Gold Jumps to the Upside; Dollar Breaks Down

Weekend November 24, 2012

Ramki counts five waves down in IBM. IBM has pretty much benn a proxy for the entire market in my adult lifetime save for when it collapsed and was re made in the 1990. Identifying a fifth wave low here adds to the conclusion that a low of some significance has been made. 

Rich Karlgaard looks at Apple.  Pleae read this article as Rich does a fine job of showing how in just five years the profit margins on the iPhone have valuted Apple past the 1999 valuation of MSFT. It won't last he says. Rich holds the title of Publisher of Forbes. There are typically a few favorite stocks near any market top, RCA in 1929, University Compputing in 1966, the dot.coms in 2000. amd Apple now. Rich notes that the rich profit margins from the iPhone, a mere five year old gizmo, have propelled AAPL past the lofty valuation of MSFT in 1999. I expect Apple will make a secondary high beneath 700 and that will be it.

When Meredith Whitney predicted municipal defaults we suggested that she broaden her definition of default ont include municipal employees, citizens, and bond holders. Holman Jenkins looks at international defaults and then how the US Government will default in kind on promises politicians appear to have made. 

Andy Kessler  notes that Robert Rubin was a strong dollar Treasury Secretary. That was the standout achievement of the Clinton administration though Rubin certainly did not continue that success as  Co Board Chair at CITI. Kessler notes the string of also rans, from Alcoa's O'Neil (I never understood a miner as Treasury Secretary), John Snow who paid himself pretty much all the money his railroad earned for ten years, Hank I need $700 billion Paulson, and the Tim Taxes what taxes Geithner. Longer term I expect a low in the Dollar this next spring and then a move back up as the world scrambles for dollars to pay debt. 

A Look Back at Our Commentary 

For new readers we exited positions September 18. We began buying partial positions back at Election Time exactly one week too early. We improved by noting   mood change Friday November 16, indeed the market has rallied since culminating in Dow 176 points up November 23. We reiterated the similarity between the sell off of March to June with September to November this year in stocks. We remain focused on that similarity. If a rally of similar magnitude, June to September,  occurs it would take the SPX from 1340 to 1540. We ended the week at 1409, less than half way there. Commodity stocks rallied this past week. 

 

Overview

The turn we have anticipated appears to have gotten underway Friday June 16. The action on Black Friday Nov 23 seems to confirm that with stocks, gold, and silver significantly higher. Insider buying intensified this past week. 

The Dollar appears to have broken down Friday leaving a sort of island reversal over the last week. Bonds gave back recent gains but remain high. We look to add to positions on any pullbacks this next week. 

Insider buying soared this past week as reported at 

J3SG Summary <[email protected]>

The corporate insiders are the most knowledge able about their own firms, spending their own money is a positive sign. 

Summation index NASD

We spiffed up our chart after an alert reader sent us a something along these lines. The full stochastics are overlaid on the main chart. The NASD Composite is at top.  The Commodity Channel Index seems to move with the summation index while MACD lags. So here you are. The actual summation index started up and the stochastic indicator confirms this. At top the price index bounced off an uptrend going back to last summer. This one has been pummelled by the drop in Apple, now down about 25%.

Weekly Stocks Over 150 Bar Moving Average

This indicator is also confirming a weekly market turn. Note the price at top, the 150 MA in the main chart, and the CCE at bottom are all turning up. 

Our reluctance to buy more this past week was based on the fact that the Dollar and Bonds were still not breaking in our direction. That appears to have changed Friday. 

The Dollar,  Gold,  Stocks

The Dollar is in the Main Chart in the red green bars. Gold is overlaid in the main chart with the gold line. The SPX is at bottom. 

We are attempting to demonstrate intermarket relationships. The Dollar bottomed as stocks topped arond our exit September 18. Gold moved higher and then fell. Gold bottomed just before the Election but stocks lagged. This is typical, gold leads stocks. Stocks finally made a low and then the Dollar collapsed, right at out 125 day MA line. Note the dollar has fallen through three longer term moving averages. 

