Touching Base.

If you still managed to hold onto the Netflix short, fantastic.  We are now searching for a bottom as the stock has started its C-leg towards the support range that starts at around $42.00/share.  If you close out the position from our $220 short entry, you've locked in about 73% gains to date.  I would recommend doing this as the decline has fulfilled the minimum guidelines of two sequential lows and diverging internal momentum on the latest low.  If you wish to hold on to a portion of your winnings to see if we get into an extended decline (true long-term support is still a ways away, and the long-term trendline from IPO comes in at the low $30's per share through the rest of 2012), I would still be looking to hit the trigger as there looks to be about one good short-term leg left in the downtrend within the next several weeks.  In the meantime, here's an opportunity or two:


There's a perfect place you can take these gains and apply them.  The Ultimate Bubble is sweating out its last few drops of exertion, and the mass exodus is about to begin.  You are lucky enough to be able to grab a seat in the front row to watch the fireworks display, and hopefully churn out a boatload of money at the same time.

The greatest bubble in human history is in sovereign debt.  The swiss yields just hit record negative territory this week, as well as German bunds.  The USofA, the most indebted country in the history of the human race (try some GAAP accounting on those government books, and you'll come in closer to $90 trillion than $15 trillion), just saw bond yields below 1.5% over 10 years while inflation rates are coming in over 2% (CPI basis).  People are literally paying governments to hold on to their money to keep it "safe".  The euro crisis has caused widespread fear and turmoil, the balance sheets of the old players are a zombified mess and will never be sorted out without true bankruptcy and auction-style liquidation by creditors (although for half of the financial instruments in those dark, moldy vaults, nobody could tell you the counter-party as it is).

I recommend a fully leveraged short position on long term US treasuries.   Not only that, if you can find an instrument to do it with or have an investment banking account overseas that allows it, short Swiss bonds at maximum leverage, German bunds at maximum leverage, and Japanese sovereign debt at maximum leverage.  The house of cards will completely crash over the next decade and people who are in position early to benefit from it will be handsomely rewarded.  Think shorting subprime in 2006, but hundreds of times the scale and without any collateral to speak of for debt holders.  The only collateral you have as a bond-holder is that of politicking and central banking, which history has demonstrated time and again is absolutely worthless.

As for gold and silver, they have been dredged pretty hard over the past 14 months.  I would have thought that the dredging would have been even harder (it may be much harder yet for silver if the credit contraction starts sooner than later, as it is more sensitive to economies and doesn't bear the same monetary premium as gold).  I have raised my maximum downside target for gold to $1300, and silver to $18.00.  both could turn earlier than that, as the next 3-4 weeks should show if the technical reset is completed with diverging internal momentum indicators and dollar-weighted volume measurements (momentum "less-down" while prices make a final low).

The HUI has retraced heavily, shedding 40% off its peak at $625 to its recent low at $375.  I recommend opening up smaller positions on established gold miners and purchasing small cap gold stocks who have completed the majority of their operational financing or are newly beginning operations.  Financing might be very hard to obtain through any of the traditional channels in the not-too-distant future, even for gold miners.  This might be a boon for solidly-positioned players who have lots of cash right now, as it will present some excellent buyout opportunities at fire-sale prices that could have hefty long-term payouts. Always do your homework on gold companies as there are hundreds of promises flying out of offices these days while there might be 5 or 10% of the exploration projects that actually end up being viable, and at that point there is still the difficulty of financing (or hoping and praying for a buyout or partial royalty sale).

With the price targets for gold and silver near at hand, I recommend re-commencing cost-dollar averaging into the metals.  A new program offered for gold holdings that is actually allocated and regularly audited, and allows for delivery once you have reached a certain amount, is my top recommendation as a method to acquire precious metals regularly and reliably.  It can be found here, and makes buying small amounts of gold or silver as easy as popping a cheque in the mail or setting up a wire transfer.  The most important aspect of this is serial-number allocation and delivery options, which synthetic instruments like GLD and SLV do not offer.  You can purchase gold, silver, platinum, or palladium, as well as swap holdings (if you are like me and do ratio swaps based on historical averages to increase total metal holdings without paying anything extra).

I am still expecting the US Dollar to rally in a big way over the next 1-2 years as credit contraction continues.  Over at shadowstats.com, you can see John Williams' work in compiling M3 data and tracking the other monetary measurements.  It will pay to keep your eyes peeled on the aggregate money measures - the world is awash in a tsunami of debt denominated in USD's, to the tune of hundreds of trillions of digital dollars, with an actual cash base of reserves, including money market holdings, at just over $10 trillion.  Something has to give, and something will.   The world is overleveraged at over 30:1, in USD terms.  Just let that mellow for a little while.

I still recommend holding as much physical cash as possible (do not leave more than you have to at the bank) along with your precious metals holdings, and avoiding the long side in almost anywhere that hot money is headed.  The few exceptions to this are in fertilizer producers with strong balance sheets and price:book of less than 2:1, farmland in cheap locations (saskatchewan, some parts of south america, etc.), uranium holdings that have a lot of cash on their balance sheet and minimal debt, natural gas holdings with lots of cash and low debt levels (emerging technologies as a result of the new abundance of the substance are making it a viable competitor for oil in a host of new areas, which should keep demand steady on the upswing for this much cheaper energy source), and a few technology stocks that have been absolutely crushed in the past 12 months, even while their prospects have improved and revenues have started to come in.  I'm not going to touch on those now, but I may in future.  As far as tech goes, look for actual viability (demonstrated performance as opposed to pipe dreams), anything that can make the physical world cheaper or more capable that poses a challenging to an existing solution to a problem.  This is the place where foresight and optimism can make fortunes.

The next couple of years are going to very interesting.  We've been floating along on a plateau with two giant monsters fighting it out as to which direction markets are going to go (Do we get long-term capital destruction coupled with huge inflation, effectively wiping out savers, producers, and lenders?  Or deflation that wipes out borrowers and hits the reset button on money levels and, hopefully, money itself?).  My money is on deflation, as we are at the tail end of a multi-decade trend of credit expansion and an almost-insatiable hunger for debt that has never been seen before.  Governments are the last onto this trend, as they are the last to any trend (hence the biggest-bubble-in-human-history - bonds).  The US indexes seem to be the last stalwarts of hope in any developed economy, and we'll soon see if hope (and central bank largesse, exacerbating it) is enough to really form a trend.  Or if we've begun to finally slide down the next leg of bear market and are taking a ride down the "slope of hope". 

