The Market Perspective

Weekly Parabolic for Gold Miners

Monday July 30 2012

One way to judge the extent of an extreme is by using a ratio chart. Here is the ratio of GDXJ the junior miners to TLT, the big bond fund. This is basically risk versus Safe Harbor Investing. We have suggested that the extreme was finally reached this past Wednesday morning. The weekly parabolic has not generated a buy signal for GDXJ yet but it is closer. 

The blue dots are beginning to flatten out at far right, I suggest we have seen five waves down but then I am biased.  The close was .153 with SAR PAR at .159, close.  The same chart but using the US Dollar gives us a ratio of .238 and a SAR PAR of .24, really close. 

An alert MP reader points out that we are not covering popular stocks like Verizon, ATT, or WMT. 

Verizon

One can read bout Facebook nearly every day but the media has missed the big break out in telecom via VZ and T. This is incredibly ironic that the media would focus on the social media stock already down by one third since its IPO and ignore Ma Bell. 

We will not be covering individual stocks for the simple reason that they do not offer sufficient diversification. Anything can go wrong with any one stock and it takes fundamental analysis to attempt to pick a winner. We will leave that to the brokerage firms. Indeed they have recommended traditional companies and money has flowed to them. VZ and  T were winners, Sprint Nextel is a near bankrupt. 

It may be that there are mutual funds that can take advnatage of moves like this just as gdxj allows one to purchase out of favor miners. We do believe the out of favor commodity group will be performing well the next couple of months I had mentioned my selection of Fidelity Funds for my retirement account but did not get a single e mail of interest so I have not commented. But we will take a look, just trying to get one's arms around the huge number of Fidelity Offerings is quite an undertaking. 

What Could Go Wrong?

Here is the Tom Clancy Raytheon  version of how our Navy would respond to multiple simultaneous threats in the Straits. Of course all these countermeasures have to work, if one missle gets through your boat is sunk, which of course is the Iranian strategy. 

A Political Tipping Point

Weekend July 29, 2012

No I am not going to turn this into a political blog. Malcolm Gladwell laid out the pattern of how connectors, mavens, and salesmen combine to create Tipping Points.  I suspect we may have seen such  a transition in the political culture this past week. Consider these events. 

• Obama's You Didn't Build That comment has created a firestorm of ads, websites and blogs, not matter what you think he said, it energized the opposition which is a negative for the Obama campaign
• Mike Kelly, freshman representative and auto dealer, spotlights an 1100 page document the Federal Govt uses to determine a qualified borrower, the House erupts in cheers, very unusual
• Rahm Emanuel  and the Mayor of Boston took  on Chik Fil a, which has ignited a backlash even among the liberal newspapers in those cities, as with Obama, they are now both backing off
• Neal Cavuto disagrees with Larry Sabato Friday afternoon, Sabato claims it will be a close election, Cavuto outright says no it will not be
• Like him or not, Glenn Beck is succeeding in building a loyal following. What makes this interestesting is that the former tv guru, Oprah, has spent over $300 M and is still not even breaking even on her venture. Beck may be moving to occupy the spots formerly held by Pat Robertson or Jerry Falwell, again, I am not passing judgement just making the obserfvation
• Finally here in Texas the presumed  replacement for Senator Hutchison was David Dewhurst, longtime Lt. Governor. But just as Richard Lugar was defeated in Indiana, Dewhurst failed to see the change in social mood. A collegial moderate is not what the public wants, The primary run off is Tuesday and will be closely watched nation wide. Ted Cruz was unknown as his opponent but has now raised more money from the public. 

No matter where you are in the political spectrum these are all 'kick over the hornet's nest' type events which have resulted in viral you tube spots and web comments. 

And so the real campaign begins. 

Mood Swings - A Short Term Outlook

Weekend July 28, 2012

We believe the mood changed significantly in the pre openning Wednesday Morning

TLT crashed five points in three days recovering a bit Friday afternoon. Half way is 129.5 and that would seem reasonable re tracement target  before the decline resumes. 

GDXJ

Conversely, GDXJ is the mirror opposite. Half way for the move  is 18.75-19, with the 125 and 162 moving averages  about there, it seems a reasonable guess. But gold finished fairly strong Friday afternoon. We may have to wait till Monday to see if there is a pause or a continuation. 

it will be interesting to see if the markets pause or continue up. As noted this was the first time in 3.5 years for such a performance by the Dow Industrials, a fitting kick off for a social mood reversal. 

