Monday, October 19, 2009

A Major Non-Confirmation for Stocks and Gold that Should Give You Pause

As the US markets doggedly continue their upward tread, a few points need to be clarified.  I have had several readers email me regarding my recommendation to sell out of stocks and take long-term short positions as of late August.  Those readers argued that the market has gone up for almost 8 more weeks since then, and that my recommendation missed a significant rally.

At first guess, that might sound true.  However, as I demonstrate on this chart, while readers might feel like the market has gone up drastically since my sell recommendation, it has in fact only gone up about 7%.

The reason it feels like so much more is exactly the reason that you should consider selling your stocks if you haven't already - the news has been hyping the higher-high situation, economists are out of the woodwork with raised GDP projections and analysts are raising price and earnings targets across the board on public companies.

However, despite the obvious improvement in sentiment, over 80% of the market's improvement in the way that counts (dollars and cents) was fully completed at the time of my recommendation.  That isn't to say that the market could make another higher high, maybe even two.  What I am saying is that the odds of a violent decline in stock prices only go up with each up-tick in this market.  Sentiment is too wildly positive on stocks and the economy, as I have covered in previous articles.  It is also far too wildly positive on gold.

Consider the following:

Gold has made an all-time high, and broken over the important psychological barrier on a weekly close for its first time in history.

However, when priced in a basket of other major currencies, one can see that gold is not actually making new highs relative to its March '08 historic launch.

In fact, this is almost a picture perfect example of an A-B-C correction formation when priced in a currency basket.  Wave B would be at or very near its peak, and wave C should carry the price of gold down below the low set last October.

The other  worrisome aspect of this high in gold is the fact that, despite being historically consistent in so many eras, this new high has not been confirmed by silver, even when priced in USD's.  This illustrates a far-too-positive sentiment level on gold that must correct.  Remember, as I said in my much-hated article in September, the time to buy gold is when everybody hates it - ETF inflows are setting records, Chinese governments are posting advertisements to citizens on buying gold (honestly, when has government EVER been good at timing a market?), physical investment demand is at a peak, and prices are at all time highs despite the fact that production is increasing and overall market demand is down.

I am forecasting a serious multi-month decline in precious metals, led by a reversal in over-extended sentiment and a bottoming and multi-month incline in the US Dollar as deflation rears its head.  We should see precious metals at new 2-year lows, if not 3-year lows.  This will most likely be the last good buying opportunity for these purchasing-power-retaining assets as a multi-year bull market ensues and takes them somewhere close to the "gold bug" high's in price.

As for stocks, I retain my advice.  Get out of your long positions, hold cash and short-term safe bonds that can be rolled over easily.  Be prepared for a buying opportunity few people ever get to see in their lifetimes within the next 5 years.

I'm excited... Are you?

Be Safe and Smart out there, Folks!


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