As I see interesting things I will post on them periodically, and if I come across any good short term opportunities I will let you know.  Otherwise, stay safe out there!
-----------------------------------------------


Ed, I decided to write up a response to you, but the character limit on comments is too large for what I typed it up, so here it is:

Hi Ed.

I plan on posting a study I've been putting together over the past few years about some of the misconceptions about the Federal Reserve - one of those being that their rate-setting is done arbitrarily and based on their idea of "stimulating" demand for the economy, focused on total volume of money (and no, this is not a justification in any way for monopolization of money, fiat currency, just trying to bring a greater understanding to investing in the markets we are dealing with NOW)

Their rate actually short-term lags the T-Bill rate, to a correlation of almost a perfect 1:1 with up to 90 days delay. 

Interest is two things.  Time and Risk.  It is affected by the overall supply of loanable money when banks are not insured and have to attract deposits from a limited stock (market based monies like gold and silver), however the principle is similar even within the banking cartel.  If the money supply/base money available to banks is high, the rate of interest will also be low - the value of time is not as high when supply is high.  On the opposite of the chart, if loanable reserves are dried up, banks will price the time-value of money higher.

Risk is the other factor, which plays large roles and lesser roles, based on overall market conditions.

There are currently about $75 Trillion in open debt instruments floating around the world, denominated in USD's.  in order to repay a debt, someone must repay it with cold, hard currency.  There are two things that have kept the debt-system afloat - The issue of new credit, which is converted to deposits (considered as good as cash, since your deposit slip is just a short-term IOU from your bank to redeem the cash if you request it), and the fact that the majority of money sloshes around within the banking system, since most transactions are done electronically these days.  This creates larger overnight and short-term liabilities between institutions than any time in prior banking history (see 2008 for an example of what can happen when overnight markets stall up, even for a short time).  BUT, these deposits or pseudo-deposits (deposits that exist only because a commensurate loan has been issued against them by the same or another financial institution) are still only promises to pay.

Actual physical cash is in an amount around the $2 trillion mark, supporting a system of around $75 trillion (this is not including derivatives and government unfunded liabilities, which put the total amount of debt worldwide at somewhere between the mind-boggling amounts of $500 - $700 TRILLION dollars, or 10x+ the world's GDP).  The system itself is leveraged at over 30:1 against hard currency, which is what everyone will demand once the credibility of borrowers begins to come into question.

What we will likely see as far as the US government and other western governments are concerned is that their ability to repay any debt is mathematically impossible through the normal channels of taxation/seizure/theft of assets.  Especially with the absolute tsunami that all markets have been throwing at them for the past 4 years, which has created the paradoxical effect of allowing for multiple times the typical amount of debt to be serviced and rolled over into extremely low-yielding shorter-term securities.  The maturity rates for western government debt will hit more than 20% of world GDP within the next 2-3 years (assuming a rosy 3-4% increase in world GDP YoY, to boot).  That is 20% of all the world's capital stock just in refinancing issues, not even new issue of debt.

As credit contracts, it is harder and harder to get your hands on cash.  The first phase of deflation usually results in yields diving off a cliff, followed by spikes in yields for anything with a modicum of doubt as to its viability.  The US government is in a mathematically worse position than most of the EU, Japan is in an even worse position than EU or USA.  They are great shorting opportunities, although you have to account for currency loss, especially in regards to Japan.

My personal strategy on Japan is to short the long term government debt, and at the same time hedge against inflation (Japan's bear market is in its final stages, whereas the US's is maybe halfway done) that will come with a rising equity market and real estate market.  Basically - short anything Japanese government, long anything high-quality Japanese business (some of the yields over there are incredible and the cash-flow is far higher than anything you could find here at those prices).

Anyway, this post went on more than a paragraph or two longer than I had originally intended.  Thanks for stopping by.  I apologize to everyone that my updates have dropped off the map.  Trading has been insanely slow and these are the first positions I have opened up in a good, long while from my cash account.  Business in the brick and mortar world has kept me hopping the last 12 months or so, but hopefully as fall rolls around it will slow off a bit and give me a chance to post some of my swing trades and options plays.

All that Glitters....

First off I am going to address one of the few open recommendations I put up in my last post. 

This trade has so far panned out to plan.  After a final surge and throwover the upper trendline to complete the entire pattern from $17.90 / share, the stock is entering a large corrective stage that should play out over several more weeks and possibly months.

Initial taget is the gap-fill at $183.00, where a close-out of 50% of the trade would be wise to lock in some profits.  Stops can be hiked down to just above potential retracement point at roughly $223.00 per share, right above a gap-fill that could draw prices up in a counter trend move.

After this, the price should break free from the channel to the downside and offer higher profits.  Stops can be rolled down to accomodate.

I am still holding no position in US Treasuries as I think they have at least another several weeks of rallying ahead of them.  The move thus far indicates this is the case and is nowhere near enough to be counted as a full counter-trend move.  That being said, the next move in treasuries should be a hefty one and having some cash positioned to take advantage could prove extremely profitable.  In the next leg I plan on shorting TLT instead of using TBT as I think the % losses in terms of actual dollars and cents will be far higher than the % gains in terms of dollars and cents with TLT.  I will once again be using a direct short-sell coupled with options plays.

 

GOLD AND SILVER

As to my writings in the past on gold and silver, the metals have relentlessly pounded higher making me look like a fool in the past while.   My only saving grace is  the fact that in fall of 2008 I was scooping up physical metals and buying silver and gold miners like crazy.  The fact that I sold the stocks or "lost" them to cash buyouts by late 2009 still left me with the lion's share of gains in equities terms, and I haven't sold a gram of my physical.

My position, for the umpteenth time, on the metals:  If you don't own any physical metal at all, you should.  Regardless of hype or hate, they are money, they have functioned as money more than any other item and always in the most advanced economies of history.  So, if you don't have real money, you should really get some.  It's a lot more likely to survive than cash in a house fire (although I do recommend keeping some of that under the mattress, proverbially speaking, as well.)  Is it a smart idea to take a huge block of cash right now and throw it into metals for savings?  Smart no, but you could do a lot dumber.  I would suggest averaging in and treating it like a constant deposit savings account.  I frequently purchase my silver from NW Territorial mint and have been very happy with their product lines and delivery times.