Thanks for reading The Market Perspective

Dennislelam@gmail.com

 

 

The Market Perspective bases its information on techniques and sources that have been found to be reliable in the past, and The Market Perspective tries to base opinions on sound judgment and research, however, we do not guarantee that future results will match past performance ands no guarantee can be made that advice will be profitable. The Market Perspective accepts no money for stock recommendations and is purely motivated by its own research in recommending any stocks.  Put another way, the responsibility for decisions made from information contained in this letter lies solely with the individuals making those decisions. The editor and persons affiliated with The Market Perspective may at times have positions in securities mentioned.  Nothing contained herein represents an offer to buy or sell securities. The Market Perspective encourages investors to be diversified, and to maintain sell stops and risk control over their valuable investment capital.  No guarantee can be made to the accuracy of text or charts.

 

Peggy Noon Gets it Backwards

Weekend July 28, 2012

Peggy Noonan is the former speech writer for President Ronald Reagan. Her star was cemented in the political heavens by penning the phrase 'The Evil Empire' to describe the Cold War Soviet Union. And so she has a column in the Weekend WSJ. Her latest non-event was cheer leading for six term  Senator Richard Lugar who only garnered 39.4%  of the vote in the Republican Primary Run Off. Read the link to see if you can identify the socionomic reasons why he lost.   Voters are angry and a 'collegial moderate' is not what they are seeking. She missed the social mood by the proverbial indiana country mile. 

At any rate, her column this weekend, The Dark Knight Rises, reverses the basic causality of what is happening This is the most common mistake of conventional wisdom and demonstrates why socionomics is a superior methodology. 

Readers will recall that I identified the latest Dark Knight Release was released  about the same time as the  2008 version. That was on the way to a market top. This time won't be any different. 

Conventional wisdom such as Ms. Noonan displays in the column is that people are affected and moved by events or the news. She even contends that 'studies have demonstrated conclusively that viewing violence on screen increases aggression.'  We do not argue that others have not been so moved by the publicity of the shooter. But she also notes earlier films with an etirely different take  on the same theme. 

-Jack Nicholson's Joker from 1989 was a garish comic figure who made people laugh

-same thing for Dustin Hoffman's Captain Hook in 1991

-she notes Tipper Gore was complaining about rap lyrics in 1985, at the end of the 1966-1984 period. 

-then she notes that Heath Ledger's Joker is pure evil.

Why the difference in Nicholson and Ledger's portrayal?  That  is how  socionomics explains the difference. 

Socionmics holds that social mood is endogenously  generated. This means change comes from within the organism, not from outside forces. The 1984 -2000 period was uplifting a bull market. Hence we saw a pleasant Joker via Nicholson. The current period from 2000 forward mirrors 1930-1948 and 1966-1984. Those were periods of negative mood which produced an interest in the dark side. People did not pack movie houses in 2008 or now because Hollywood convinced them to do so. Rather it is just the opposite.  Negative mood set in after March 2000. The causation is  a stock market which gyrates  up and down ratehr than moving in a long upward pattern as it did from 1984-2000. it made the Twilight and Sookie Stackhouse authors multi -millionaires, both are a series about vampires. The last of the Dark Knight trilogy continues the Dark Theme. The Sopranos, the Godfather comes to New Jersey, preceded True Blood based on the Stackhouse series. As the mood grew lighter, concern over Rap Lyrics mentioned by Tipper faded. Her concern was a bit late for the cycle. 

Ms. Noonan promotes the idea that violent  and negative themed movies make people negative. But there was only one violent person in the theater. 

On the other hand, people with negative moods seek out movies that reflect that mood. And note this happened at the same stock market moment, near new highs, as in 2008. 

Consider the cover of last Thursday's Weekend pullout in the San Antonio Express News, the Hearst owned paper here. 

The photo on the cover of the Weekend pullout was even worse but you get the idea, not exactly who you might have in mind to date your daughter eh?  the ad says Five Finger Death Punch (what does the band name suggest to you) emphasizes variety and volume, yes no doubt. The Dave Clark Five they aren't. 

And that is just the point. A positive era supported Bill Cosby in 1966. The ensuing negative era brought fame and fortune to Cosby's polar opposite, Richard Pryor. 

Ms. Noonan complains that 'the film industry isn't going to change.' No it is not, it will continue to resonate with the mood. The same industry that gave us the laughable Joker in 1989 is the one she  condemns in 2012, don't shoot the messenger Peggy. The Industry gave us Singing in the Rain when in fact the public wanted to Singing in the Rain in 1952 as America emerged from WWI and the Depression as the mood changed in 1948. 

Really the two images on this post say it all about the change in mood and just how different the two eras can be.

No doubt Ms. Noonan will decide The Industry has improved by about 2020 when I suspect musicals will return. 

 

In a Bull Market, All News is Bullish

Weekend July 28, 2012

Investors flocked to dot.coms to form a market top by March 2000. Now it appens again, the bloom is off

the social media rose.  Each top has had the same social mania mood but prompted by a different market.

