Friday, March 12, 2010

The Muddy Waters of the Market

Today the S&P500 made a new all-time high for the move off March '09.  The way this correction has played out is very similar to the one that occurred in July 2009, and we are seeing some similar upside potential now that could very well take the markets 15 - 20% higher than they are right now.

As such we have closed off our small term shorts with a break-even on the Dow trade, and are going to be looking for some short-term long trades with tight stops.

I'm not going to be taking any immediate long position on the market, as it still looks quite over-bought and should pull-back a few percent over the next while.

A secondary re-enforcer of this potential bull-leg is the most recent Investor's Intelligence Survey.

The latest collapse in the bull:bear ratio on the Investor Intelligence Survey was the largest single move since August of 2007.  The rebound has been lethargic compared to the scope of the rally in stocks, indicating that investors are now back to the "worry" phase of the game.

This, along with the technical moves in the broad markets this week, seem to have finally indicated a short-term direction as the battle between bull and bear was extremely even matched with sideways choppiness all week.

This also changes the mid-term outlook for precious metals - if "Reflation" is still in the books and not quite done its work through the system, then the lower price in gold is still some ways off, and we just witnessed a small A-B-C correction in the metal.

As such, it might be a good idea to start making some small and regular purchases of the yellow metal.  The maximum upside we see in gold is an even shorter price-length rally in the metal that takes it to $1300 - $1325 at most.  However, as the price direction is not currently clear, we are not even a fraction as bullish as we were in fall of 2008 on gold, and even less so on silver at this point.  Small regular purchases of physical are your best bet right now, until some clarity can be had.

The funny thing about the human disposition (most likely excluding our daily-oppressed Dark-Age predecessors, mind you) is that it is so prone to optimism and hope, that despair melts away very quickly.  Even in the face of the largest credit bubble in the history of mankind (although, unlike 100 years ago, most people have no clue about aggregate money and how banking works), the most massive debt implosion that has ever been documented, the future implosion of governments they have come to depend on (as a libertarian I find this sad and thank my lucky stars I get to be alive as this happens, for the betterment of mankind), they can be "optimistically worried".

That's the stuff that drives bull markets, unfortunately (for the perma-bears/shorts).  Even laborious ones, with decreasing trend slopes.  To that, however, it looks like this next break up, if it does happen, could be a significant move in terms of time and breadth.  Backbone indicators (actual buying activity versus selling, breadth and strength) have been getting stronger the last few days which tells me that a big move is in the works.

It looks like the odds are favoring the upside right now, however those odds can quickly change - keep your stops tight and look for good, high-probability setups.


Upon review of today's move, and the continued weakness in the momentum the last few days, I decided to scale down my short positions by 50% in the meantime instead of closing them out completely - the market looks primed for at least a several % correction next week and I will follow its movements closely, as well as the type of patterns that play out.

The VIX has not managed to make another low, despite the sideways-up inclination of prices, and I will hold my position at least until the VIX reaches the downtrend line and further review from there.  I will post an updated VIX chart on Monday.  I have also moved my stop up 50 points (to 10,801) on the Dow as there could be an exhaustion spike up long on Monday morning and I don't want to get printed on volatility.  

Have a great weekend!



  1. If your prognosis is correct Derick, and it appears it could well be, then this could be the final blow off where the baby bears are squeezed to their last breath.

    Thus is usually indicated by a spike move. Bot nothing is guaranteed.

    There could also be some 'unexpected event' waiting in the wings to add to the downturn, and which will be blamed.(They always need an excuse)

    A weekend is perfect for this to happen, so stops could be passed before the main market opens.

    Today, stops are no guarantee as life savers. Too many at it. Perhaps cover by an 'opposing' option will be safer.

    It will almost certainly at the beginning pull gold down with it, a little. If so, that is the time to get in, if you are not already.

    As long as established gold dealers are spending millions on TV advertising begging me to sell them my gold, I too will be a buyer.

    In this world of 'virtual reality' anything can happen. And this is the age we are living in.

  2. Short-term is anyone's guess, but I also sense a few % further move down before this renewed bull gets underway.

    What I want to say (and I think Derrick is starting to realize this, as he admits the system must die), is that leverage is dying. The apparency of leverage is a facade, and it must fail. So not only do you need to have trade stops, you need to have "get out of the fiat system" stops as well:

    All the best.

  3. Derek,

    What effect do you think China's announced plan to raise their Gold holdings from 1000 tons to 10,000 tons in the next 3 plus years will have on the price of gold? Do you think it will be a factor near term or long term?
    Thank you!