That being said, gold and silver in the mind of the world is not money just yet, but an "alternative asset" to traditional ones.  Precious metals are traded in an intangible financial market for the most part, and as such are subject to the exact same emotional and powerful forces that any other financial asset is subject to.

The recent run-up in commodities in general has not been the subject of "fundamental" factors.  It has not been the subject of massive inflation.  It has simply been the subject of a "reflationary" period in pure psychological terms in which optimism has multiplied to both set new records and match previous records set in the 2008 highs.  The Daily Sentiment Index for Oil reached 95% this week, the same reading it hit in 2008 within a week of topping out at 144.00 / bbl and crashing an amazing 78% in a mere 5 months.  Does a 95% DSI reading by itself signify an imminent top?  No.  Oil looks to have a bit of room to run, but I am sharpening my short stick.

This type of one-sided psychology is prevalent in the commodities markets, with virtually all metals - including gold and silver, grains, oil, and many other commodities all reading 90% + readings of Bullish participants.  This is not a healthy market, this is a massively one-sided market that needs to unwind and potentially completely reverse the level of optimism.  Some of these market have already recently rolled over after rallying in tandem for many months, and others are still eking out new highs.

Gold's psychological position is similar to silver, although not quite as extreme.  Interstingly, gold is having a much harder time confirming the peak price in silver, and the HUI is having a hard time confirming the rising price in gold.  The precious metals market is diverging within itself outside of simply waning internal momentum.  This fracturing is often seen in significant broad-based tops (DJIA versus Transports, according to Dow Theory, is a high-probability of an impending reverse of trend).  I believe we are witnessing such a peak at the same time as inflationists believe we are now (finally!) entering the period where inflation really accelerates.

I do expect gold to eke out a new high above this one, however this is not a time I would be adding anything "glittering" to my portfolio.  Sentiment is at a long term extreme and this is becoming a band-wagon trade in the immediate term.  The faith that proponents have in its continued rise is remarkable.

Even Goldman Sachs posted a report at the start of the year stating that they expected the average gold price to be $1650/oz, 15% higher than the current levels.  Major gold producers like Barrick Gold, AngloGold, Freeport-McMoRan, and Kinross have strong coverage from analysts, with less than 5% offering an opinion as negative as "underperform" and 0 recommending to sell.

All of this after a move like that.....  What were they saying in 2001 when the last analyst covering the market finally threw in the towel and Barrons said "I see literally nothing good about gold right now"?

Those are my current thoughts on gold and silver.  The silver short is still in play, and I have currently moved my stop all the way up to $37.50.  So there is some significant downside risk to this trade if the price rockets to the moon like everyone is betting.  The reason I'm holding out is that everyone is betting, outside of the commercials and the devlish JP Morgan Chase, that silver is a bull's dream.  This is a mature price structure with a one-sided retail participation that has jumped immensely in the past 12 months.  A move of this type, once it reverses and regardless of the asset since they are all subject to the same herding forces of participants, turns quickly and profits can be made blazingly fast.

Best of luck out there.  More thoughts on the broad markets as a whole coming soon.

Cheers!

Derek.

Very Quick Update on Closing one Open Position

At the end of August last year I published This chart:

And intiitated a long position on TBT (a short position on treasuries) due to the terminal pattern and nearly unprecedented optimism.

Since that time US Treasuries have significantly fallen in value, even as QE2 put a guaranteed bid on the billions of dollars per day traded in these bonds.

As of today, optimism is fairly negative towards treasuries even as it is extremely elevated (setting records dating back 20 and even 50 years, by some indicators!) towards stocks and commodities.  Now is a ripe opportunity to close out this trade, both the options contracts and the actual holdings of TBT that were initiated 6 months ago.

I have sold the shares of TBT at $40.85, and the March 2011 $30.00 calls purchased at $3.80 for $10.65.  The gains realized on acutal stock are $7.15 per share for 21% after trading fees, and a very nice 180% gain on the options plays.  It is possible that TBT could have a final breakout, however I think that if the market turns in the next week that treasuries are going to rally hard as most investors are taken completely off-guard.

Another interesting tidbit is that Hedge fund inflows in the fourth quarter of 2010 were $9 billion over the previous all time record of $140 Billion set back in June 2007 (just a few weeks prior to the Dow Composite index and within months of virtually every investment market in the world rolling over and eviscerating over $10 Trillion of "wealth" in a matter of months versus the years it took to build.  Investors are all in, belief in the rally is fully charged, and the time is ripe for a historic reversal. 

Although the numbers in the economy are back up to levels seen at the peak in GDP, the wealth transfer has shifted trillions from productive entrepreneurs in soceity to wealth-destroying operations directly run or indirectly overseen by the State.  The foundations supporting this belief are even more fragile than in 2007 (not just debt this time, but the belief that some sort of "benevolent overlord" can manage the economy and direct capital in a matter that is a net benefit to society.)  This belief will not only be challenged but completely shattered over the coming years, especially in regards to the Federeal Reserve's "control" over the economy, interest rates, and total money supply. 

I'll be in touch soon.  Hope you're enjoying the snow - we have more than twice the usual winter where I hail from (And everyone was so invested in global warming just a few short years ago...).

Cheers!

Derek.

P.S. I don't know if anyone has paid attention to NFLX (kind of hard to avoid, given its manic cannon-launch to the stratosphere over the past year or so.)  It is forming a terminal pattern even now and is due for an extreme set-back in the very near future.  If you have the cash available, and the stomach for it, it looks like an ideal short-sell.

It's currently trading at nearly 40x its book value and just under 75x it's earnings.  It pays no dividend.  Have fun with it!  (it's also a weekly parabolic rise starting around $18.00)  Moving average and momentum internals are making lower highs even while the stock is rocketing up, and Money Flow topped out in the initial 150% run off the lows in 2009.)  I'm recommending a small, speculative short sell position at current levels.  That being said, the current channel it's running and the terminal pattern currently allows a throwover to the $235.00 -$240 level, although it is not required and the trade is fantastically one-sided.  Here's the chart:

Best of luck out there.  I'll be responding to the load of emails and comments on gold and silver shortly.