March 2000    Dot.coms

Fall 2007        Real Estate

Fall 2012        Social Media, Real Estate in Foreign Markets, Banks Gambling with Zero Interest Rate                       Loans using FDIC guaranteed deposits

The media  convinced the majority to stay in 1.4% Treasuries while companies like CLF (in business since like 1847, a bit longer than Facebook) went begging for buyers, now expect more rear view mirror thinking like this headline

• ECONOMY
• July 27, 2012, 7:32 p.m. ET

U.S. Hit by Weakest Postwar Rebound

Sure that is true but, sentiment towards the markets shifted from negative to positive this week.   Some readers point out to me that there are many high level meetings scheduled the next couple of months. The suggestion is that any one event could de rail the recovery in the markets. Yes there are lots of meetings the next two months. but there were the last two months as well. Do politicians really accomplish anything at such meetings, not really, I have sat through plenty of them at the city or county or university level. What happens is that politicians kill time as they have the last few months with endless 'fixes' for the Euro, until sentiment changes and then of course the politicians declare victory and demand credit for 'fixing' the crises de jour. 

My reading indicates a grudging admission among analysts and such that the market might get to 1420, then they will be shoring again. This virtually guarantees the market will go higher. Again the market will be fueled by money coming out  of Safe Harbor assets of low yielding bonds forced back into the market.  The negative headline above will gradually morph over the next couple of months a in this sort of progression, just a hypothetical on my part.

Investors Putting Toes in the Waters of a Rising Market

Sun Shines on Traditional Companies like CAT and XOM as Confidence Builds in World Economy

Emerging Market Shares Garner Renewed Interest

Head for Mongolia-the New West!

Copper Scores Surprising Gains as Confidence Builds in Housing Sector

Commodity Sectors Register Surprise Gains, What to Expect Next

Finally expect a spate of new ads from brokerages like Merrill who want to advise you on how to become wealthy. These will only appear after the SPX has risen at least 100 points. Recall I noted that Fidelity had created a Bond Investment Center as rates fell to all time lows, late to the party as usual. 

Such headlines will simply stop discussing disasters like Zynga or Facebook. The lead article  above notes that Amazon took years to get going while it built computerized warehouses. With $10 B in the bank Facebook FB has plenty of time and money as the article notes. Clearly the writer is still in the defensive phase for FB.  The problem here is that Zynga and FB do not produce anything, Amazon does, it is the new national Macys, Foleys, Saks, Target, Sears. Zynga is simply the 1930s Monopoly game brought into current times, unemployed with nothing to do in the 1930s  embraced Monopoly then, as they did Farmville now. And as I mentioned earlier this week,  Zuckerberg said his whole point was to improve communications between people, not to make a lot of money, remember he is only 26.

Okay let's get to it shall we, what to expect.

The Road Ahead

As usual we will focus on the internal indicators of the market. Here are three or four that should be of considerable help in identifying an exit point for us. 

SPX Bullish Percent

Note I have been adding  125 (half way between 50 and 200) and 162 ( halfway between 125 and 200) MAs, I like this ribbon approach. Note that the SPX went bearish as it fell under 50% in late May. That was the low and as we have noted in our update last weekend, despite what you read the market was going up. I suspect, which is all anyone can do, the party will not end until that 85% level is regained.Note that the Index is below three of the longer MAs but above the shortest. I mention this wanting the reader to note that the different indicators are at different stages of development. 

Weekly High Low

 This is what I mean about different stages of development. here the MAs are all moving up or sideways. The indicator is at mid point. There is plenty of room for the  rally  to return to the February highs. 

VIX

On first glance the VIX might suggest that this will be a short lived rally, it is not far to the previous low. But remember this is purely a sentiment index. Investors must be lulled to sleep again, assured that Bernanke and Darghi have thngs under control. Just yesterday I watched some politician tell Bernanke to 'get to work' on the job recovery, as if there were something Bernanke could do. Sentiment will need to be assured to the point that the fear recedes, bringing the Dollar down and bond yields up.

Back to 2007-2008

Note this is the VIX the year before the crash, exactly four years ago. Note the volatile nature, even more so than now. Huge spikes of uncertainty followed by huge drops indicating confidence, recall that a low VIX is a show of confidence and a high is a show of fear. 

NASD Summation Index

The small stock represented by indexes like the Russell 2000 have underperformed the larger averages. Indeed it was only the Dow Industrials that were holding up last weekend, the Transports had already tanked. But more on that later, here the NASD summation has 700 points to climb to regain its February high. Patience. 

