Have we just found a New Leading Indicator?

Here at Investophoria, we have been hard at work taming the bear and the bull. This is, indeed, the mission statement, the "slogan" by which we operate. It is our goal to keep ourselves and you, dearest readers, from being gored when short, maimed when long, or trampled by sideways erosion.

To keep the tradition alive, we are constantly sniffing out clues as to where the broad measure of sentiment is headed in relation to where it is today (every day).

Most of the headlines you read infer causality between events and market fluctuations. Or they infer inverse-causality (for example, today - "Stocks Mixed Along with Data" from our friends at TheStreet.com)


Funny enough, if you check back at about 4:15 you will see one of three things:   

"Stocks flat along with mixed Ecnomic Data", 

"Stocks up on [one piece of good data] - continuing claims were slightly less today than expected", 

or 

"Stocks down on [one piece of bad data] - the trade deficit was about 20% higher than expected."


Seriously.  I challenge you.  Head on over to TheStreet.com and see what their market wrap up headline says about the day's trading. Or any other news-wire finance/economic daily publication.   After much study on this inferred correlation that media tries to use, I have realized that they miss the point entirely.  That being said, saying "Markets drop as Trade Deficit balloons" sounds a lot better than "Markets drop as the only explanation is a lower sentiment toward price level by all participants today than yesterday".  And these folks have papers to sell!  (or web hits or video views or commercial air time)


But that doesn't exactly jump off the page.

So... how do you measure sentiment?  Well, there are readings like the D.S.I (Daily Sentiment Index), which is a broad poll of traders and market participants.  It's pretty good for determining turning points in markets.  Okay, what else.


Oscillators are a good tool - you MACD and slow/fast Stochastics, etc.  RSI is a good indicator of sentiment.  But these are all indicators that tell you when you are at an extreme level low.  However, I might have just found a sort of leading indicator that I'm going to be looking into a little more deeply.


Call it a roving case study in data-we-have-used-before-for-confirmation-but-not-for-anything-else.  Might end up being an interesting find.  What do you think?

 

It would appear that we might have stumbled upon something at first look.  Of course, you can't just do ONE experiment and say you've got a proven hypothesis.  We'll keep you posted on this one.

It makes sense though, when taken within the context of a market acting as a market.  Since price is driven by perception first and follow-through action second, it would make sense that perception could go to new extremes while action peters out.  This is a good indication of a coming reversal of the trend in price-perception.

the Money Flow Index  (MFI from here on out) is actually a very strong indicator in general.  Unlike many indicators of its ilk, it is volume weighted, which gives a much clearer picture of the extremes.  Notice that before the all-time top in 2007 - long before - the MFI had already started to fizzle downward.  After the major crash, it bottomed all the way back in October, but the lowest lows weren't put in until March 9.

On that note, it is very possible we are seeing a similar sort of turning point coming up based on this indicator.  MFI topped out in early June.  Based on its action compared with actual price movement there is a good chance we will see one final rally on a weaker MFI, possibly pushing the markets to new highs, followed by a true trend reversal and the continuation of the bear market trend.

As always, these markets are tough to trade and I recommend safety over risk hands-down right now.  Risk appetite is revved up across all sectors of the market right now (they are selling securitized life-insurance buyouts now!), meaning speculators are rampant.  Speculation in and of itself is not bad but higher levels of it indicate extremes in sentiment and price movements are near at hand.

Be careful out there guys.  And as always, happy trading!

Derek.

The Implications of Sky-High Gold and Why you Shouldn't Wish for It....

There is an interesting point to be taken from the barrage of gold-related articles and videos on the net these days (I freely admit that, yes, I have made my fair share of contributions).

Gold bugs and gold investors are hyped up and jumping (or were when gold was breaking $1000 - I don't know what they are doing right now.  Probably sleeping.).  Many of my readers, who agree with me philosophically on gold, disagree with me on its mid-term future price movement in terms of the dollar.

I realized something today at lunch.

It really doesn't matter. Actually, before I go on, let me reiterate - it doesn't matter in context.

The arguments are vicious on both sides (although it's a bit drafty on my side of the room these days). 

In the end those philosophical beliefs completely negate the whole concept of dollar terms when it comes to quantifying its value.  Furthermore any gold bug out there should really think twice before seriously wishing the suffering of $10,000 or $20,000 / oz Gold on us.

Why? - you might ask

.

It's fairly simple.  First, in a market sense, gold is still treated as money - real money with real value.  A good example - offsetting huge increases in money supply and total credit following the dot-com bubble-bursting of 1999.  Money supply increased exponentially as Mr. Greenspan (a long line of Federal Reserve chiefs helping bring the loathsome organization to where the fault-lines are exposed - and to finally receives [not enough] rage from the public for causing the boom bust cycles we have suffered through) flooded the market with cheap debt.

In nominal (Dollar-measured) terms, the GDP of the US improved at a fairly decent rate.  Although through this era, the rate of growth was actually slower than in the lower-credit, higher-interest-rate era preceding it.  This exemplifies another point regarding how a debt-based (vs. saving/producing) economy actually deteriorates itself from within.  But that is for another post.