  4. I was surprised we didn't get a 2nd test to the $1000 level. And I am still not ruling that out, come late March, before this renew bull gets underway. The best thing to set this bull up for a blowoff style rise, would be a final capitulation by the worried bulls who have their finger on the trigger still. But as Derrick points out, most of them have already been bleed from the market. It seems there are less and less people playing this leverage game. Perhaps what we have now are the funds in the markets. I think most people having been pulling out of the market on this rise and moving to bonds and/or to raise cash. Any statistics?


  5. About China (or at least the Taipans that run China), they are not telling you what they are doing, but they are buying all the gold they can without causing a stampede.

    I am not at all worried about gold helping us hold our purchasing power relative to western economies. But gold is not going to grow your wealth as fast as laborer in developing world is. But that is just a fact of the exponential function. Someone who has $1 networth, can double it by buying a few soft drinks and selling them along the road on a hot day.

    Gold is what you should do with your savings. Then get busy finding something productive you can do in the world, other than gambling in the casino of the markets.

    Gold is not going to make us rich. It will preserve what you have. Some few gamblers will get rich in mining stocks, and other leveraged bets. But most inside a casino get slaughtered by the house. That is the way it must be mathematically.

    We are wasting our time here. K.I.S.S.


  6. In short, one may think of themselves (and this is not directed at Derrick but a general comment about all of us who have tried to trade) as a sophisticated trader, but to JPMorgan, you are just sheep for their computer program to slaughter eventually.

    Even if you set stops and make a nominal gain on most trades, you are likely being debased at a rate that is higher than the consistent gains you can achieve. I had an automated system what could virtually guaranteed me 14% gain per annum, but buy & hold gold is beating that for 9 years.

    The way to make money is invest in real or undervalued production. In this era, you can no longer do that effectively via stocks, because the mgmt's are mostly all frauds. Buffet can take over a company and insure the mgmt is good.

  7. Here is me again Dow 12,000 S&P 1,200. March 1st rally to Oct

  8. Dow Jones heading towards 12000 now. Where is the Rebel now??

  9. Derek, the calls you make in these next few weeks will make or break your website, if you think something will happen then make the call but dont it because you think you need to or risk missing it. 1300 dollar gold is a very big statement, your basically saying that gold will reach an all time high, interesting.

  10. Derek's website is already broken. Anyone who pays this guy is a moron. His call for the DJIA to tumble has given many of us who shorted HEAVY LOSSES - whether you covered or not.

  11. Several people I know who do not use technical analysis have done extremely well this past year proving to me that Larry Kudlow is absolutely right - Technical Analysis is just a bunch of goofy charts.

    TA only helps you to understand what has already happened. And I think Derek's calls for the DJIA to sink like a rock according to channels and other indicators floating around in his crystal ball proves this fact tenfold.

  12. Those who followed the leading indicator rode the rally confortable and made ton of money in this market. If I were to pick only one indicator to identify patterns in the market, I would pick the leading indicator.

    So what's the leading indicator telling us now? The leading indicator peaked in October last year and has been going down since then. I expect the indicator to turn negative sometime in May. Hence, one can expect a fall sometime around late April/Early May.

    Keep and eye on the leading indicator. For all claims of massive deflation, the leading inflation indicator was in a upward trend till January which means that do not expect any massive deflaiton in commodities at least for the next few months.

    I am not a chartist but it is obvious to me that one can make money in the stock market just by following some basic fundamental indicators and the flow of money.



  13. Ajay,

    What is the leading indicator?


  14. Ajay,

    flow of money then you must short bonds

  15. Dean,

    The leading indicator is ECRI's Weekly leading indicator (WLI). Here is the link:

    Do not look at the absolute numbers. What matters is the rate of change.

    For example, here is how the WLI looked like from March to June to last year...

    Date Level Growth
    13-Feb-09 107.5 -24.0
    20-Feb-09 105.9 -24.0
    27-Feb-09 105.4 -24.0
    6-Mar-09 105.0 -24.0
    13-Mar-09 105.5 -24.1
    20-Mar-09 105.9 -23.5
    27-Mar-09 106.2 -22.6
    3-Apr-09 107.2 -21.2
    10-Apr-09 107.3 -19.9
    17-Apr-09 107.4 -18.7
    24-Apr-09 108.0 -17.4
    1-May-09 109.7 -15.8
    8-May-09 111.2 -13.6
    15-May-09 111.5 -11.4
    22-May-09 112.5 -8.9
    29-May-09 114.2 -6.4
    5-Jun-09 116.3 -3.7
    12-Jun-09 117.2 -0.6
    19-Jun-09 117.8 2.2

    Notice how the leading indicator had almost stopped dropping in feb and march and actually started improving since March (less negative means better)..