Silver's "Double Tap" is a Strong Sell Signal

Silver broke to record highs again today, screaming up to another 30-year peak and above the $30.00 / oz mark.

This is where I am going to take the opportunity to hedge against potential losses in the physical holdings I have accumulated for the past 8 years, as well as a great trade setup.

As of this moment, gold has not confirmed silver's high which is a telling sign of massive exhaustion in this rally.  While gold bugs and silver bugs the world over are sure to be proclaiming "this is it!", there is a backdrop of unfettered optimism towards their "sure gains" that raises the warning flag.

• A smattering of recent DSI readings on gold and silver above 90%
• Waning internal momentum on each new push higher
• Most demand increases for the metals have come from the "investment" (speculative) side of purchases versus more practical and sustainable levels of demand
• China's recent approval of a sovereign wealth fund to invest specifically in gold and silver ETF's around the world
• COMEX's reserve requirement hike (similar to 1980 in silver's major top)

There are plent of other factors to consider, including this:

For the uptrend starting in 2001, silver has met this resistance line on 3 previous occassions and suffered declines of at least 30%, and each decline has been larger in percentage terms.  Silver "double-tapped" this resistance line as it shot to new highs two weeks ago.

As a hedge against losses in my physical holdings (I will use the proceeds of this trade to purchase more physical in the future), I am short in the futures market at $29.92.  I have also opened up several options trades on the SLV ETF with April 2011 and June 2011 expirations.

Initial trade target is $20.00 after which I will close out 50% of my futures shorts and 50% of my options plays, and $14.50 or a terminal price pattern after which I will close out the remaining portions.  I will keep you updated on this trade as it plays out.

My stop is at $32.25 pending another small spike for a potential total loss of roughly 7.5%, with upside potential of 32%.

Best of luck out there.

Derek.

Telling Bar Patterns and Record Volume

This is going to be a quick post.  Silver is in a blow-off top stage, as mentioned in my previous post, and in commodities these are generally spectacular, immensly participated in, and that the subsequent crash is usually at least as breath-taking as the run-up preceding it.

Gold, Silver, and the HUI all had daily reversal bars today - quite a feat considering all 3 popped to significantly higher record highs right off the open.

Silver was an interesting case, holding on to more of its gains than its more valuable cousin.  That being said, the intraday trading range for silver was around $3.00 / oz, and the SLV ETF volume was a record-shattering 148.42 million shares traded on the day, just under $4 billion (this is equivocal to about 150 million ounces of silver, roughly 1/6 of the average worldwide yearly silver production for the past decade.  In a single day.)  The past two trading days on the SLV have ousted every weekly volume record for the ETF since its inception.  This appears to be a week to remember for silver.

A closer look at the intraday action reveals that, besides the overall wave of volume, the behavior was that of distribution and very strongly.  Volume spiked with each reversal and waned swiftly as the ETF attempted to regain lost ground.

Is this (finally) the start of the major decline in silver I have been calling for?  Right now, it is extremely difficult to tell - probabilistically silver is due for at least a significant correction, and it should find itself back within the confines of the channel, at a bare minimum, if it is to try another rush into a blow-off yet again.  If this is the start of the larger, more protracted decline, then silver should swiftly plummet below the $20.00 / oz mark and smash through a few significant support levels.

To further solidify the position of at least a near-term trend change, on final intraday correction and push lower is required tomorrow before an upward move of 1-2 days would take place.  If silver immediately turns in the morning and attempts a thrust upward, a break of  $26.96 on the SLV (27.81 COMEX futures spot) would indicate another rapid thrust higher to finish off the move.

If you are long gold stocks, silver stocks, or anything in the "paper" arena of precious metals investing, be extremely careful.  The volatility experienced in these markets was vastly more intense than that in the rest of the North American stock markets, and could be a precursor of things to come in the very near future.

Have a great week!

Derek.

P.S. - A quick afterthough of some significance:  It appears, judging by the last several days of behavior, that the US Dollar has finally put in its low against the Euro and is quickly starting the largest part of its multi-year rally that began in 2008.  Forex traders long EUR be wary.

I am anticipating this pullback in stocks to accompany a run-up in the dollar, and then the final peak in the broad US indexes to accompany a higher low in the USD within 1-3 months, whereby markets will jive back up and start moving more in tandem.  I will post some chart hypotheses on this in the near future.

What people DO.....

True believers in a massive deflationary wave are few and far between.  In fact, among professional analysts and more "renowned" forecasters, you can count the number of real deflationists on one hand - maybe two if you stretch things.

The large majority of forecasters, and more importantly the investors who listen to them, are predicting inflation.  Hyperinflation is a fairly common term these days, one can hear it frequently by flipping on a major financial station.

However, talk is talk and talk is cheap.  It requires no investment other than a few breaths or clicks on a keyboard.  The place to watch is where people are moving their money.

I have mentioned in this space before about the fallacies of "efficient market theory" and also about "market manipulation" (one of the most commonly used excuses by traders and investors alike for why they lose money).  The market is a singularly interesting composite of activity - millions of people gather together every day with their excess (or not so excess) capital to find a place to compound it.  They do so via a foggy window, in that the information on what they are buying is extremely limited and the things they are buying are intangible. With such a limited amount of information, people naturally revert to the same mechanism that most do when seeking safety or advantage in physical life - they follow what other people are doing.

Most investors and traders are not aware of this phenomenon.  It is a totally natural impulse, the same type of impulse that organically makes humans form lines or walking-lanes in busy foot-traffic.  This is why such a small percentage of traders can be successful over the long term.  Objectivism and discipline are two keys to successful trading.

But I'm not here to talk about successful trading in the aggregate.  I've found a few interesting tidbits that I believe might be setting up the market for its next wave down (and in response to the market downturn, the next serious bout of monetary deflation - right in time for "QE2").

For the first time in 6 months, net inflows into US Equity markets were positive for two weeks in a row.  US Equity markets took in just under $2.8 BIllion dollars last week.  This is the first time two consecutive positive inflows have occurred since, you guessed it, just prior to the April 26 market top.  That in and of itself is not a damning piece of data for market behavior, however within the context of the past several months it is very pertinent.

