FAS Update

A quick note to the many readers who have sent me the following question:  "You have shorted FAS, should I go long on FAZ if I don't want to short something?"

We do not recommend using the leveraged ETFs as a long vehicle, as they suffer price decay consistently over time, and only overcome that when the market runs one way with little or no pauses for some time.  (This is not a very common occurrence, so generally the decay will work against you).  You are better off to catch any of them on high levels of sentiment in conjunction with high levels of sentiment in the assets they are leveraging, and short-sell them.

Once the market starts working against a leveraged ETF, even in a slow, steady way, the declines are greater relative to the gains because the gains are coming off of lower price points (i.e. a 3% loss from $50.00 is larger than a 3% gain from $48.50).

Here's an updated chart of FAS with some more in-depth analysis.

 

And our thoughts on the broad markets as a whole:

Have a great weekend everyone!

A quick note for next week - I will be doing some ice-fishing during the middle of the week next week so I won't be posting for Tuesday, Wednesday, or Thursday.

Stay warm, and keep your heads up out there.

Derek.

End of Day Update,  due to the barrage of email I have received sine the market enclosed. In the last hour, I've read more variations on "I think gold just bottomed" or "you are suicidal if you think gold is going down now!" than I thought the English language could produce!.

Thought I'd throw up a chart of GLD to pull in some perspective.  Have a great weekend!

Just remember that we are unwinding a 14 month uptrend that has grown rife with skyward expectations for the price of gold.  Such a thing will take some time, and serious price action, to neutralize this optimism.

Derek.

People are Still Asking "What the Heck is Going On"?

This morning, I watched a video of the CEO of Gold Fields, Mr. Nick Holland, expressing his surprise at Soro's recent statement that gold is the "ultimate bubble".  Mr. Holland said that almost every other expert on markets he talked to had a vastly different opinion of the metal - that it was "fundamentally sound" etc.

So, that being said, how does one explain the drop to a new low for this gold bear market, just moments ago?  If fundamentals are so good, if the experts all agree that gold is a solid buy and say things like "you just can't go wrong with gold", why is it that the price is in a sharp decline that will carry on for some months and shave nearly (or possibly more than) 50% off the recent highs of over $1200.00 /oz?

It is for the same reason that wherever you are reading this article, there are surely a laundry list of gold and silver forever-proponents, both young gold-bulls and those who have been saying it was the ultimate buy since before some of their readers were born.  That reason is sentiment, the psychology towards that particular asset.

We are in the final phase of the unwinding of positive sentiment that has been fueled by easy dollar credit and an overnight-rebound in gold in late 2008 to early 2009, just as those stocks that "always go up in the long term" continued to lose a staggering amount of value. We witnessed a flood of people seeking the "Safety" (translation:  profits) of gold - Now we watch the unwinding of the speculative chasers, the capital gains hounds.

For gold is not an "investment" - its producers can be, perhaps, but only if you're sharing in their profits - gold is a savings vehicle.  For a very long time we have advocated keeping half of one's savings in the precious metals (we favor roughly a 70/30 silver:gold allocation).  However, we are not like most gold bulls - we don't profess that $1200 is a fantastic time to buy, and that because the price is so high it must go to new highs.

This is the oldest flaw in the book - one that has been historically proven time and again.  The price/demand curve of finance that only exists in the realm of high emotion, little information, and many peers.  Price goes up, demand goes up.  Price goes down, demand goes down.

Here at Investophoria we try to step back from the foray and take a good look at the big picture.  We look at measurements of sentiment (including price) in order to determine where we are in the price/demand curve, how much farther we can go, and when the particular trend will change.  All these are integral to a winning strategy of investing, because if one doesn't know all the rules of the game, one has lost the moment they sit down to play.

We only care where the crowd thinks the price is going, in order to measure how many of that crowd are running the same direction.  We never have a particular bias for long or short, only the bias that we believe in our analysis and act according to it, on either side of the trade.