Towards A  New Model of Technical Analysis

Click here to re examine our analysis of the SPX this past week. We noted that it was in an uptrend and had held support. We went so far as to challenge the Dean of Letter Writing, Richard Russell, who had declared a Dow Theory Bear Market. Here is how Mr. Russell reached his conclusion, and why so many were absolutely positively certain the markets would head down. 

Dow Transports

Charles Dow created his Dow Theory about 1896. The idea is that one set of companies, the Industrials, produce things. The other set Transports, move both raw materials and finished product. The two indexes need to move in tandem. If both move to new highs we have a buy signal. If both move down we have a sell signal, that is  an over simplification but the basic idea. 

Back then of course Charles had to calculate the daily averages on pencil and paper. Indeed this did not change until the advent of personal computers in the late 1970s. Now however, everyone has the ability to follow, as the Doobie Brothers might say, minute by minute. The 300 point drop shown by the blue circle on the Transports above convinced near everyone that the markets were doomed. Actually the RUT and NDX and QQQ did not drop like this. But with the hysteria over a 30 point drop in Apple, the Stock that Cannot Drop, everyone from Art Hill to John Murphy to you name it was bearish. 

This happens now again and again. A market will fall below a level and quantitative programs generate sell signals. But as the crowd piles in at the low, the market runs out of sellers and reverses. The same thing happens on upside breakouts. 

Another interesting aspect of this is that both the Transports and the price of oil fell pretty much together. Now that oil is back over $90, the Transports jumped While this may seem counter intuitive, it really reflects the fact that the markets can afford the higher price of oil. 

The bottom line is that technical analysis needs a re-write to incorporate sentiment and the fact that the world has embraced regression analysis. This keeps most believing that the trend will not reverse, technicians have in that way all become economists. 

Recent Performance

Regular readers will recall that I originally recommended Central Fund CEF shown in blue. It dropped the least which is reassuring to those watching daily values of their portfolio. I recommended GDXJ only after it fell to the $20 level, shown in red. XME has lagged an just now picked up, XES has performed well. But the point is, the greatest rebound percentage is liable to be in GDXJ not CEF. I am thinking of shifting funds from CEF to GDXJ for that reason. The miners have horribly underperformed the gold price. 

This would be a good time to review Irrational Ratios.  That post shows that the XAU to SPX ratio is back to March 2009 levels. This suggests that it is still time to buy the miners. Dave Rosenberg has suggested that while the miners have lagged gold, in the latter stages of the gold rally they will outperform.That time may have well arrived. 

Well I am already to the 1400 word count, that's enough for this post. The next post will examine the very near term. And Peggy Noonan gets causality exactly backwards in her column the Weekend WSJ. 

The Bottom Line

The sentiment switched from negative to postive this week lifting all indexes Wednesday through Friday. Short sellers had to buy back and their quantitative programs forced them into long positions. That gave the market a double buy which rocketed the Dow to back to back 200 point days. That is the first time this has happened in 3.5 years. That is a clue to what lies ahead but most 'experts' looking backwards are still overly cautious looking to short again. They will be disappointed.

The New Model of Tech Analysis for this extended period of stagnation (2000-2018) is understanding that money is chasing its own reward. it matters not that the economic recovery is slow, in an effort to make more money hedge fund managers will chase stocks, gold, and  oil all higher. 

Think of the markets as an hourglass. The sand just ran out of the risk on globe (stocks, gold, oil) to completely fill the risk off (bond and the dollar) globe. Wednesday sentiment turned the Market Hourglass over. The sand of sentiment is now pouring from risk off to risk on. This will happen in classic Elliott fashion. Let's review

Wave One or A - a move begins seemingly out of nowhere, doubted by most but taking the market by surprise. Numerous theories on why the 'market is wrong' are advanced

Wave Two - A pullback occurs allowing the above group to say ' I told you so'

Wave Three  - A tsunami of buying overwhelms the naysayers taking the markets ever higher

Wave Four - Four is an alternate in character to Wave Two, if Two was strong Four is weak or vice versa, but the trend is interrupted either way. 

Wave Five - a Weaker advance with less breadth than Wave Three but it registers a new high, this is precisely what happened in the Dollar and Bonds this past week!!!! Then both collapsed. 

Whether we will see a five wave or an A B C advance is not known but this should typify the sentiment as it unfolds

Thanks for reading The Market Perspective

Dennislelam@gmail.com

 

 

The Market Perspective bases its information on techniques and sources that have been found to be reliable in the past, and The Market Perspective tries to base opinions on sound judgment and research, however, we do not guarantee that future results will match past performance ands no guarantee can be made that advice will be profitable. The Market Perspective accepts no money for stock recommendations and is purely motivated by its own research in recommending any stocks.  Put another way, the responsibility for decisions made from information contained in this letter lies solely with the individuals making those decisions. The editor and persons affiliated with The Market Perspective may at times have positions in securities mentioned.  Nothing contained herein represents an offer to buy or sell securities. The Market Perspective encourages investors to be diversified, and to maintain sell stops and risk control over their valuable investment capital.  No guarantee can be made to the accuracy of text or charts.