The story of municipal, regional, and corporate high-yield debt continues to play out and is, quite simply, a ticking time bomb.  Since markets are still yielding a very bearish low dividend in a historical context, investors have been flocking to Junk Debt in order to start getting some kind of return on their money.  The obsession with yield and the flagrant disregard for the security of their principal investment shows that the underlying acceptance for highly-speculative "investments" is still engrained in the mind of the average investor.

Bond Up/Downgrades are at a bearish extreme seen only just prior to the Dow:Gold peak before the turn of the century.

Sentiment measures are extremely one-sided across all markets.  90%+ Bullish readings on the short and long term DSI are spread across commodities like Gold, Silver, Copper, Sugar, Cotton, currencies like the Euro, all 3 US Equity markets, US Treasury bonds, etc.

Meanwhile the US Dollar's DSI is flailing to stay above 10%, and has experienced one of the longest periods on record with a DSI reading below 15%.  Internals on each subsequent high in stocks, bonds, speculative currencies, commodites, et al are weakening at each new wheeze higher.

All markets are lined up as a massive one-sided trade.  Double-speak on commodities runs rampant, including things like "x will go up if the economy improves because people use it more and demand will increase." and "x will go up if there is a depression because people run to it as a safe-haven".  There is a host of reasons people cite.  The most popular reasons generally encountered are:

• Inflation - ' "money printing" by central banks will cause the price of commodities to go up.' - Ignoring the fact that in a wave of pessimism no amount of QE, or whatever label people like to put on it, will change the fact of total monetary contraction, this is one of the most commonly cited reasons for commodities' (especially precious metals) perpetual rise in price
• Central Banks are Buying Gold - central bank buying increases demand and therefore drives up prices.
• Investment Demand - while investment demand has certainly increased, this demand is speculative - Buying for the sake of investment is buying with the expectation that someone else will be willing to pay you more for what you purchased at a later time.  Since the price-demand curve of finance is the mirror opposite of the tangible economic world, this does not bode well for future participation.
• The "Mania" Stage is not here yet (Mostly cited for Gold) - The expectation of average investors and even those newly entering the gold market is that at some point in the not-too-distant future flocks of thus-far-non-participants in gold's 9 consecutive annual up-closes will drive gold into the stratosphere.  While this may or not be the case, the one-sided expectation that there will in fact be a gold mania, just as there was a tech-stocks mania, a real estate mania, a commodities mania, etc. is generally a precursor to something drastic happening that is the mirror opposite.

Inflation fears are so rampant right now that TIPS Treasuries actually traded up to a negative yield recently - this means that people are so worried about protecting their cash against future losses via inflation that they are willing to pay a small percentage just to insure against that chance.  With the DSI on Treasuries hitting 98% recently, they are one of the ripest short opportunities on the market.  What people are DOING is raising a massive red flag to me that expectations on inflation are in the red zone, meaning the probability of seeing $5000.00 gold in the near future is extremely slim.

 Gold appears to have put in its major top, although with the non-confirmation of silver being erased after 2 weeks we could see yet another stab upward above the upper channel line on both metals.  It's movement patterns thus far suggest it is the first asset to have topped out and should soon be followed by a plethora of others.  I have not accumulated any physical metal since gold was below $900 and silver below $12.00 and I will not be purchasing any more until they are well on the way into their downtrends.

As for stocks, there are quite a few good shorts out there now.  Some of the "Darlings" of the recent rally, including Amazon and Google are extremely overvalued and have seen hugely optimistic readings for the past 2 months.  The entire market is elevated and stretched and barely wheezing along.  If I see a definitive turning patter play out I will post it as soon as I can.

I apologize for the lack of updates for the past 6 months.  I have been doing a lot of consulting work on the side lately and only made a few multi-week swing trades in the interim outside of my core positions (Long USD/short Euro and short US Treasuries long term via Put Options.)  I'll try to pick up the volume of my posts through winter as the markets become more volatile.

I hope all my readers are doing well.

Derek.

The Treasury "Bubble"

A huge majority of investment "experts" and pundits watching the action unfold in the treasury markets have been treating the recent upswing in prices as its own little corner in the big picture.  Investors and advisors alike regard treasuries as relatively insulated from the rest of the markets, or at best correlated in an inverse manner.

However, when I look at treasury bonds, all I see is a tiny piece of a much larger puzzle.  Seeing the forest for the trees, as it were.  That forest is the debt saga that has grown and bloated and expanded for over 70 years, resulting in the largest financial bubble ever to grace mankind's irrational nature.

The treasury market is more like a stop in the game of hot-potato.  Investors, fund managers, pension funds, et al, are trying to find a safe place to park their cash and make some money from it.  From securitized consumer debt to corporate bonds to munis to regionals to treasuries.  The hot potato gets passed along.

Municipal bonds are a disaster waiting to happen.  This has been well-documented by some very astute observers and I won't touch on it now.  Everyone and their uncle already knows the story with securitized consumer debt - that's been old news since 2007.  State bonds are starting to become highly questionable - some states, like California, have a higher probability of default than Portugal.  Foreign sovereign debt prices have been dropping consistently as sentiment towards debt once again resumes it pessimistic shift.

The last domino to fall, then, is Treasury Bonds.

Long-lauded as a safe haven, due to the state's ability to use its monopoly on violence to gain funds and its political ties to the printing press, Treasury bonds have had quite the run of late.  Virtually no one is bearish on this final domino in the debt bubble (98% bulls registered on the DSI last week).  While we could see a pop in bond prices, this move is exhausted and near its end.

I have written before about how a deflationary environment can still drive up yields as the probability of debt repayment drops drastically with the contstriction in available free cash.  This should be the reality of the situation over the coming years.

The moral of this story is:  Treasuries aren't in a bubble - debt is in a bubble.  Treasuries are just another name for the same thing - someone taking on an obligation they cannot repay.  We are unwinding several generations of positive sentiment that morphed into a mania - this is not a slow and easy process. 

And a classic pattern to end the move in a classic "safe haven":

As you can see, this is not a pretty picture for long term Treasury holders.  The coming move is going to take millions of investors, pension funds, traders, etc. by surprise. 