So many are shocked by the drop today.  The silver-bugs can't believe the price is below $16.00 / ounce, it's not possible!  And yet, if they had read our analysis, even just one article published a few weeks ago
they might have saved a nail-biting loss of 20% where they knew the price should be going up, and yet watching in horror as it plummeted.  Or if the gold-bugs had read the article we published calling the top in gold on November 26, and its subsequent and rapid fall, they might not feel the horror of watching their worthless FRNs go up in value relative to Real Money.


This is going to be a time of trials for all investors of any ilk.  The sentiment towards investment in general has been slow to unwind from its 1999 peak (as indicated by dollar volume), and has some years left to go before we get to that point where everyone isn't saying "turn your cash into assets", but "quick, turn your assets into cash!".  See the following charts:

 

  

  

Yes I would estimate that there is still much unwinding of psychology to be done - another good indicator of an end to the bear market in precious metals will be a level of dollar volume lower than that of 2008's low.

 This is still a young trend we have just begun - a toddler, compared to the multi-decade bull market that preceded it - in all investment assets.  There's a lot of life left in this one, and until it is "over the hill", we plan on profiting from it.  With some skill, we were able to open our short position within 1% of the market top, as were you , dear readers, if you followed along.  All our shorts are growing in value today, as all the hopeful longs and "long-term bulls" are yielding ground.  This is a trend that will not only continue, but also pick up in speed and breadth.

It appears gold and silver have resumed their downtrends, as have the markets as a whole.  This should be the first of the "big ones" in terms of drops, which we have anticipated for the last several days.  It will continue to surprise the vast majority (except you, who have been reading us, of course!).

 

As for gold specifically, it may try one last stab upward before a major downward fall, taking it well below the $1000.00/ oz mark, although the highest probability is that it has already begun a more rapid descent.  Once this level is reached, we are anticipating a highly volatile period of sideways movement before the last leg of its bear market brings it in the $650 range.

Silver should follow these price movements as well, however its moves will be far greater in percentage terms and it should fall eventually to the $8.00 / oz or less range.  If you want to see some of our arguments for why gold and silver are going to fall, and if you haven't read this article yet, you really should - it's a fan favorite and continual hate-mail magnet!

As always, keep your heads up out there!

Derek Blain.

P.S. Thanks to all the readers who submitted excellent suggestions for our upcoming subscription newsletter and trading alert services.  Some great input which we will be putting into practice in the coming 1-2 months as our site is developed and opened up to the public!

Suggestions are still always welcome, and if you have any, send them off to Investophoria@execulink.com, or my personal email, J_Derek_Blain@hotmail.com!

Our Thoughts on the Bear Market Pause Thus Far.

Well, the Dow didn't quite break above the resistance lines by the end of the day yesterday like we supposed - however, vindication!  First candle of the morning and up up and away it went.

Well, perhaps not "up up and away", more like sauntering up a rolling hill.  But the point is there - all major indexes moved in-tandem (et al minus the USD of course, which is virtually the only thing that will be moving counter to the bear market, as we have been saying for months).

Here's the latest forecasts on the S&P500 (we thought we'd switch over from the Dow for today and look at broader measurement).  The retracement might actually have ended butting right up against the primary resistance line (double top a few days ago before the final low).  The number one scenario we are looking at is a spike up at or near the open to breakout, then a quick retracement below the line to resume the bear market.

Secondary scenario is a continuation of the slower, steadier upward move, which could take us up to two different ideal support levels.

Ideal stop-out is listed on the chart.

 

Gold and silver should follow the markets, and at this point, a day in which all markets make a decent low for the day while the USD rallies is a strong indicator that the major downtrend has resumed.  This portion should be faster and of greater magnitude than the last, as more positive sentiment is wound out of the market particpants.

Financial advisers the globe over are still "long-term bullish" on stocks (would you really expect anything different from the guys selling you long-only mutual funds?), and citing that this is a much-needed correction so that stocks can resume their bullish run.