In nominal terms the broad markets climbed to new all-time highs (excluding the Nasdaq which was in the center of the bubble, and therefore had to - still has to - retreat to its pre-bubble era lows).  However, when measuring the Dow Jones Industrials in terms of ounces of gold, one can see something interesting.

 

I know, I know.  Gold bugs the world over are yawning.  We've seen this this many times before.  Yes, you have - you and me both.

But there's a point to be made here.  You already know that too - gold is money.  Gold is money in terms of the amount of assets you can get for it, the amount of goods and services you can exchange an ounce of the good stuff for.

So in the end, it really doesn't matter what the DOLLAR price of gold is.  in market terms, whether dollars or gold or soybeans or oil or GE shares, all things are a constantly fluctuating supply/demand/sentiment/emotion equation whose variables change with each participant and each second of the trading day.  In fact, the ONLY thing that matters is the when, not the what.  As in, when did you guy your gold?

But in terms of practical purchasing power - an ounce of gold bought you a really good full outfit (suit), a high-quality belt, and an excellent pair of leather sandals in the Roman Empire.  No matter how they inflated (mixed it with other lower-grade metals to lower the purity) it.  You can get about the same for an ounce of gold today.  Actually it would be argued that you can get MORE today and that is only because the amount of goods and services available per human has certainly risen in relation to the amount of gold per human over the last 2 millennium.

To call for $10,000 price in dollars for gold is suicide.  Sadly, we may very well end up there.  But that is not the trouble for today.  And even more troubling still is that the only way to STOP that from happening is for people to take action today and put men like Ron Paul and other Libertarians into office to actually represent the best interests of the people;  leaving them well-enough alone.

But here is why the gold-bug hopes and dreams are masochistic at best.

In order for there to be $10,000 gold today that would mean that the dollar would have to lose 90% of its value in relation to gold from here.  

Think about that for a second.  You own gold.  You actually wish for that to happen? 

Here's the funny thing about hyperinflation.  Or even very high inflation.  Things do not go smoothly in such conditions.  Money is spent and shuffled around much faster because nobody knows how much it will be able to buy tomorrow.  This only exaggerates the problem, but it is secondary to the main point.

Another interesting thing that happens in high and hyper-inflation is that the disparities in the value of assets widen and widen the worse the inflation is.  

It goes something like this:

The more liquid an asset is (easily transferred to or able to act as money), the closer its value matches inversely to that of the underlying currency being inflated.  In other words, the easier a product moves, the closer it stays to its real value in terms of purchasing power.

So here's the part that should be scaring gold-bugs out there.

Now.  Couple that with this:

What's the end result of this latest mad-cycle in credit expansion?

Consumers have negative net equity on average.  Savings rates are going up but most of that is going to pay down debt.  Otherwise, most "equity" is in illiquid assets like cars, houses, appliances, and consumer goods.

Very little of this equity or "wealth" is in cash.

Sure, gold bugs will argue that they aren't like these dopey sheeple who got sucked into the FNR pump-up session.  They continued to save and continued to buy gold.

But I'm sure you have family that didn't.  Or friends.  And if/when a massive wave of inflation does slam and fracture the foundations of the dollar, those assets are going to go up in value a lot slower than the dollars are dropping.  That little bit of gold they might have will not last them very long.

In Weimer Germany, during the wickedest routs of hyperinflation, gold's purchasing power went up 5-10x in value compared to normal times.  It was not only ultimately liquid, it was stable - they can't print a billion of ounces of the stuff, now can they.

But how many people do you know who have all their savings - I mean ALL - in gold or silver?  All their non-yielding assets.  That is the context I spoke of earlier.  The only way this can benefit anyone on earth is if ALL of their holdings are in something that is immediately liquid, and static in value (only precious metals, especially gold and silver, meet this criteria).

I know not a single person who can fit this category.  And if I did, I would most certainly call that person insane.

So, in the end, whatever percentage of your savings/investments are in gold and gold related products (ETFs, producer's stock, leveraged futures, et al), you had better hope beyond hope that if the scenario gold bugs are clamoring for never comes to pass.  You'd better hope that people wake up to Liberty and realize how beneficial for society it truly is to let the market pick the money.  Hard money.  Real money.

Because if we ever see this moonshot we all talk about, we'd better home that percentage of gold and silver we hold is more than enough to feed our families and clothe them and shelter them.  Our wages aren't going to do us much good at that point.

I guess, in the end, the moral of the story is:

Be careful what you wish for....

See you later this week.

Derek.

USD BREAKDOWN! GOLD BREAKOUT!

September comes in with a roar!  Hear that lion as he takes a bit out of the USD, sending it breaking down below the support line!  Watch him grin wickedly as gold hammers up and through (for a short time anyway) the psychological overhead-anvil of $1000 USD!

What a day.  What.  A.  Day.

It's like I've been saying all along.  The US dollar was going to crash this week, and gold was going to end up trading at some price and velocity only a PHD physicist could put into practical terms.