As such, my recommendation is this:  Short Treasury Bonds - the longer term the bonds you can short, the better the results will be.

Have a great week!

Derek.

Update for August 11, 2010 - The Breakdown

In my last forecast I wrote that the highest probability was that the Dow would push to new highs before rolling over.  The ideal scenario called for a burst above the rising trend line followed by a quick reversal, which would kick-start a resumption of the larger-degree bear trend.

While the upper trend line was still over 80 points from being breached, the market behavior still met the psychological criteria - a sharp drop on Aug 6th, followed by a solid upward swing that sucked a large number of players in who had watched the same thing happen to smaller degrees the previous few trading days.

This was followed by an immediate reversal, with 2 trading hours wiping out the previou 7 1/2 of hard-wrought gains.  Today's 250+ point hammer-down in the Dow, with the market barely able to pick itself up at all during the whole trading session, indicates that there is a high probability the game has changed, and we have reversed trend.

To add strength to this thesis, the USD put in 3 up-days, with today being an extremely strong move, wiping out the previous 9 trading days of losses.  These moves are sharp, scary, and leave financial analysts scratching their heads as the only news has been the Fed's return to QE and moderate caution regarding the economy - but shouldn't, according to faulty cause-effect market models, QE mean that stocks will go up?  Stocks rise when money is free, right?  Inflationists are hopping about, saying "this is gold's ticket to the stars", and "inflation, inflation, here we come!".  And yet.....

M3 is currently contracting at its fastest pace since the 1930's

This is actually a huge fallacy as history will show that, more often than not, stocks rise as interest rates climb - but that is a study for another time.  Here is the market update for August 11, 2010:

This is a weekly chart of the Dow running to today's close.  Notice that the April high was an almost perfect .618 retracement of the entire first bear leg from Oct 2007 to March 2009.

This hourly bar shows that the Dow has decisively broken down from the bearish rising wedge pattern.  Momentum continuously slowed and, while hype and "phew, it's over" became more prevalent, this market rolled over and has caught most by surprise.

Notice that this current correction, the same bearish sequence as the one showed above on the weekly Dow chart - although two degrees smaller - retraced to only 10 points above the .618 before rolling over.  An ideal retracement target, this leaves huge bearish potential for the next several months, and we should see the Dow take a haircut of at least 2,500 points.

Further techincal evidence for a change in trend is a weekly reversal bar, which today's downswing has formed.  Even if the market manages to eke out a 200 point rally from this point through Friday's close, the bar is intact.  It will take a huge burst of bullish activity to erase the potential for a bearish turning point, something for which the odds are fairly low.

The only other reversal bar, either bearish or bullish, in the past 18 months is the April 2010 market top - the Dow subsequently lost 1600 points.  Since this stage is the "majority in" part of the move, whereby the majority is on with the trend, we should see a larger loss in percentage and point terms.

Gold, since I forecasted a top in late November, is virtually net sideways from that point.  Gold should begin to roll over more quickly with the rest of "risk assets".  I will be watching it closely.  The nonconfirmation between Gold and Silver going back to March 2008 (and even further back to 1980) still stands, and gives weight to the bearish case for both metals.

Momentum has continued to wane just as hype and general acceptance has grown.  The recent high in gold saw similar participation on the futures to the March 2008 high.  A decline of similar or even slightly greater magnitude is in the works and should provide gold bugs who aren't too disenchanted the chance to pick up the metal much much cheaper.

Our oil trade still stands, and it appears that oil is rolling over into a larger stage of decline.  This should take oil somewhere into the $50.00's per barrel and possibly even lower.  Our final target for oil is below the fall 2008 low.

Best of luck.  If I don't get to doing an update before the weekend, enjoy it!  Get outside and take advantage of the summer - only 5 weeks left until fall arrives.

Derek.

3 Charts and a Happy Friday!

I just have 3 charts today, all of the Dow Jones Industrials.  Just a snapshot of where we are in history.  My position on other assets (gold, silver, USD, oil, etc) remains the same;  We are either in the earlier stages of a major decline (silver, gold, oil), or starting major trend turning points, both bearish and bullish (Dow, S&P500, $USD, Euro).

Something to contemplate.  Have a great weekend everyone!

Derek.

Did the Market's Corrective Pattern Top Out Today?

I have been warning investors for many months now that this market is going to suck in the maximum amount of long participants before beginning its larger-scale decline.

Today's gap-up from the open was a very high probability exhaustion-gap which carried the Dow to a new intraday recovery high.  From that point on, prices started falling immediately and the movements look extremely impulsive.  This indicates that a new trend has developed.  Chances are, the correction going all the way back to June 8 is complete, leaving huge potential for downside all the way into Dow 8,000.

Gold, silver, and the stock market have been moving in a high-correlation lately, and with gold's turn down from all-time highs to rapidly break down from its rising trendline, it appears likely that a minimum target of $1000.00 / oz gold could be met sometime this fall.  Silver's initial target is $14.00 / oz with larger bearish potential as time goes on.

Another fantastic trading opportunity is in oil, which we recommended a short position on several months ago at $86.00 / bbl - Crude's downside potential is into the $50.00 / bbl range which makes this an extremely high-profit short potential.

The Bottom Line:  Virtually ALL asset classes without exception should decline in tandem as the next phase in the credit contraction gets rolling.  The USD also appears to be either just completing its multi-week correction or within days of doing so.  Once this trend reverses watch out.  Gold and silver are not an exception to this rule and they should decline in tandem with stocks, commercial paper, and other commodities.

While central banks around the world have beent trying, and will continue to try, to pump liquidity into the system and inflate credit markets, this activity has exhausted all their ammo and will soon exhaust their credibility.  This is a positive for the future as massive deflation will destroy many "wise" central bank balance sheets - these cartels have left themselves exposed 100% to current market forces and foregone the usual safe-falls.

The question might just be:  Who will bail out the Fed? 

The coming market behaviors will be one for the history books.  Make sure you have your cash safe (keep a significant reserve OUT of banks), and for investments are purchasing the safest cash equivalents in USDs.  When there is actually a real chance of inflation you will read about it here and the investment strategy will change to ensure that purchasing power is retained.  Until then, deflation is the name of the game and many will be taken by total surprise.

Make sure you aren't one of them.