Unfortunately this mentality is prevalent in the initial parts of a major downturn - remember what people were saying a month or two in after the 2007 top?  Did you know we had just witnessed the highest stock prices we might see in over a decade?

We'll be back for more analysis tomorrow.  Have a good night!

Derek.

A Non-Asset-Related Post

Okay, I already lied - I'll just cover what I think we are going to see on the week.  Gold and silver should see some consolidation (albeit wide-ranged) with a slight upside-bias.  This might not last out the week, however this should be the "calm before the storm" in these metals.  The next major leg down in silver should take it to <$14.00 and in gold below $1000.00 / oz. - The USD also looks ready for a pause in its rally that should shave a couple of points off on the USD trade-weighted index, before it starts its larger-leg upside move.

As for the broad markets, we are expecting similar - a sideways-corrective pattern in the Dow with an upside bias.  The price should correct to a maximum of 10,380 before a resumption of the downtrend.  A clean break of the bottom of this latest, shallower channel will negate that forecast and could take the Dow down as low as 9,600 to 9,700 (yes back into the 4-digit territory) before a sustainable pause.  We'll keep you updated on this most-traded-of-indexes.

 

Now that we've got the formalities out of the way, I'll get to the Non-Asset-Related aspect of this post.

We've had a wave of email response to our announcement of future subscription services and as such we are very excited.  I spent over 8 hours this weekend working with my "tech guy" and good friend Mike "the Fox" to figure out how we are going to approach this thing.

One thing we would like to do,  is to give all you who are asking about our subscription services the chance to give some input before we actually get the site up and running.  I don't really follow other subscriptions (we can take that one back to not being caught up in social mood, I suppose) so, for readers out there who have followed such things, I'm sure you have had good and bad experiences, and we want to go into this thing having already dealt with anything bad that our "competition" might be dealing with now.

Already we have a lot of praise for the fact that we are not going to be a "long-only" subscription, and we will offer lucrative positions that will make money in declining markets, as well as the "long-only" alternative, all in the same service.

We are also planning on keeping a fairly low limit on the amount of subscribers as we want our primary source of income to continue to be trading (keeps us honest), and not "advising".  Not to mention that some of our more high-profit-potential trades are not in the 5-million-shares-a-day liquidity situation, so our most aggressive/highest profit subscription service will have a very low limit on the number of subscribers.

But what else would you, future subscribers, like to see in our services?  What assets do you want us to focus on or ignore?  I'm opening this one up to the several thousand visitors that come here every day to get rational and objective analysis - what do you want our services to include and exclude?

We've already been brainstorming and have some good ideas, but in this case (contrary to the markets) I think several-thousand heads are better than just a few.  So send those ideas and suggestions away to:

investophoria@execulink.com

And have a great week!  We'll be back with more in-depth charts and analysis soon.

Derek.

UPDATE:

Sorry, I couldn't resist - very high probability intraday long setup just came to my attention - we should see the Dow end on the higher side today, for all you intraday traders.  If you are already short from the very top, and are in this to make serious gains on the major trend, then this little move shouldn't worry you.  Just an exercise in charting, which I find to be so much fun!

Enjoy!

Derek.

END OF THE DAY UPDATE:

Thanks everyone for the suggestion emails already sent in - some great ideas and keep them coming!

Here's the end-of-the-day chart for the Dow.

And the last free in and out trade that we will offer before we launch our new website and subscriber services.  This is another one with huge profit potential similar to our STD Trade we posted just a short while ago (already in-the-money double digits).

We will be opening our position tomorrow morning, especially if we see a gap-up in prices off the open.  We'll post it as soon as we have executed the trade.

From this point on we will only be covering the general movements of the Dow, the USD, Gold, and Silver on the blog, until the new site is up and running. 

Thanks again for all the feedback we received today and we look forward to hearing more.

Derek.

UPDATE:  February 2 @ 9.37 AM Short FAS - Entry at $73.05.