July 25, 2010
John Townsend sends this article titled 'SP-500, GLD and GDX - Sentiment Trumps Everything', originally on TSI Trader.
*When too many players are on the same side of a trade they eventually find themselves in a crowded position where most everyone around them has the same motivation - to reverse their position when the tide changes.
*Little by little, as participants slip out the back door by changing the bias of their position, the pendulum of price swings more sharply against the remaining herd in the crowded trade. Inevitably, something akin to panic sets into the herd as they begin to aggressively reverse their position for financial survival. The primary ingredient that causes price to catapult, up or down, is sentiment oscillation and capitalization from one sentiment extreme to the other.
*An astute market technician, investor or trader will look for those flash points where conditions are ripe for a market reversal. It sounds easy to do, but remember that when the analysis is very convincing, the preponderance of market participants will disagree. It seems that to be effective at market timing one needs to listen not to what others are saying, but to what the sentiment data represents as truth.
*With these thoughts as a foreword, let's see what the current sentiment situation is for the SP-500.
*The following chart is from Market-Harmonics and assimilates 4 years of bull/bear percentage data from Investor’s Intelligence. To this chart I have measured and notated in blue the percent change in bearish advisors per the Investor's Intelligence data, for each downswing of the SP-500. My notation in green is the percentage change in bearish advisors for the related upswing of the SP-500. The price of the SP-500 is notated in black at each swing peak and trough.
*One of the most striking observations I have made of this data is that it appears the maximum pendulum swing in the bearish direction is a 20% change. This occurred in Q1, 2008. More frequently this percentage change has topped out at 19%, followed by 16%, 11% and smaller percentage changes.
*The obvious conclusion I come to is that our current bearish % change situation, at a 19% reading, is about at the maximum. History seems to show that investor's emotions, like a physical rubber band, can only be stretched so far into pessimism (19-20%) - the bearish direction - before they snap back in the opposite bullish direction.
*The pendulum swing in the bullish direction is about to begin at this very time.
*I would expect that the stock market could not possibly peak until the % of bears decrease by a minimum of 8%, and more statistically likely 10-15%. With a current reading of 36%, I am suggesting that we should not even consider a peak in the stock market until the bear percentage reading drops from where it is now at 36% to 28%, and more likely to around 26-21%.
What this means for now is that 1100 is not the top in the SP-500. Far from it. The bears have not even begun to turn into bulls. Price will go much higher from here and it will take weeks, if not a couple of months, minimum, to reach a shift where the % of bears are themselves finally out of whack on the teeter-totter.
Gold, while not covered by Investor's Intelligence to my knowledge, would appear to be in a similar setup as the stock market. For this I turn to data published this past week at Schaeffer's Investment Research and look at the 2 year history of the GLD put/call option ratio.
When the put/call ratio spikes high, it means that traders/investors are convinced that the price of gold will fall. I have circled on the chart such instances from the past two years in red.
What we can observe is that when the bearish trade gets excessively crowded, when a preponderance of participants are convinced that gold will fall, that is not the top in gold. Rather, it is the bottom. I have circled with green the price of gold for each occasion of a put/call ratio spike.
Again, think about what is going on here. When the put/call ratio spikes upward you have an intense perception and emotionally dramatic conviction of traders that substantially puts too many folks on the same side of the trade. When gold starts to move against them, even just a little out of their expectation range, each owner of a put option is no longer a seller of gold, but becomes a motivated buyer of gold! This is precisely how huge brisk run ups in price are both setup and then executed.
*If I were presently short gold and looked at this chart it would send shivers down my spine. No kidding. Nothing like finding out you are in a crowded trade that once it starts to go bad, you KNOW it will go very bad.
*Now, I am not saying that the bottom for gold is in just yet. Gold could still delight the bears and frustrate the bulls with one last brief maneuver lower this week. But after that, if it happens, I believe gold’s low will most definitely be in and then there will be a lot of folks who will wish they did not hold puts on gold.
*While gold has not yet told us if the last shoe has dropped, the GDX miner ETF, however, is suggesting a favorable outcome. The following daily chart is the GDX and below its price movement is the True Strength Index Indicator (TSI) with volume. You can make you own chart and use the TSI indicator by visiting FreeStockCharts.
*On the negative side for GDX, the True Strength Index indicator reading is still barely below ZERO in negative territory (-0.06). On the positive side, GDX is sporting a positive divergence between price and the indicator, a recapture of the uptrend line begun last February, a breakout of a 4 week price downtrend line and a breakout of the TSI indicator on increasing positive volume. All in all, I regard this setup as bullish for GDX and most likely for GLD, as well.
If you are interested in reading more about the techniques of using the True Strength Index (TSI) indicator, want to be exposed to discussion and analysis of various mining stocks, as well as the US Dollar and stock markets, or just want to participate in a blog where your thoughts are heard and responded to, I invite you to join me at my website which is: The TSI Trader. Or jot me an email, tsiTrader@gmail.com
I wish you a profitable week!
John Townsend
July 22, 2010
Today I am puzzled. It will take a while to explain to you why I am puzzled. So, please be patient and bear with me as I show you some 'items' that I have been pondering.
ITEM ONE is a link to this article titled 'More Troubling Housing and Employment Data', by Richard Suttmeier on Minyanville.Com. I quote it below.