 

Sentiment Shifts

Friday July 27, 2012

I would not worry that commodities might become more undervalued because of a weak economy. The markets around the world are fueled on speculation driven by the differences in currencies, not the difference in economies. Hmm, that is a good point to put in the update today. This is how oil went from 100 to 145 to 35 in a few months of 2008 or from 110 to 78 to 90 today in the last few months. Demand around the world did not change in that percentage fashion. 

Comments to a thoughtful Market Perspective reader by myself

I received a very thoughtful e mail from a reader this morning. The very good part of that, like being asked a thoughtful question in one of my college classes, is that it got me to thinking. And as I say, markets are driven by speculation, not the underlying economies. Social mood is what it is all about. Which brings me to Friday morning. Yesterday I stated it appeared the Dollar was finally coming off its highs and reflecting the divergent lower MACD. 

IN the 1970s John Naisbitt published his first Megatrends book. His theory was that the size of newspapers does not change but the content of what is reported changes radically. He attempts to discern those changes and then report on what he deems to be the next big megatrend. Since the first book he has like Proctor and Gamble got into product diversification, Megatrends for Women, China, etc. 

I believe socionomics takes his idea one step further. I scanned this morning's WSJ and here are a few comments I highlighted concerning the Euro, which of course has been routinely trashed until two days agao. 

Page A 7 Irish Return to Bond Market

members may be able to become financially self reliant within the planned time frame

the true indication of Ireland's success

investors have rewarded the country with yields that have fallen sharply

five year bonds were sold at an average yield of 5.9%

now note this comment....It was a stunning result...It surpassed all market expectations

In other words, the social mood towards Irish debt changed overnight, trumpets please!

Page C1 Stocks Take a Leap of Faith

The sentiment swing on Thursday brought respite to weeks of fixation on the European debt crisis. 

Indeed, as I remarked yesterday, I when I began writing a very early morning update the spx was down about 5 points thursday morning, then I got an e mail from a reader and bang, the SPX was up 14 in the blink of a socionomic moment. Like a giant school of fish in the aquarium, the school changed direction at that moment. As the quote above states, the mood changed. 

Now granted there is an article about the ECU buying up debt on page A 7 as well, and the media will point to that as the change. Not so. We have been treated to endless reports, such as the German legislature backing Spain just last Friday, only to see the last drop in Spanish bond prices on Monday. After countless EU meetings of support the mood finally changed, period.

Oh one more thing, we know the sentiment is just now turning and the the waves are just starting up, INn a Wave A or Wave One there is considerable doubt which manifest in a Wave B or 2 pullback, this from page C 10 in the WSJ today

The ECB is talking the talk, sending stocks soaring and Spanish and Italian bond yields lower,

but will it walk the walk?

The existence of that doubt will cause many to hold their short euro positions and eventually be forced out which of course will vault the Euro market higher. 

The media of course has been of no help in assisting you in making money. While we have focused on buying out of favor commodities, they focused on, yes, Facebook, now trading at post IPO lows. Mark Hulbert  suggested FB was only worth $13, it is down from 38 to I think $24. Who would be surprised?  On page A 2 this morning Zuckerberg himself states that the best advertising is a message from a friend. Well sentiment wise perhaps so but that won't drive FB earnings. At least Mark is honest in saying he makes money to build a better FB not the other way round. Sounds like he should have been a 501c3 not an IPO to me. 

Well, stocks gold oil copper all up this morning, hoepfully by day's end valuations of our suggestions will have risen again. 

Thanks for reading TMP, tell a friend.  As Mark Z.  says, teh best ad is a message from a friend!

 

PS The Targets given yesterday are for an expected top which probably will not happen until after Labor Day. We will have both ups and downs between now and then. 

Break Out or Fake Out?

Thursday July 26, 2012

I believe we are turning the corner here but I thought that twice before and had to wait a while longer. 

This analyst thinks gold is a buy on a break out at any price or a break down to 1450. The break down scenario looks less likely. 

The Last Few Days

We made this comment in the weekend update after observing Friday that the market was ahead of itself.

The character of the rally changed after June 4. Now the market has been moving higher with the RSI bouncing off its zero line. Since the top on June 18, the market seems to have averaged 4-6 days in one direction or the other. I labeled the down moves in days. so a test of that 50 day MA now at 1333 seems realistic in the next week. 

