Pea Thick Gloom, Doom, and Fog

Wednesday Nov 23, 2011

Generals always fight the last war, investors remember the last crash. The headlines on www.marketwatch.com this morning are uniformly negative. 

When in doubt, Markets may return to 2008, China Data toDeliver blow, Greece in critical period

We have discussed the decline in China since it started this time a  year ago, so none of this is news on this blog. And yes, the bullish percent of stocks on the NYSE is a very low number, low enough in fact to be coincident with other market lows. 

Preparing for the last war, investors are notably defensive. Hedge funds are underinvested. The VIX is putting in lower highs though as TLT is within striking distance of its recent highs at the october lows. Some stocks are approaching their October lows. But...

I am more and more of the opinion that the rules for tech investing need to be re-written with everyone following the same charts, the lemmings tend to run over the same cliff. Recall that as the market took out 1100 in late September, most analysts proclaimed 975 was in the offing. The market instead stopped at 1075 and rallied all of October. Our T Day Black Friday gift to readers is a look at a first turn indicator, shares of gold mining companies. 

Gold mining companies bottomed in November 2008, well before the final stock bottom in March 209. GDX is Barrick, Goldcorp, and Newmont, the big guys. The chart shows a reverse head and shoulders pattern, it appears to have just completed the right hand shoulder; note the rally yesterday amid the gloom and doom. MACD at bottom shows the same pattern. If that is correct the ribbon MAs should reverse up as they did in August. As we showed the seasonal pattern still argues for an up move in December.

GDXJ made a lower right hand shoulder, all the better to shake out late comers not interested in the Black Wednesday sale at 28% off form the recent highs in GDXJ. 39 -28 = 11/39 = 28%.  Other than the Goldline ads on cable, little has been said about investing in gold lately. 

Now quick true false quiz, amid all this negativity, was VIX up or down yesterday? The answer is, down 2.86%. If this were the end of the world VIX would be making new highs. In fact VIX is flat lined with lower highs. As if that were not enough, would you believe QQQ made a third higher low yesterday?  We show QQQ versus TLT below, VIX not shown. The fact that VIX is flat, it cannot be bought by investors, and TLT is still climbing, TLT can be bought, shows the buffalo are stampeding the wrong direction. 

August, then October, now November, a distinct low accompanied by 'Head for the Hills' headlines. This is a divergence. TLT is near as high as it was in late Sept, but the QQQ is much higher. QQQ is the black line hat may have reversed yesterday. This is irrational unfounded fear at its best. Now that the hedge funds and investors have scurried to the sidelines, who is left to go short?

We will have extremely low volume trading today amid all the hype. No doubt many small investors will withdraw more funds from the market today. 

Comments

[Neil Master]

Dennis, the VIX can be traded through ETFs and ETNs such as XIV, IVOP, TVIZ and TVIX.

[Dennis Elam]

Neil

Good point but the correlation is weak to the actual, thanks for reminding me we will show the correlation in the next update!

[valentin tristan]

In order for gold to rally like it did in the period between 1929-1934 it has to decouple from the stock market. In the 1929-1934 periods the stock market was going down while gold was rallying to new highs. So far when the market tanks so has gold but if you notice gold recovers faster while the general markets lags. Is it possible that the gold market is setting itself up for the next explosive move up while the market continues down? My predication for 2012 Gold will easily hit 2500.00 an ounce, silver will hit 75 an ounce and the Dow will be at 8700 by year’s end. The gold juniors will have their day. We are in the very beginning of a bear market for stocks. But lastly less not forget that the NASDAQ has been in a bear market for eleven years. It has not touch the highs of 1999 when it was over 5000.

[valentin tristan]

I agree with what you say about the technical analysis, if everybody is reading the same chart they are pretty useless from a day to day basis but for the long term they provide some value when use with fundamental analysis and the study of the stock market along with what’s happening in the world. In other words the tech charts should be just a small part of an investors arsenal.