Have a great week, and enjoy the summer days.

Derek Blain.

Opportunity: Made?

In my last article I covered one of the companies directly involved in the oil spill, and suggested that more downside was coming.  This, I also asserted, would be partially affected by a slide in the price of oil.

That was on April 29.  Since then, we have seen a significant correction in stock markets the world over.  Furthermore, since pointing out that (despite being the "darling" of the world in economic terms) Asian markets were getting ready to roll over once again, they have done just that.  Shanghai's market has now surpassed the 20% drop point from its market high, putting it into a technical bear market.  On April 28 I posted that another drop in the broad US markets was also coming - at the time, I didn't foresee a 1,000 point candle.  However I have written in the past that during this next major leg down parts of it will be so furious that it might be unwise to be a participant at all - what's the point of being short if you can't close out your position?  We saw erratic and erroneous behavior on several tickers last Thursday, including transaction prints running 25% in or out of the money as the entire side of a Level 2 was blown away.

A slew of emails in my inbox since Friday have continually asked the question "was the 1000 point drop in the markets a computer glitch?", or something along those lines.  In short, no - it was not.  In fact, the reaction to such a drop begs the question in regards to financial assets as a whole;  If a massive drop on last Thursday was immediately disredited as a "glitch" in computer trading, then why was a 14-month record gain posted yesterday accepted with smiles and gratitude?

Oil has suffered a quick haircut since I posted my turning point on April 29, down 12% - along with it, RIG continued its slide by another $10.00/share.  While the US Government may place a moratorium mid-term on offshore drilling to appease the beating these companies will take, offshore drilling is going to be one of the cornerstones of world energy for decades to come and RIG will be there to profit from it.  (For an Austrian Economics perspective, and one that I certainly share in regard to this incident, I encourage you to read this excellent article by Murray Rothbard)

I am not buying shares yet, but they are looking more appealing than they were 3 weeks ago (down 24%).  Our other recommendation, STD hit our Wave 3 target of the low $9.00's and has surged up to just under maximum retracement - any break of $12.36 indicates the mid-term downtrend is over and a bullish run is to be expected.  Our stop is set just above this point, with our closing target still set at below $4.87/share

GOLD AND SILVER

Gold has broken its all-time high today, negating the current bearish forecast I have been working with since late last year.  Despite this, at least a minor correction is to be expected with the current DSI levels reading 95% - pretty much every one who can get on one side of the trade is there, and this usually marks an ideal turning point in gold.

Despite that, one must not forget our investment philosophy at Investophoria.com - be safe with the money you cannot afford to lose, and take high-probability opportunities with smart money-management and well-defined stops with the money you can.

Precious metals are what we recommend for savings, not for "investment" - this point has been covered in detail for ages.  On many occassions readers have asked, both via email and through public posts, whether they should buy gold and silver - my first response is always:  Do you own any yet?

Whether gold goes to $1500 or $600, you should have some on hand;  It's real money.  The same goes for silver.  

So, with gold's break my forecast for much lower gold seems to have been negated (for a while), and the pathway is clear to up to $1325 gold.  That's not saying that we'll get there, and that bieng long right now is even close to a safe bet, but optimistic extremes can carry to head-scratching heights, and gold may well just be the last domono to fall.  A downward correction at this point would be healthy as sentiment is very elevated towards precious metals.  I will keep a close eye on price activity to see if better targets for upside and downside time and price can be established.

One thing to keep in mind, which still lends to silver's bearish case, is that the stab up to the top of the trendline has finally been put in - this completes an almost ideal ending pattern for an uptrend, and offers a high-probability that it will turn very soon.

Whether or not it is believable today, deflation is on its way, and will rear its head soon - even the skyrocketing bond-yields on government debt are deflationary in the short term - more capital will have to be diverted away from private sources and to government just to service debt, and defaults will take swaths of "wealth" from balance sheets the world over (upon which more debt has most likely been taken out for speculation, in many instances).

With gold's break to a record high, it just goes to show that (because of one of the most commonly cited reasons for gold ownership) everyone is betting on inflation, and lots of it.  And when everyone is betting on one side of the trade, it is not necessarily the safest place to be.

As always, if you have questions, concerns, ideas, or just a friendly (or unfriendly) hello to say, you can email me at:  Derek@Investophoria.com

Derek.

P.S. I apologize for my absenteeism over the past couple of months.  I have been very busy out and about for much of my days and as such will be posting evening articles over the next few weeks.

An Opportunity in the Making?

Any hard asset investor can hardly call themselves such if they don't have at least one oil stock in their portfolio (this, despite the fact it's gooey, slippery, and definitely not hard).  I recommended some oil companies in late 2008 and early 2009 which were extremely profitable.

However I am looking at another potential setup in the fairly near future (anywhere from a few weeks to several months).  Something to keep in mind, anyway.

The sentiment towards oil itself has been gaining strength, with speculators holding a huge number of open long contracts the past several months - the past few weeks have been holding steady at well over 110,000 open long contracts.

While looking at only the number of open contracts aside from anything else is not a great idea for trading oil, it is a nice piece of data to show where overall sentiment is sitting.  As of right now, it's pretty elevated - I'm not saying we won't see another surge up in oil, but upside in the immediate future should be fairly limited.

The particular stock I'm looking at isn't an obscure name by any means (they are the biggest in their industry), and they have been tossed around for years now by major publications.  That being said, most of these guys were recommending the stock before it took a 75% hair cut along with the market.  It is still under 50% of what it was at the oil peak in 2008.

The company is on the higher end of fairly-valued right now, but fairly valued nonetheless.  As of today, it trades at under 9x Price/Earnings, 1.33 Times its Book Value, and 2.36 x Gross Revenue.

Cash-flow is fairly strong, with a 4x net interest coverage on all outstanding debt from free cash.  The company has retired a large chunk of its debt over the past 2 years (over $5 Billion), and seen 2 years of revenues above $10 Billion (from $2.8B, $3.9B, and $6.4B in 2005, 2006, and 2007, respectively.).

All in all, revenues are up, the cash position is strong, assets are generating tons of cash, and demand for the product they offer is growing steadily with growth potential reaching far out into the future.