Here is an update of the same chart showing what actually happened.

SPX

And the market hit 1330 for a low, making 1333 a great target. After the predicted four days, the market bounced nicely to say the least. 

Biut you say, it has done that in late June and mid July is this any different, Well there is always one in the crowd isn't there?

TLT Bonds

TLT looks to have completed five waves up. The low was clearly in March. Waves 2 and 4 show alternation. Wave one and five are about the same time length, a month. And the MACD has diverged lower on the fifth wave even though price is higher than at the top of Wave Three. 

US Dollar

The big break down in the dollar today makes a persuasive case that indeed this time it is different. This is a less textbook pattern than TLT but still works the same way. I circled today's trading which is much lower. 

The Psychological State of the Market

I spent some time today listening to the commentary on Bloomberg. The floor brokers at the Merc thought the fundamentals for the Euro were poor, short the Euro on rallies. Later various blokes  with titles like Strategic Visionary Analyst  most  wore a suit that probably cost as much as all the clothes in my closet, would intone the same thing. Like economists they simply extend recent history into the future. 

The graph of the Dollar above these paragraphs argues otherwise. And so the market begins to turn, wth the conventional wisdom not wanting to give way. Cavuto featured  a visual of the last few days of trading with triple digit losses for three days (floor brokers grabbing their temples in literal agony) and then two updays (floor brokers delighted, they make money either way what do they care?). The Strategic Visionary Analyst speaking at that moment cited lousy retail sales and therefore the markets hve to go down don't you see. Nuts to that, markets are about where the money is going not where someone imagines the economy to be at the moment. 

Anyway, the shift in sentiment has begun.  While the media focused on a statement made by the Italian head of the EU Draghi,  the truth is that the market finally reached the tipping point, money will begin coming back to risk assets. 

One of my  accounts, in the red over $9,000 a few days ago, improved about $3400 just today, $1900 yesterday.  That is a mood shift.  See my previous post about enduring paper losses on the way down.

The Timeline

A reader asks exactly what I am expecting a bit put off by the Dark Knight reference. Good question.

The Summer Rally Begins

Yes I have announced that before but this time we finally have the dollar coming off its highs. I expect stocks gold oil silver to rally probably past Labor Day. I expect stocks to  zip past the last high of 1420. Mr. Market must get  everyone out of their Bond Safe Harbor and into stocks, before a the real sell off begins. 

A Peak Before the Election - A Few Guesses

Stocks Zip Past 1420 on the SPX

Crude Oil equals the previous high of $110 which is why I recommended XES

Other commodity plays do well as emerging markets like Brazil EWZ soar on improved commdity prices. 

The Euro stuns everyone soaring over 135, the new French President says see the world endorses my programs

Gold breaks to the upside and takes out $1800. 

TLT sinks below 109.  The Dollar drops back below 80.

And then the markets begin topping out. The ensuing bear market should wipe out all gains from March 2009 to Labor Day 2012. This will be brutal as it will be evident that the US has become a basket case like Spain or Greece. 

At that point we will use the SAR PAR to put trailing stops under our positions, that way we can go higher but will sell as the markets pull back. We begin to put buy bonds and HDGE at that point. 

Thanks for reading the Market Perspective, I have tried to add complete coverage during these volatile market days. We hope TMP has improved your investing results. 

 

 

The Psychology of Trading

Thursday July 26, 2012

I want to demonstrate a few examples of just how powerful psychology is in determining prices in the markets.

Back in the day, say the early 1990s, lots of small investors were buying Wal Mart. The rumor got started among this group that, and watch the wording of the rhetoric here, 

after Wal Mart splits the stock,it always doubles!

Well stop the presses, the search for the golden goose has finally ended. Now appreciate that there is no more correlation between a stock split and the subsequent performance than there is between a tire blow out and a car battery failure, one does not lead to th other, it is purely random. But in the psychology of the small investor who cares about boring statistic rigor?

As one WMT stock split neared I started getting calls ( I was listed in the phone book as a broker).  I did not know any of the callers but the conversation sounded liike something out of a B movie Film Noir, imagine two guys meeting in a dark alley to fence the stolen diamonds, neither knows or trusts the other ....

The caller always dropped his voice near whispering in the phone, what would you charge to seel me X shares of WMT?  The question was delivered with the sort of sly you don't know what is coming next inotnation that would have made Peter Lorre proud. 

My point is, that psychology drives the markets. 

One Market Perspective reader made a point about CLF in an e mail. 

CLF 15 Minute Chart

Note that CLF collapsed from 48 July 19 to 36 today July 26, that is a loss of 25% ot total market capitalization in five days!