Or wait.  I didn't say that did I.  Actually, come to think of it, that seems to be the exact opposite of what I said.  I seem to recall.... yes!  The stuff that I said was "absolute drivel"!  Of course the USD is going to crash immediately and of course gold is going to skyrocket in dollar terms accordingly.

So.  Let's take a look at the charts then.  What story do these lovable snapshots of time-action-based data tell us?

Okay.

Wow that is one hell of a beautiful looking trend!

What about the USD?

Ahh, there's our dead friend.  The worthless greenback FRN (That's federal reserve note, for all you non-gold-bug types out there who haven't seen the term before.)




Well.  If I was chasing a trend trade right now I think that it would be impossible to hold myself back.  I can literally feel my trigger finger itching to pick up some GLD shares and squash the USD like a pesky fly.

Wow, what a feeling!  Exhilerating!  I took a little look around the net today and came across a great many articles extolling these developments.

But, despite the rush I'm feeling, I suddenly get a small voice in the back of my head, whispering something.  What's that?

Careful.  Be very careful.

Ahh yes.  That still small voice making its way through the rush of feeling you get with even the thought of putting a huge pile of your hard earned chips in the pot.


And I remember.  I am not trying to chase a trend.  This is not the time for chasing trends.  These trends are old, stale - too long have they been praised.  The trader in me, the cooler side of me, is facing what the crowd is walking away from.  And there seems to be fewer and fewer pointing in my direction.

No, dear readers, I said a few days ago that there was "room to run" in these shenanigans.  There are still more people to be pulled in by Mr. Market (who I must say is very a very alluring bull-costume these days).  And that's the funny thing about Mr. Market - he tends to bring you just past that point where you doubt what the countless hours trading, those hard lessons of taking his beating and learning from them, have taught you.

It's never easy being a contrarian.  It's never easy when you are one of the few and everyone seems to be on the right side of the trade.

But that's what makes it pay so well in the end.

I intend no pun here, dear readers, but that is what makes those lessons so worth their weight in gold.

Happy trading.  We have already seen some big moves in key markets today and I am betting that this is only the beginning.

Derek.

The Mysteries of September

September is here to stay! (for another 23 days anyway).  Yes, dear readers, fall trading season is in full swing starting tomorrow.  What wondrous things can we expect from this month in market terms?

Well, at this point it is tough to say.  The rally still hasn't breached its trend line or made a lower-low after a few days of correction.  The USD still has not squeaked out of the oh-so-tight quarters at the end of its triangle formation.  Gold still hasn't cracked $1000.00

And where is the collective psyche these days?  Well, we've got a sky-high stock market held against the backdrop of 26-year-high unemployment numbers (which are official so take that as you will, oh discouraged or should-be-putting-in-full-time-hours workers)



See?

We've also got Super-O getting the lowest approval rating we have seen yet.  This by itself isn't a huge deal but couple that with the plethora of other data coming over the wire in the last couple of weeks, and this makes for a fairly negative social mood.

But it's anyone's game as to where the market goes this week.  Will it break that support line?  Will it rally to a new high?  Will it consolidate sideways?  Maybe.  Maybe to all of these things.  This rally could take us over the 10,000 mark on the Dow Jones Industrials.  Or not.  If we see 10,000 DOW, then I would be willing to stake a "goodly sum" that we'll see $1000 / oz Gold on the week too.

Please see my post (and thanks for the steady flow of denouncements, guys! :) on what I think will happen with gold in the mid-term.  But no mail-bombs please.  I have grown to despise them....

So here's my take on the DOW:

And there you have it.

One thing I'm fairly certain of is that we are going to see some historically huge moves in every market on this planet.  Take your pick - dollar, euro, gold, silver, Dow, S&P500, TSX, Hang Seng, the list is miles and miles long.

Just make sure you are on the right side of the trade.  The market only makes money for those who deserve it. More importantly, it takes money from everyone who deserves it too.

So if you are a long-only investor my recommendation is to hold cash and maybe some short-term treasuries (3 or 6 months).  There will be a time to buy.  For sure.  But not now.

The time to buy will be when everyone you know hates stocks again, because they were trying to hold on and make back those losses they had in '08.  And as astute and well researched investors we know that, in general, the average retail investor buys at tops sells in and out when bottoms and corrections are forming.

The moves will be big, dear readers, and they will make some wealthy and many poorer.  If you are not sure that you can be part of the few, than my advice is to stay clear, wait for the big dips and buy the things you know will be worth something in ten years.

Enjoy the rest of your Labor Day!

Derek.

On a Very Happy Note!

I hope everyone's long weekend is going well.  The weather up here has been beautiful and the golf course just keeps calling my name :)

A couple of hours ago I popped on to my Facebook after cutting the lawn and doing some cleaning and such, and came across a delightful surprise.  I recently joined the Mises Institute Facebook Group and have been involved in a few of the discussions.

I didn't know this at the time but I guess there is a monthly contest for best discussion and best contributor, and they picked me as August's winner!

Pretty exciting stuff!  The Mises Institute is sending me a copy of Origins of the Federal Reserve by Murray Rothbard.  I actually have not read this book and I am very excited to get my hands on it!  Thanks a ton, guys - you just made this weekend even better!

Derek.