    Within 3 months, the growth rate turned positive. The smart money understood this very well and you know the rest of the story from there. The bears can keep crying that this market is manipulated (the conspiracy theorist) but the fact is that this rally is nothing but a repetition of history. Markets start going up even before the fundamentals start showing improvement. By the time the economy actually shows positive growth, it is already time to take profit...

    I work for a consulting firm and usually the strategy consulting business is always the leading indicator of the general business confidence. They are always the first one to lose business when the downturn hits and are the first ones to be in business when the businesses feel more confident about their future. I have seen the same cycle play out this time too.

    Out strategy practice started doing much better when the technology practice was still losing people. One can already see that the job prospects in the technology area are much better now. A clear indication of the improved business expenditure on technology.

    We may get another recession next year but this recession seems to be OVER..

    Hope this helps.



  16. Sorry Ajay, but you are guilty of fuzzy logic. Looking at those, or any numbers, in retrospect, is little different than looking at the chart trend lines etc. Now if you could forecast those figures ahead of the market movements over a year, and not after, you could be on a winner.

    Now lets look at your statement -

    "......The bears can keep crying that this market is manipulated (the conspiracy theorist) but the fact is that this rally is nothing but a repetition of history. Markets start going up even before the fundamentals start showing improvement. By the time the economy actually shows positive growth, it is already time to take profit........"

    This infers that 'manipulation' 'theory' is something new. It is so old, it is history. What you are guilty of here is something much more hard to swallow and that is 'coincidence theory'. History if you really study it, is full of conspiracies and manipulation especially where the struggle for power. or gaining advantage where large sums of money are concerned. Surely you do not need me to start listing them.

    There was a large one by the king of market manipulators immediately following the battle of Waterloo, before the news of Wellington's victory had reached the London Stock exchange.

    But that was a one off one as there are other occasions that use an 'event' to pull it off (want some more?). The ongoing manipulation uses knowledge of mass behaviour dictated by such naivety as their thinking they aren't victims of manipulation ( and not just in the markets).

    It is not so easy to tell what an individual may do in a particular circumstance, but like animals, when humans act in a 'pack' they are very predictable. And they will fall for the same tricks over, and over again.

    Even the great individual players in the markets have never doubted the 'rigged' game they were playing in, and will use ploys to hide the extent of their dealings such as spreading them over different brokers,

    In the gold market, the large movers and shakers will use every tactic in the book to throw others off scent as to their dealings, and will use 'proxies' to deal for them, and different national markets. And if you do not know this you have much to learn.

    Financial Markets do not make money, they only redistribute it - from the many, to the few. A sort of reverse Robin Hood.

    I will leave this subject here, but I just wanted to present an opposing view for the readers to make up their own mind. If you or they think I am wrong, no problem. The markets prove that the masses think much more as you do. And that is why they always lose. It has to be so. I mean how long would a Casino stay open if the the mass of 'punters' kept winning?

    It's a huge subject and not one for going into deeply here. One either sees it, or they don't.

  17. In fairness to Ajay, I should add that his closing paragraphs do have some merit as 'indicators'.

    That is by watching where, and what businesses are picking up. Especially where money is being invested to bring this about.

    As I have mentoned before, when those companies that live off the gold business stop spending millions on TV advertising trying to get me to sell them my gold, it will indicate to me where the gold price wil be heading.

    This does not mean the price may not 'dip' in the short term. Professionals think way ahead.

  18. I care little whether somebody here thinks of me as a lowly punter from the masses that deserves to be fried in the market. I come here to get and share information that is objective and can be used for investment decisions as per one's risk appetite.

    I am no Martin Armstrong. I am just a small investor who realizes that we are in difficult times and we need to safeguard our interest to the best of our ability. I am sure that there are many like me who come to this blog trying to make some sense of the rapid changes happening around them and I am hoping that we can learn from each other by sharing meaningful information.

    I am more interested in facts than opinions. A satatement that the secondary indices are making new highs with high A-D ratio is more meaningful to me than a general statement that all fiat money is worthless(true, but how do I make use of this information other than buying some PMs as insurance). After all, getting the trend right is more important than being right.

    The fact that I missed the major part of the rally doesn't stop me from learning from my mistake and making better investment decisions in the future. BTW, I have been long on the market for sometime now. My speculative long positions(Ultra long dow and may out of the money options) are in decent profit. I expect Derek's latest SL to be hit before May. Only time will tell whether I am right or wrong.

    One thing looks sure for now. The 2nd half of this year is not going to be good for equity. If Dow corrects 15-20%, expect more than 25% correction in the emerging markets.

