Weekend June 30, 2012
All the things we have been writing about the last few weeks came to pass Thursday and Friday.
The market returns to risk on assets. Read about the AC72 the new design for the Americas' Cup which will take place in San Francisco Bay. I have been on a Hobie 21 Catamaran at full speed, one can only imagine the forces invovled with a 72 foot boat. And yes, there is a very real risk one of these can turn on its side which is why we chose this photo to lead off this weekend TMP.
The conventional wisdom about crude oil was wrong, it is not going to $60 ro $70 but has more likely formed another higher low, ready for an assault on $100 again.
Gold soared over $40, ditto. Even Silver joined the party. Recall our observation that silver has been trading right at the 50% re tracement level for its entire bull move since year 2000. Recommendation such as CEF and XES also soared.
The Euro rallied over two points again despite the media predictions of its demise. Greece has been in a long slide for about 2,500 years, our guess is that the latest deal gives them about another 2.5 months before things become unhinged again.
The Public was invested in the wrong thing, long bonds, as we said last weekend, priced for the End of the World.
It was also a banner week for extreme social mood. Those negatives will come to full force later this year and certainly in 2013-14. We discuss that topic at the end of today's post as usual.
US Dollar versus Canadian Dollar
If we were going to show you one chart this would be it. It is allyou need to know. The Greenback collapsed and the Canadian Loonie soared, the Aussie Dollar did even better. This is what we have predicted that stocks, metals, and oil would reverse when this happened. Now understand we believe the US Sollar is in a long term uptrend, this is a pullback along the way. I would guess this Dollar Pullback might last into Labor Day, September 2012. August is usually friendly towards stocks. At that point we will be looking to exit the positions we have accumulated this past month.
Bonds TLT, A Road Map for the Future
Absolutely no one wanted a 14% Mortgage Bond when I began buying them for institutional clients in 1984. Now everyone wants a long bond with a yield of less than 3% for the 30 and 1.6% for the 10 year.
We have five waves up since the 2009 lows on the weekly bond chart. I drew in what should be two impportant 'not going to hold support lines.' 'The first is the top of Wave 3 at 120 and the second is the support level for Wave 4 around 109-10. When TLT breaks these levels expect a surge out of bonds and into stocks. That will propel both stocks and commodities higher. Indeed that is the Supply of Money that will drive the stock market up into Labor Day. Perhaps Bill Gross will recommned one of his new stock funds to those same investors around Labor Day. If he does that will be our cue to exit our positions.
Summation Index
It is not unreasonable to expect the NYSI to top out by Labor Day. This is another tool we use to judge the rationality of the market. Markets topped out in February and bottomed early June. Weekly MACD has a ways to go before the market tops again.
Let's use XES the Energy Service ETF as a proxy for our various recommendations.
XES
As Steve Kaplan says, to buy low and sell high first you have to buy low. This means acquiring value assets at lower and lower prices. As the public sells out, one must buy. This results in short term paper losses. But one can never know where the bottom truly is. And the reversals tend to be violent, XES moved about 10% in three days!
XES shot up 3.75% on Friday. Now, it is possible that some readers are shall we say 'not on board.' The puacity of e mails causes me to believe that many of you no doubt believed the majority of analysts who were convinced 2008 was beginning all over again. That was the case for example for the two analysts at stockcharts.com. I certainly don't want to promote TMP by criticizing the work of others. But here is a quote that pretty well reflects the still exisitng skepticism about this rally.
Chart 6 shows Spot Gold ($GOLD) bouncing off support in the 1525-1550 area for the fourth time since September. Overall, a large descending triangle is taking shape. A break below the May low would confirm the pattern and target further weakness below 1500.
My point is not so much to criticize the point of view but to remind you that this stubborness will eventually give way to endorsing and powering the rally. The public will be dragged out of bonds and eventually into stocks over the next two months. Then and only then will the market be ready to tank, once again with the public on the wrong side.
XES Hourly
XES, XME and others are quite voerbought after a vigorous three day rally. In addition, July 4 falls on Wednesday. So there will be a slowdown in trading this week. That could provide one last opportunity to hop on board at lower than Friday's closing prices. here 29.22 looks reasonable.