CLF the big picture

The drop from 75 to 45 of 30 points was 40% of market cap. And it took five months!  But the last nine points was a 20% drop in just five days, not five months. The point is that near the very end, investors panic out of a position in an otherwise fine company, in a true selling climax. This is why 'crashes' come at the end of a move, never at the start of a move. 

Now to continue our journey into investor psychology, what was the reason for this big drop?  Surely the company lost money, faces a major lawsuit over environmental or human damage, has lost a patent fight so the very future of the company is threatened, right?  OH not at all, in fact CLF is making great money, read on.

Cliffs Natural reported after the closing bell Wednesday a 37% drop in second-quarter profit compared with a year ago. While its per-share earnings of $1.81 topped Wall Street expectations by 4 cents, the company warned costs at its Canadian operations continue to rise. Analysts at FBR Capital Markets cut their recommendation on the stock Thursday to market perform from outperform. Cliffs Natural shares were last down 7.8% at $37.94, extending the stock's 39% drop so far this year. 

Not only did it make money it topped expectations, so it was sold down even further. As the saying goes, in a bear market all news is bearish, because that is the psychological imperative at the time, and will be until the mood change!

Our point here is that money in the markets is like sand in the hourglass, it runs all the way out, and then the hourglass reverses and it goes the other way. At least that is the case in a period of stagnation where values lurch violently from risk on to risk off. 

The previous 18 years of bull market taught a generation to buy and hold. With 18 years of re enforcement ivestors were hardly prepared for a time when all their thinking needs to reverse every three or four years. 

Everyone still clinging to buy and hold is making little progress!  And so the advice from one generation to the next horribly prepares the next for what lies in store. 

The Pain of Paper Losses

Buying lower and lower results in paper losses in the account, until the market turns. One way to judge how close we might be to the bottom is by my correspondence. When I get e mails wanting to know when I will recommend getting out, throwing in the towel, the bottom is liable to be near. By the way remember when I gave up on SJT, it is now back to about where I gave up, patience. 

Friday I suggested the market had topped and a likely 4-6 day sell off would ensue, I named 1330-35 as a likely low. Well Wednesday was the fourth day, the low was 1330 Tuesday afternoon. But even I was doubtful, so go figure, the psychology of the moment is a tough challenge. That was the reason for the lengthy pre-market ratio charts this morning showing the rationale. Expecting I might have to wait another month, I was finishing the post when one of you logged on to notify me the markets had rocketed up from being five points down in the SPX just minutes before.

How's that for mood change?

Irrational Ratios

Thursday July 26, 2012 Posted at 7:30 AM CST

The President of 321gold has a couple of graphs which illustrate just how irrational valuations are towards the miners right now. 

Yesterday I admitted things are not going as planned and suggested those of you who are uncomfortable might well unload the losers. Before you put those orders in this morning, consider these pictures. This is an attempt to explain the nature and rationale of my thinking. 

I started this b blog because like most others, I did not take advantage of the extreme irrational valuations in November of 2008 or March 2009. We are actually near those levels today in terms of what we have recommended. The fact that our accounts show great paper losses every day suggests that a reversal lies ahead, but where and how soon, waiting is indeed nerve racking. 

It is easy to look at a chart, particularly one in which the onlooker has no physical position, and say, well obviously that was a great buy, if I had been there I would have scooped up the bargain. Yet in the real world where one has a position and it keeps going against one, it is a real psychological barrier to do that. 

Let's use some ratio charts as 321gold did in the referenced article above to illustrate just where we are in the recent history of things. Are we near an extreme high in these ratios or near a multi-year bottom?

XAU to Gold

I have often referred to our Time Machine, the ability to reproduce charts for  a particular past time. We are now back to the irrational undervaluation of mining stocks as represented by the XAU index to the price of gold. Looks like it took about four or five weeks of extreme low valuation in those frantic days of Fall 2008, when the world really was falling apart, for the market to bottom and reverse. We have had about that length of time so far but no reversal. 

Pan American Silver to Stocks

Pan American Silver is at the same irrational extreme as the XAU compared to the overall stock market. 

XME to SPX

Last Friday Afternoon a mere four days ago, I considered putting out a sell order for XES and XME. XES had a profit that would offset what was then a very small loss in XME. I did nothing, bad call or not?  XME collapsed three dollars causing the loss there to zoom. The psychological problem here is that we as investors want this both ways. 

Modern computerized trading shows us marked to market every day. A $500 paper loss in XME is now a $2300 paper loss, ouch!  The psychological alarm bells go off as metaphorically we see the buffalo herd turning  attempting   to chase us down, and we are on foot, danger alarms ring loudly. 