    As far as I am concerned, I will be watching the WLI and FIG closely. If Derek's deflationary scenario is to play out, both these indicators will have to drop drastically between now and June. As he pointed out in one of his posts, the current rally is based on hopes and hopes can give way to fear very fast.

    I provided the link to the ECRI indicators and I expect other readers to look at the data themselves to see how these indicators have performed in the past in predicting recessions and major turning points. I will be very happy if we can find something more useful.

    For those who are interested in learning more about the ECRI indicators, here is some more information:

    Another indicator I will be looking at is the ratio of insider buying to selling. Nobody knows the company growth prospects better than the company insiders. The fact that the corporate insiders have continued to sell as the rally has progressed indicates that there is not much confidence in this recovery at a broader level.

    BTW, I am not affiliated with ECRI and my interest in them is to only use their publicly available information for better investment decision.

    Constructive feedback is much appreciated.



  19. David Rosenberg (one of the best economist of our times) on the ECRI indicator:



  20. "....I am no Martin Armstrong. I am just a small investor who realizes that we are in difficult times and we need to safeguard our interest to the best of our ability. I am sure that there are many like me who come to this blog trying to make some sense of the rapid changes happening around them and I am hoping that we can learn from each other by sharing meaningful information.

    I am more interested in facts than opinions........"

    I am sure we all understand perfectly how you feel, Ajay. and your reason for being here.

    The markets are what they are. We have to take them as we find them. There are times when trends are more clear, but then they often all seem clearer in retrospect.

    Even in the wild heady days of the Nasdaq bubble there was anxiety, and fear. It is later when we look back we can see how much we could have made had we got in early, ignored the doomsayers, and rode the wild bull for a while.

    Also, see how we could so eaily have got out if we had not been greedy, picked up our winnings and run,before the bubble burst.

    The world has lived with conspiracies and manipulations, bubbles and what have you throughout history. Like a good sailor must know how to handle the elements by not denying they exist, but using them to advantage, so we must accept the chicanery in the markets.

    All trading whether its manipulated or not creates a pattern. In crime, criminals are usually tracked and caught from their pattern of behaviour.

    As for 'facts' I am more inclined to heed Nietzche when he says that there are no such things as facts, only interpretations. Certainly I believe that in most cases he is correct, especially where the financial markets and economics are concerned.

    For the present I would stick with gold, and trade it. Though they are murky waters out there, and another bombshell could hit the headlines any day.

    We are passing through a huge change taking place, that will take a long time to settle. Great patience is needed.

    Fare ye well

  21. If we look with open minds, look deep, and ignore so much misleading rhetoric, we will see that we are still a 'gold backed' society.

    True, none of the fiat currencies that the common man (that's all of us minions; whether we have the odd $1000
    dollars or a few millions) are given to play with on the giant board game of life, are backed by gold, directly, indirectly they are.

    By this I mean, gold is still the currency that is trusted for all the attributes credited to it over millenniums by the real movers and shakers who control our destiny whether we like it or not.

    'Manipulation', or perhaps a better word is 'control' of the price and movement of such a key ingredient of economies, and therefore social well being of our increasingly tight knit world, is essential.

    The spot price is fixed twice a day - by five selected powerful Financial Institutions, often referred to as 'banks' by telephone. It used to be by a ritual style meeting around a table in London.

    However, the five 'Banks' are still all controlled by the banking dynasty of the family who's head used to chair that meeting.

    This is no more a 'conspiracy' than any
    board of directors who 'conspire' together to ensure the well being of their company in the greater scheme of survival, and progress, in the economic
    battleground that exists in what could be termed 'big business'. It is all part of the capitalist system.

    Having a 'spot fixing' gives the price of gold a point from which deviation can be monitored, and even used to help balance 'inconsistencies' that need adjustment.

    It's a sort of 'point of control'.

    This is an over simplification by way of explaining and emphasising the importance that gold plays in ALL economies.

    To change this would require such an upheaval that it is not worth contemplating, even if one could.

    I still believe, personally, though a few other voices have raised this, that because of the 'derivative', or virtual real, market that has grown over the years, and which has caused such devastation elsewhere, we have today a situation where there is more gold of the 'virtual real' variety 'circulating' than the real.

    This is the problem, that of bringing things back to near sanity, which is the next huge mountain to slowly climb; or for it to be brought down by some quick fix that will bring another financial and economic 'crisis'
    on our troubled world.

    Whether I am right or wrong, I think the gold play is a good one to stick with over the coming years.

  22. Someone things all stock markets are topping:


  23. Katz has a different perspective: