected. However given the sharpness of this rally – we would like to see a sell off prior to entering any new positions.
Market surge
We’ve been just watching and waiting while we watch the action unfold and will summarize with charts this weekend. And expected pullback has not occured, rather the markets have been pushing higher. We are still expecting a pullback and will not chase and market that has extended itself such as what has been occuring in the past two weeks.
If one is in the markets now, it would be wise to stay in. Any new entries should be made only after a pullback, as the markets are vunerable to a short term pullback. However as we unfold it appears that the Dow 10,000 scenario will become apparant.
We remain uncommited except for our small positions which have been waffling.
wait and see.
The portfolio watch list has been updated, and as expected, ALL the sectors we followed issued buy warnings. We are going to wait however before commiting posistions since this move was expected and seasonally we do not expect the metals to rally too much higher. For us to commit additional money we want to see key resistance levels of 967 broken in gold.
Additionally the COT numbers as posted below do not encourage us that this rally will have teeth. We are also monitoring the stock market as conditions exist for a rally and a way to raise cash into fall.
Here are the latest Blees COT ratings released on 7/17/09 for some key markets. Remember “100? is the most extreme bullish position on the part of commercial traders (aka the “smart money”) for the last eighteen months. “0? is the most extreme bearish position:
S&P 500 Index: 43
S&P E-mini: 76
Dow Industrials: 57
Nasdaq 100: 59
Nasdaq 100 Mini: 28
Gold: 38
Silver: 76
Crude Oil: 49
Copper: 77
Corn: 91
Soybeans: 48
Sugar: 45
Wheat: 100
Cattle: 35
Hogs: 79
U.S. Dollar: 96
Cocoa: 68
Natural Gas: 76
Possible change…
We are monitoring intelligence which suggest we are at a tipping point for a near term rally. However as previously discussed, the COT structure is unfavorable to any dramatic rise in gold. We are going to review this weekend and determine a course of action. Gold still needs to make some headway past key resistance levels.
However, a new wave up is very possible and may be an excellent time to raise cash or trade the rally into the remainder of the summer.
We will also be checking out the candlestick signals this weekend.