And so saddled with our primitive survival system, fear sets in. S

Sure we all claim to buy low. But there are really only two ways to do that. 

One is to believe that somehow magically one will 'know' where the markets will bottom, step in at the moment, or with perfect premonition, place the order in advance cleverly catching the bottom, not too high nor low, and get in. 

Get real, who can do that?  Look a the above charts. Are we coming into, or are we at, a good buy zone?  I would think so. But where is the reversal point, no one knows. We might indeed have to wait until Ed Carlson's 8/21/2012 projected low date, a tedious 19 trading days from now. Can one stand to do that with all this negative re enforcement? 

Two, the other alternative is to start accumulating on the way down. But that will result in ever lower purchase prices (that buy low thing) and paper losses all the way down. Without knowing where the exact bottom will be, the tension mounts daily. In a world of 24/7 news or computer coverage, the re enforcement all the way down is also negative.Now that I think about it....

Indeed it is as though Mr. Market had created a sort of idealized mental torture obstacle track to keep one from buying low. As XME falls the investor gets a steady drumbeat of information telling he or she of the error of their ways.

Gorgeous women (the men aren't Chippendale quality but not bad) on Bloomberg or CNBC announce the disintegration of Europe, each point drop in the Euro sounds like the end of the Euro.

Technicians on stockcharts always following the trend line announcing  with each price drop that the trend is re enforced to the downside, lower prices ahead. They NEVER suggest that lower prices are a bargain, NEVER. They always however suggest that HIGHER PRICES    are (in the words of Wally to the Beaver) just swell. And so a higher price for TLT or UUP should always be bought, that you see re enforces positive feedback, we are winning. Buying lower and lower re enforces negative feedback, you silly  putz why do you keep buying a loser?

And then there are the blogs on the internet, Business Insider is particularly adept at suggesting even a modest sell off is, oh, the end of Italy,  one of the oldest civilized countries on the planet. 

For every buyer there is a seller but buying lower and lower means enduring continual negative feedback until that low arrives. Not many can do that which is why most of us need day jobs or an accumulation program of buying dividend paying utility stocks and then doing just that for 20 years. 

Now let's flip the ratios to see if this is valid looking the other way.

TLT to XAU

I have received several e mails from those of you who are rightly quite concerned that your accounts reflect mounting paper losses. Yeah, me too. This is the ratio chart of TLT, risk off bonds, to the XAU index of gold miners. I drew the blue box at left to emphasize that the top of this ratio, the time to buy XAU (note that is important) seemingly lasted for about five weeks. The absolute extreme at .2 probably only lasted a day, and has not been seen since. Note that was four years ago. Note the mathematics of the extreme. 

The extreme was 1.2, three times the low ratio of .4. That is fear on display. Will we have the same scenario play out in the right hand box, as the Edward R Murrow used to say, 

You Are There, now in this case. 

What about the other choice for risk off, the dollar, let's take a look. 

US Dollar to XAU

Since we are dealing in dollars it is the same 1.2 ratio. I suspect this scenario is further down the road, hard to imagine that we will see this extreme in the next few weeks, but who knows? Again the point is that the markets went to an incredible extreme before collapsing back to the 'normal' trading rance. 

I sincerely hope that these ratio charts explain the rationale of our recommendations. Please review the two alternatives listed above for catching the low price. One is either perfectly prescient or one has to buy lower and lower enduring the inevitable paper loss before things reverse. 

This is the most difficult game in the world. When I recommended buying bonds yielding 12% in 1984, I only found one taker, who had several million to spend. As the rally progressed, and by the time the yields fell to 8%, everyone wanted to buy. Now bonds yield 1.4% for ten years, and everyone wants to buy, I am getting e mails telling me I am nuts for wanting to buy irrationally valued mining stocks. 

And of course the guys at stockcharts continue to intone

what does the bond market know about stocks, suggesting that of course, since bonds are still going up they must be the right place to be. 

I at least hope this explains my thinking of the past few months and how,if you folowed it, you have come to see red on your computer printout of accounts, paper losses, and of course,  no positive feeback from the media. 

All my best. 

Wednesday Mid Day

Wednesday July 25, 201212:35 PM CST

Gold so far is holding over $1600, the 50 day MA is 1586 so a close over that would be a positive

Central Fund generated a buy signal on the daily SAR Parabolic today. GDXJ is up but needs another 60 cents to generate a buy on SAR PAR. 

SPX

The hourly chart of SPX generated a SAR PAR buy signal earlier this morning. We speculated it would be four to six days  before a reversal, this is day four. note the two previous turns were slow with the larger up move coming the next day. 

UUP

UUP the US Dollar, generated a SAR PAR sell signal on its hourly chart. TLT is down a smidgen.