Question: How will we know when the bear has returned?
Well, for one, the market will break back below a yearly cycle low initiating a series of lower lows and lower highs. This year that cycle low was set in February.
But didn’t the market break that low during the recent correction?
Well yes and no! The S&P and Dow did both marginally break below the February lows. However a big part of the weakness that dragged these two indexes down was due to crumbling energy stocks as the mess in the gulf unfolded.
The rest of the market held above the February lows. Some like the transports comfortably above those levels. I tend to think if the economy was ready to fall back into recession again we would be seeing a lot more weakness in the trannies.
The banking industry has also held up quite well during the recent crisis. Surprising since it was the failing European financial sector that has been blamed for the current market swoon. If the financial sector is collapsing again how come the banks are holding above the February lows?
So we are kind of up in the air right now on whether we are indeed making lower lows.
The next thing I would need to see before I would be willing to call another leg down in the secular bear would be a Dow Theory sell signal. In order for that to happen both the industrials and the transports would need to break below a secondary low point. I think we just put in that low a few weeks ago. So if the Dow were to close back below the June 8th low of 9939 and it was confirmed by the transports closing below 4089 then I would have to say it’s time to hunker down bad times are a comin’. (They are surely coming eventually – we are just trying to get the timing right.)
Then the final straw would be for the 50 day exponential moving average to cross back below the 200 and for the 200 to turn back down.
Obviously none of these things have happened yet. Until they do it’s just too early to get beared up.
At gold’s top, half of your neighbors will be buying gold (not selling like they are doing now).
At the top there will be lines outside the the local coin dealer waiting for the next shipment of gold to come in.
Here is a chart of the Nasdaq followed by a chart of gold. You tell me, does gold look like a bubble yet?
I was going to post part of tonight’s report to the blog but decided I didn’t want to go through the hassle of transferring it over. So I just unlocked it on the premium website. If you want to read the report just click on the link to the right and it will take you to the subscriber website.
During the recent correction miners underwent a significant change of character.
During this latest intermediate term correction something changed though. During the first stage of the correction the mining sector could have cared less what was happening in the stock market.
During the first two weeks of the correction while the market was in crash mode miners actually rallied over 14%. Miners, like gold had completely decoupled from the stock market. It wasn’t until gold put in it’s smaller daily cycle correction that the miners pulled back at all and even then it was only a mild 16% pullback.
Pretty impressive action considering the stock market was still experiencing severe selling pressure at the time.
It’s apparent that miners have now moved into strong hands. Hands that aren’t going to sell at every little wiggle in the market. Hands that are going to scoop up the shares that flighty retail investors are foolish enough to let go of.
We’ve been following the Dow:gold ratio for quite a while. I’ve been saying for years that we will eventually see the ratio move to par by the time this bull is finished. Actually we may even see gold briefly become more expensive than stocks.
At the moment the Dow:gold ratio may be poised for another leg down after the year and a half consolidation.
As you can see these big consolidations eventually lead to another leg down in the ratio. Once the consolidation completes we get another repricing of stocks compared to gold. Usually that means a big rally in gold although the last leg down included not only a big move higher in gold but also a drastic downward price adjustment in stocks. By the time stocks finished the bear market leg gold had established a new value zone between $1000 and the old 1980 high of $850. Then for almost a year and a half stocks rallied while gold consolidated that big move, eventually even broadening the range up to $1250.
Now gold is poised for another major leg up while stocks are stuck either in a consolidation of the big rally or maybe even another leg down in the secular bear. Either way, I think once the Dow:gold ratio breaks below the bottom of that range we will be heading into another major repricing of stocks compared to gold.
It’s sad to say but I’m afraid 90/95% of all retail traders/investors are not going to successfully ride the gold bull. The reason of course is that they are deathly afraid of draw downs. It’s glaringly apparent every time gold pulls back or suffers the slightest correction. Immediately a slew of traders come on the blog and warn of impending doom. “Gold is going to $600” (think Elliot wave). Some are even brave (maybe I should say ‘foolish’) enough to short. Here is one we hear alot lately, “miners are going to get crushed if the stock market enters a new leg down in the secular bear market”.
Both bulls exhibited powerful moves out of the bottom followed by a 9% correction separating the second leg from the third. In the `02 – `07 bull we then entered a 2 year phase were the market ground higher. That phase is missing from the current bull.
What followed the `06 correction was a powerful runaway move into the February `07 top. That persistent rally skewed sentiment extremely bullish at the time. We saw the exact same thing develop as the market entered the runaway move out of the February 5th bottom. At it’s peak sentiment had reached bullish levels exceeding what we saw at the top of the last bull market in the fall of `07.
In `07 the runaway move led to investor complacency and severely depressed put buying. The same thing happened at the recent top in April. Investors became terribly complacent. Protective put purchase fell off the chart. The market had no safety net under it. In that condition it was at risk for a crash if investors all tried to head for the door at the same time. They did, and we suffered a mini-crash in the spring of `07 and again in May.
In `07 the initial crash low was tested and broken followed by a 2b reversal.
Recently the S&P also broke to lower lows and bottomed with a 2b reversal.
Both markets experienced volatile swings as the market put in the intermediate term bottom.
Both crashes quickly moved sentiment back to extreme levels of bearishness. In `07 sentiment turned more dour than at any other time during that cyclical bull. At the recent bottom sentiment was blacker than at any time in the last 10 years as measured by a basket of intermediate term sentiment indicators.
These kind of extreme sentiment levels are the building blocks for powerful moves. In `07 the extreme bearish sentiment drove the market into a final double top that capped the cyclical bull.
If sentiment levels are any indication we should now be set up for at least one more explosive move higher before the fundamentals final overcome this market and drag it back down into the next leg of the secular bear.
The similarities are piling up:
Initial runaway move drives sentiment to extreme bullish levels? Check!
Protective put buying dries up leaving the market with no safety net and vulnerable to crash conditions? Check!
Test and 2b reversal of the initial crash low? Check!
Sentiment depressed to extreme levels of bearishness? Check!
Volatile swings back and forth during bottoming process? Check!
If history is any indication we should now be on the verge of one more explosive move higher before this cyclical bull expires and heads back down into the next leg of the secular bear.