TLT Bonds

No such collapse has taken place in the bond market. Complacent investors are getting about 2.5% annually but risking quite a potential drop in price here. This is the same time frame  chart as the dollar but we moved gold to the top panel as the interplay is not evident here as with the Dollar.  My guess is that bonds hold up another week as stocks have a short term pullback this next week. 

GDXJ SIL

Overlaying the full stochastic really emphasizes our exit in mid September. Now CCI is at its midpoint in the lower panel.  GDXJ suffered a big drop as programs sold it when the 200 day moving average was broached. But there was no follow through, I wonder how long funds will follow these computerized programs using obsolete benchmarks. The weekly stochastics will lag and have not bottomed yet. 

Agriculture MOO

MOO  is nicely invested across Monsanto, DE, potash and other ag based industries.  Every time Jim Rogers is interviewed he mentions farming and agriculture. 

Extreme Expression of Social Mood Occurs at the End of a Move

Here is an excellent example of the maximum inflection of mood occurring at the end of a move in the stock market. The Slope at bottom registered its maximum Nov 12. I drew three black lines under the price index. Note that the slope dramatically increases form line to line. As the market sold off, the need to sell grew more and more intense. More and more rushed to the exits. Then with the selling exhausted, the market was free to quickly advance. Why, the absence of any sellers in the market meant that buying had a positive result in pushing prices up. 

Short Term Expectation

I admit to having become a bit overly cautious the past five to six trading days. However, on the very short term two hour chart above one can see the market is a bit overdone. I suspect the market pulls back  this week. Blue arrows highlight the tops of the stochastic at bottom and the  RSI at top. In the main panel those have coincided with short term market tops all the way down. And note that none of the MAs have begun to even flatten yet, so let's continue to keep watching. This prompted my comment Tuesday that I was not buying anything else at this time. Even one negative article about the Fiscal Cliff could easily knock things back short term. 

Gold Silver Inverse Head and Shoulders Pattern Breakout?

Last weekend we showed a potential inverse head and shoulders patter in both gold and silver. Both appear to be emerging to the upside from those patterns. 

GDXJ to Gold

The Pattern of higher lows in the gdxj to gold needs to continue. So far so good. The idea of buying gdxj is that the mining stocks have been irrationally beaten down relative to the price of gold. 

An update from November 14 2012 - All Aboard!

The overall stock market is advancing when the NYSE index is moving higher relative to the VIX. We showed this rather busy chart back on November 14 and update it here. The solid black line in the main panel is the NYSE Summation index, one of our favorite indicators.  Bottom line

The NYA to VIX ration turned  up-those are the red black dots

The NYSI Summation Index turned up - the solid black line in the main panel

The NYA price index turned up in the bottom panel, so all three are confirming the move. 

Socionomics

The WSJ has a review of Mandelbrot's The Fractalist. Fractals are an essential part of our theme at TMP. Market moves contain smaller versions of larger waves. We show this in the two hour chart in our short
term expectation. It appears that the short term two hour chart is over bought, the daily has just begun to turn, and the weekly lags them both, welcome to the concept of fractals. This explains why stockcharts.com exists in fractals from as short as one minute to as long as one month.

I have three degrees from the largest University in the South, UT Austin. I have taught college myself now full time for twelve years. A letter to the Editor in the Friday Nov 23 WSJ however sums up the problem with our education system. It To wit

Years ago if a student dropped out of school after the 8th grade, he knew enough arithmetic to become a carpenter. Now that same student would only qualify to stack lumber. 

A student recently used the phrase, The Best of Times the Worst of Times in an essay. I stopped here and asked the original author, the title of the work, and the subject. She did not know the answer to any of those questions. Out of two of my classes, average age 32, only one person knew that Charles Dickens wrote that in a  Tale of Two Cities. While I do not teach British Literature, exactly what separates the college graduate from the non graduate. It used to be a bigger knowledge of the world....

Fernando Belaunzaran Mendez submits a bill in Mexico to legalize marijuana. He notes that pro pot votes in colorado and Washington have changed the debate. I have written for years that the solution is not a drug war but treatement as practiced in Japan and Britain, countries that have not locked up their own citizens for such minor offenses. The long war on drugs will end. This is one thing Obama could do in his remaining term. 

Thanks for reading The Market Perspective

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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.