The company is one I'm sure you've heard of before.  Transocean (RIG on the NYSE), headquartered in Switzerland (for tax purposes), and with the largest fleet of underwater drilling ships on the planet. 

This is not an easily entered industry - It is extremely capital-intensive ($500 + Million to build a drilling ship), which offers an excellent natural barrier to entry against a wave of new entrants/competitors.  Furthermore, the type of clients that Transocean deals with aren't fly-by-nighters or small-time companies where taking their business may be a bet on receiving payment.  Transocean's customers include Chevron, Exxon, and many of the other big players exploring and tapping underwater reserves - Most of these guys have stockpiled tons of cash over the years and are hungry for new projects to keep revenues up as older project output dwindles.

From the technical side, it doesn't look like the stock has a high-potential for further upside in the immediate future.  As far as sentiment tops go, the recent major push by the Obama administration encouraging underwater drilling is a re-enforcing signal of an interim top in positive psychology.  As sad as it is to say, the oil spill in the gulf of Mexico is as fitting an occurrence as could be in the wake of that sentiment (remember, the State is always a late-comer).

This should provide a mid-term negative backdrop for the stock to settle into a more opportune price-level and make a great addition to a long-term core portfolio.

I'll keep you updated on this pick and let you know when I'm going to scoop up some shares.  At this point, the stock looks to be building for a major move with downside potential being far greater.  That being said, key resistance is at $93.25/share, and a daily close above that mark would indicate a major bullish breakout potential in the immediate future.

Have a great weekend everybody!  As always, if you have any questions or comments you'd like to send me directly instead of posting on the blog, I can be reached at derek@investophoria.com

Derek.

A Minor Top Is Nigh

The Greek "crisis" continues to unfold almost uniformly to our expectations, and its ramifications for the EU as a whole are certainly not painting a rosy picture for the coming decades.

The first order of business is to deal with the still-open STD short.  I picked this bank back in December because it was a mirror of the overall psychology toward the finances of Greece itself, being a mammoth-sized financial institution (relative to Greece's overall economy).  Many readers sent emails and posted comments doubting this choice, and even the severity of the debt crisis that is unfolding.

This debt crisis is not a Greek, PIGS, or Euro problems alone - the entire world is going to soon enter another deflationary cycle after this reflationary pause is complete.  I don't feel there is much time left ticking on the reflation clock.  The market has ridden to exceptional highs, over 7.75% higher than our ideal retracement target of 1132 on the S&P500 (at its recent highest peak).  A very respectable opportunity to close out open long positions is at hand, and I suggest taking advantage of it with at least a large chunk of the core funds you don't want to put at unnecessary risk.

Today's break of recent key support opens the path for another sizable drop in Greek bank stocks, and further tensions in the EU

As for the broad markets as a whole, they are far overdue for at least a minor correction to shake off the extremes in positive sentiment we are seeing today and pull some more chasers into another small leg up.

An ideal retracement point on the Dow is around 10,800 before another leg up.  That being said, most are expecting at least another leg up, so there is a chance that a more major top is in the could erase 1/3 or more of the rally since March '09.

Speaking of Sentiment Extremes:

The credit contraction continues as M3's negative move accelerates even further.

As for the broad markets themselves, some small nonconfirmations of momentum and price could be indicating that larger move down.  Coupled with sentiment levels this is not a healthy stock market to be long in for the short term.  Once a small correction has occurred we will re-assess the situation and see where we can expect another minor leg up or more downside.  If the next day brings an immediate push down, the case for further downside is strengthened as this weeks bar would be a reversal bar (

The precious metals run-up seems to be drawing to an end.  The HUI hit the Fibonacci .618 retracement of the first larger down-move from December 2009.  It could not maintain a close above, and turned down in the last hour.   The initial ideal target has been met to mark the correction complete, however one final push up and a new high in 4 days would mark it complete in price target range and time as well.

One further piece of evidence that this move is corrective and not part of a larger trend up is that the slope of the move up is only 54% as strong as the down-move that preceded it.  The impulsive move ahead still seems to be more probably to the downside, and a significant one at that.

The non-confirmation between gold and silver should rectify itself with silver pushing to another final high.  The minimum corrective target at this point is $18.18 with further potential up to $19.00 and slightly above.  If this scenario plays out silver should immediately reverse and rapidly approach a new low for the move below $14.50 / oz

Have a great Thursday and Friday, and enjoy your weekend!

Derek Blain

P.S. Comments or Questions?  Email me at derek@investophoria.com

How Do You Measure A Paradigm Shift?

For the record, this is not a recession.  This is not even a very harsh recession.

What we are currently smack, settled, and complacently in the middle of is a Depression.  A rare, multi-generatonal economic "phenomena" that takes the vast majority of the population by surprise.

A depression is not the type of situation where supply has outpaced demand growth (due to minor levels of malinvestment, generally due to the meddling of money supply and interest rates), where the heat needs to settle in and the shelves need to clear some space before growth can resume.

A depression is where capital has gotten so out of whack with natural market forces that much of it needs to be put on fire-sale and fast. This isn't a run-of-the-mill recession where the government puts on the appearance of "fighting" it, and "providing jobs" that seems to work enough for the non-economically educated to give them some credence.  A depression is where generations of "help" from the government and easy money and credit have finally misallocated such a vast amount of resources and capital that the whole thing just sort of gives.

It would stand to reason that since this literal era of misallocation and malinvestment we have concluded took more than a few years (decades, is more like it) to play out, it would take more than one or two years to even partially correct itself.  Especially since it involves something humans seem to fight against tooth and nail.  Change - lots of it.

This massive misallocation of resources happens to include, in part, the attitude and ownership of financial assets in general.  Therefore, the following might be a hint of the future.

One thing I have been forecasting for several years is that the overall allocation of resources into financial assets will decrease sharply in years to come, especially measured against actual capital and tangible production.  There are still swaths of debt instruments that will be declared worthless or "unmarketable" as time progresses, and many other assets worth far more than their real value.  Migrating cash from these sketchier plays (where everyone seems to be going, to get the "yield" compared with high-quality debt) into something safer is certainly one of the smarter things that an investor could do.

Things are lining up for a major market top within the next few months and the coming downturn should put a more realistic perspective on a lot of things that everyone is "hoping" have somehow worked themselves out.

Have a great week!

Derek.