We would suggest a succession of lower orders be placed at even intervals but at odd prices like 29.22 rather than say 29.25. Here is a similar chart for our suggested investment in Central Fund CEF.
CEF
Most people will probably celebrate the Fourth next rather than this weekend, That means many will be leaving town Thursday or by Friday Noon. Be sure to continue your orders lower than you might think, the way the Holiday falls may allow for some good opportunities here.
CEF should be considered a core holding. It has pulled back 30% from 26 to this 18-19 area. As we have noted, there is not a single government on the planet that plans on actually paying down its debt. Central Banks have begun buying gold. Eventually most will re peg their currencies to a much much higher price of gold claiming that the money is now backed by a hard asset. Given the amount of gold most Central Banks own now versus their total government debt, that will call for much much higher gold prices.
SIL Silver Miners
Silver is always a wild ride as it stradles both the industrial side as well as the poor man's gold idea. But this looks like a least risk opportunity to me.
Crude Oil
In one day crude oil erased the entire month of decline in June. Don't doubt me this is for real.
While one can theorize that the EU finally made a deal, the fact instead is that markets were stretched as far as possible. They then sanpped back, too few were on our side of the table. Above one sees the effect of all the shorts covering. This is why we recommended adding XES on the way down. Waiting for a pre determined target is dangerous for just that reason, suppose the market never reaches the target, then you are not in the trade.
Recall we dismissed all the fundamental analysis regarding
lack of demand for gasoline
declining economies in Europe and the US
Less driving in the USA
all of which we were told just a week ago would keep gasoline prices low. Wrong. Oil is priced in dollars and moves expoenetially in the direction opposite the Dollar. The Dollar index dropped from 83 to 81.5. But oil moved 7.93% in one day. The fact rthat there was a massive short position which had to be covered also contributed to the jump. But readers will recall that just this past week we doubted the call for $70.
Ramki is as good an Elliott Wave Analyst as I have read. But this article demonstrates the difficulty of using one methodology to the exclusion of others. And it demonstrates the dange of not buying on the way down and waiting for some idealized target to develop.
The Bottom Line
The low prices for CEF, GDXJ, XES, XME, SIL and other commodity plays is now in place.
If you are not on board we suggest scaling in orders between the extremes ( the low to the high) recorded this past week in your favorite investments.
Avoid bonds and the Dollar, the move will be in energy service, gold, silver, copper.
Socionomics
We have spent considerable time preparing you for a hardening of attitudes. Those opposing beliefs and other extremes of mood mainfested themselves quite well this week. This is also a reminder that one cannot simply use news events to invest. One might supose that a vote finding the AG in contempt of Congress would be negative for markets but that is not the way this played out. Here is our short list of Socinomic Extremes.
Supreme Court upholds Obamacare on a 4-4-1 Vote, the Bush Appointee giving the go ahead to the biggest tax increase in history. If this law stays on the books it will inject massive uncertainty into the job market next year. No employer will know the potential cost. In addition numerous taxes will kick int that will slow the economy.
Business has no idea what to expect; the biggest tax increaases ever to fund the program loom, the WSJ devotes several pages on the tax implications.
Congress votes to Hold the Attorney Genearl in Contempt over Fast and Furious. The Justice Dept of course will not prosecute.
Stockton, CA becomes the largest US city to take Chapter 9 Bankruptcy. This ramps up the trend begun by Harrisburg PA and Vallejo, CA. Expect more cities to take on impossible pension promises to unionized employees in coming months.
Turkey sends troops to Syrian Border, US backs Syria's Story.
Sturm Ruger
Fast and Furious was a US Goverment effort to put US originated guns in the hands of Mexican Drug Cartels so that this could be used to pass another ban on assault weapons. (This is of course an absurd use of language, if you are assaulted by anyone with a gun by any definition the criminal is using an assault weapon, just ask anyone who has been mugged.) At any rate we submit this chart of Sturm Ruger as the NRA public reaction to the idea that the US Government may not be able to force you to do this or that but can tax you for not doing this or that.
Our view is that the lows are now in place for stocks oil and metals. The rally should last into about Labor Day. We will monitor the public exit from TLT as well as a lower VIX to form an exit stategy. Then it should be time to buy TLT as well as some short positions.
Thanks for reading The Market Perspective
Dennislelam@gmail.com
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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.
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