Comments

[Trader Kid]

You certainly can count 5 down on IBM, and now you can count 3 back up which can mean the components of a larger 1,2 (and note that it has already moved up well beyond what that post shows just from Friday's session), but waves are not very good for individual stocks anyway.

My highest probability count of the $SPX is a nest of 1,2s and I am now looking for the crash towards the 1000 area I have mentioned before to resume in short order, so I remain short. This unsustainable explosion up over the last few days screams bear market short covering rally to me and the count just doesn't work as complete here like it does for the sell-off into June. I don't see any reason to believe the market can make it to the 1500s from here as while the more sensitive sentiment indicators came down nicely (but who knows now with the late week bounce), the longer term ones are nowhere near extremes, and too many analysts are looking for one more high, so I expect it to be the one everyone sits around waiting for until they realize they are at the bottom and they missed their chance to exit.

Congratulations for calling the bounce as I certainly did not expect one, but I suspect this is the last good chance to exit the market before a real, long overdue clearing of the weak hands.

I have now even unloaded some of my gold and silver and probably will get rid of some more next week. I did not expect such a bounce there either, but the pattern is clear enough now for me to act on. COT was plenty frothy even before this recent rally, we shall see what it looks like on the delayed Monday release which won't even include the late week surge yet. I am looking for a move back down to the huge support shelf in the low 1500s (which is also the .236 retracement of the entire bull run BTW) to clear everyone out again and then I will re-enter for the next leg up (assuming everything plays out this way of course).

I expected a little pullback in the dollar, but I must admit that that break was stronger than I would like to see for my interpretation that the bottom is in, but this needs a few days to settle down either way because of the ease of things moving around "too far" in such a low volume environment from the holidays. It is also almost at the 50 day SMA.

Since we agree there should be moves downward next week, the key is to observe the power of the move, if it is lazy and sloppy, it could be just a consolidation before moving upward again as you expect, but if it breaks hard and fast you sure won't find me catching a falling knife to buy the "dip".

[Dennis Elam]

trader Kidd

thanks for the response, if the market breaks to 1000 from here it will be the first time ever that it did so with the public safely in the bond market and out of stocks, with major stock outflows the last few months who is left to sell?

[Trader Kid]

I assume by "public" you mean the dumb money in which case the sentiment and COT reports show plenty of people are left to sell as I mentioned. I am not sure what else you would go on, or what you mean by "outflows", all stocks, bonds, currency notes, etc. are held by someone somewhere at all times, the price merely gets bid up or down, so there is of course always someone available to sell. I don't like to harp on this point since I think the concept is somewhat useful as a mental tool anyway, but I'm bringing it up because I already referenced the sentiment and I want to make sure we are on the same page. I see plenty of reason to believe a lot of weak hands are left.

Peak to trough hasn't even been 10% yet and people seem to be calling left and right for a bottom which is in itself a contrary indicator. The economy is very likely already in a recession and the business indicators are deteriorating rapidly. Unless you think that the economy is on the verge of recovery, how could this tiny correction be sufficient to compensate for these conditions?

We have already discussed the bond thing, and bonds are in the very late stages of a very long bubble. If anything the heightened bond prices shows traders are fearful enough about the economy and/or complacent enough about "inflation" that they don't mind the pathetic yields, implying that the stock market doesn't "get it" yet and needs to catch up with reality. But in either case, do you think that when the bond bubble pops and investors raise cash in fear that it will be bullish for the market? We are also near all time highs on the $SPX, if bonds haven't sold off to "move into" stocks by this point, do you really expect that will happen now? I accept that one should not go around willy nilly claiming This Time Is Different, but you also can't get fixated on a single correlation to claim that no one is left to sell.

Also note that one of the big factors for my bearishness is the massive wedge that has built itself across the last 5 peaks and troughs of the $SPX which is a very bearish pattern. I don't recall off the top of my head seeing technical pattern analysis on this site (by which I mean head & shoulders, triangle, etc., not searching for similar market period fractals) so I am not sure of you familiarity with it or if it has factored into your analysis, I read a lot of sites, so maybe I'm just forgetting, but wedges are expected to retrace to their origins which is where I get the 1000 area target.