Weekend February 10, 2013
Gasoline prices are headed higher. While the facts cited here are true, the author misses the point. Stocks and crude and gasoline are all risk assets. Their prices advance together in bull markets. Just as in 2008, the price of gasoline will advance until it starts to choke off the economy. Ironically the Transport Index hit a new high as the gas price rose, risk assets move together.
OUr internal indicators have flashed overbought warning signals over the last few weekend updates. I hope I made it clear that the markets are now in the final stages of advance. However as our first monthly chart shows, final can mean seveal more months or perhaps the entire year. Bull markets end in overbought condition. As we noted this is the same extreme social mood we saw in Year 2000 and year 2007-8.
SPX Monthly
I boxed in Year 2007.The market spent the entire year bouncing between 1400 and 1500+.I extended the box on the right side to illustrate the same thing happening again.
Dow Transports versus price of Unleaded Gasoline
Contrary to what most television commentators believe, the price of gasoline and the very index that should fear high fuel costs, the Transports, rise together. When social mood believes the economy is strong, one can avoid higher priced fuel.
Semi conductors SOX and IBM
The SOX index is indicative of the health of the high tech industry. While IBM is more a consulting and ERP company than a manufacturer, it displays a high correlation in the bottom panel to the SOX index. IBM at top SOX in the main panel.
NASD Summation Index
The NASD Summation Index is actually higher now than in 2007. Interesting given that Apple has fallen from 700 to 450 or so.
Too Much of a Good Thing, Dollar discount Stores
Big Lots
Investors drove up the prices of Dollar Discount Stores, Big Lots, Family Dollar, Dollar Tree. Here is the example of too much of a good thing. Now with too many stores open, the prices of these stocks are collapsing. this last kiss good bye on the underside of the 200 day MA for BIg may be an ominous sign of more trouble ahead.
Bonds marked time moving sideways this past week.
The Euro moved higher and backed off.
XEU
The Euro Currency is in a claer channel uptrend. It backed off from its upper level this past week. Note the ribbon of moving averages is moving higher.
A Look Back to 2007 for GDX
Here is a good example of how a market will take out the stop sell orders of the impatient, and then leave them all behind in a stunning rally. IN August of 2007 GDX dropped $10 in five weeks, six bucks in one week. The sudden drop below support at $36 no doubt triggered stop sell orders. ONce the selling was done, the buyers scooped up GDX at the lower price and enjoyed a $22 gain over a few months.
Silver likewise dipped below its 50 week MA, and then advance from $12 to $20.
Now let's update to 2013
GDX
GDX has again dropped $10-$12. It is on an uptrend line. It is well below its MAs. Silver has returned to its MA.
GDX TO GOLD
Money is made buying assets which have reached extreme irrational under valuations. This appears to be the a case for the ratio of large gold miners GDX to the price of Gold itself. We are a mere fracton above what was surely a generational skewed relationship between the two at the very bottom in November 2008. It is possible the relation could get as skewed to .0225 now as then but that seems unlikely baring a collapse in all markets.
PAAS to Silver
SIL did nto exist in 2007 but Pan American Silver did, a component of the XAU index. It has reached an even more drastic extreme than GDX to Gold.
We have positions in GDXJ, SIL, REMX, XME, COPX. We believe those stocks are closer to breaking out but admittedly it has been a long wait since Sept 18 when most of them topped. Stocks overall benefit from numerous calls for new bull markets.As in 2007 investors are pouring in at the top. This will however drive the various stock indexes to new highs before we are done.
Socionomics of Higher Ed
In Texas the legislature has shown reluctance to approve additional tuition revenue bonds. Yet numerous private and public campuses are adorjned with construction cranes. This is happening as UT Austin joined the MOOC Massive Online Open Course movement this week. Joining other top names from the East Coast, UT plans to initially offer four classes for certificate completion. But it is not hard to see a revolution at hand. What if UT, Harvard, Univ of Michigan all begin offering more and more classes for low prices that will lead to a degree? This parallels the crash in retail shopping space that Howard Davidowitz has outlined. See our look above at the rapid expansion of Dollar Stores, and the stock price pullback since. As with shopping, the internet is offering alternatives. We have outlined our concern that the trillion dollar student loan debt will collapse. Already there are calls to forgive that debt. There is of course no plan for what to do with the losses that would create.
Higher Ed Administrators assume that the linear regression in enrollment to the upside will continue indefinitely. There are already signs that this may not be the case, at least not for on campus students. The legislative love affair with Higher Ed is ending as health care costs for seniors take center stage. Will this render the brick and mortar traditional campus as obsolete as the emptying enclosed shopping malls?
We suggest that the ultimate junk bond is a tuition revenue bond which assumes tuition continues indefinitely to the upside financed by student loans with no collateral. If an acceptable alternative to the traditional campus experience appears, expect change.
Thanks for reading The Market Perspective. As always we like to hear from readers. I began the blog to improve my own trading. Readership continues to grow, tell a friend if you enjoy TMP. I have read numerous market letters over the years. TMP is now about where I wanted this to be and frankly is about as good as most of the paid subscription letters. We have avoided major errors, caught most of the highs adnd lows. When we did not, at least we admit it!
Dennislelam@gmail.com
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