ITEM TWO is this. Yesterday morning Red and White D and I were engaged in conversation. He challenged me in a 'where's the beef' moment to show him where exactly the deflation is occurring in our economy. All I could demonstrate at that moment was that home prices were still going down. Given Richard Suttmeier's quote above, it looks like that trend is going to continue. But I left that conversation with something nagging me...in the back of my head...something that was telling me that more deflation should be happening right now. But, if it is, what is it? Where is it? And why is no one talking about it yet?
ITEM THREE is this. Yesterday I posted Tobby Connor's article, which contained the following graph.
What this graph intimates is that the top in the gold price should occur about in the middle of the 2009-to-2016 eight-year cycle, with those two years marking the bottoms. When I read the chart, that projects a top to occur along about 2012. It is a reasonable asssumption. What do we know that is happening that could very well make that particular timing true? We know that gold becomes popular in economically scary and hard times. See item four below.
ITEM FOUR is this. We knew two years ago that mortgage resets were going to be higher in the summer of 2010 than they were in 2009, that last summer was just a breathing period of sorts. Then resets were due to jump to very high levels this summer, right now. Item one in my list above would seem to indicate that the resets are happening, and that our nearly ten percent unemployment is exacerbating the situation. We also knew two years ago that the summer of 2010 would be the prelude to even higher levels of mortgage resets in the summer of 2011.
ITEM FIVE is this. In our morning conversation Red and White D also wondered why mutual funds were suffering outflows. Well, I did some research and found that they are not. Here is a link to 'Fund Flows Turn Positive in June', by Sonya Morris on MorningStar.Com. I quote it below.
THE PUZZLE is this. If deflation is happening as I believe. It should show up in mutual fund inflows. They should decrease, and here is why. When you lose your job your 401k/IRA is probably one of the few nest eggs you have. After being unemployed for a year, you are going to have to tap into that fund. The fact that housing is also taking a dump, means you can not get any cash out of that. In fact, you may be losing your house and that process will put an even bigger strain on your finances. The unemployed will have to tap the 401k/IRA. But the story above, in item five, would indicate that is not happening.
Granted, the 90 percent who still have jobs are still contributing to 401ks. Their contributions create a huge amount of inflows for the mutual funds. But inflows should still have taken a hit, and should take an even bigger hit a year from now. This piece of the financial puzzle does not make sense to me. Mutual Fund inflows is precisely where some deflation should be happening, and it should be happening right now. I am puzzled. Help.
July 21, 2010
Tobby Connor sends along this posting:
Just like the stock market, gold runs in cycles (all markets do because the humans that trade these markets go through periods of optimism and periods of pessimism).
For the purposes of this discussion we will concentrate on the intermediate and daily cycle, after a quick explanation of the two larger degree cycles. At this point all one needs to know is that gold's 8 year cycle bottomed in '08 and isn't due to bottom again until 2016.
The yearly cycle bottomed in February, and no yearly cycle except the one at the 8 year cycle low has ever moved below a prior yearly cycle low since the secular bull started in 2001.
That means in order for gold to move below $1044 we would have to entertain the fact that the current 8 year cycle has already topped in only two years. That would also mean the secular bull has likely topped.
I just don't buy that, as no secular bull in history has ever topped before reaching the bubble stage and gold is clearly a long way from that. So all this nonsense about gold falling back below $1000 is just that - nonsense. The odds of a move back to $1000 anytime during the remainder of this bull market are probably less than 1%. I don't know about you, but I make it a rule to never bet on something with odds of success at only 1%.
Now let's move in and take a look at the next larger cycle, the intermediate cycle. This cycle has averaged 18 weeks since the secular bull began in 2001, but has lengthened to 23 weeks after the global debt problems began in '07.
My guess is that the Fed's extreme monetary policy is acting to stretch golds intermediate cycle slightly. As you can see from the chart, gold is now about to enter the 24th week of the current intermediate cycle. This of course means it's becoming extremely dangerous to sell gold. On the contrary, this is the time where savvy investors want to be looking to add to positions. Remember, this is a secular bull market after all, and you only get this kind of opportunity about every 5 to 6 months.
You certainly don't want to blow it now as you will have to wait another half year before it comes again, and since this is a bull market the next opportunity is going to come at higher prices. For all you traders who claim that you are going to back up the truck when gold experiences a pullback, well you are getting your pullback right now. The question is, will you follow your own advice?
Now let's look at the smaller daily cycle and see if we can pinpoint a closer time frame for when we should be looking for the final bottom of this intermediate cycle.
On average the daily cycle tends to run about 20 days. However, it's not completely out of the question to see a cycle run as long as 30 days occasionally.
I will also note that we usually see a failed daily cycle as gold moves into a final intermediate cycle low. With that in mind here is where I think we are in the current daily cycle which, by the way, does appear to be a failed and left translated cycle as it was unable to break to new highs.
It appears we are now on day 16 of this cycle. Since we know that the average duration trough to trough for a daily cycle is 20-30 days, we can extrapolate a reasonable timing band for a final bottom somewhere in the next one to two weeks. Here's what to look for. First off, I think gold will need to retrace at least 50% of the intermediate rally. That would come in around $1155.
Next, I would like to see sentiment turn extremely bearish. We are already well on our way to that happening as public sentiment is now nearing the same levels we saw at the February intermediate cycle bottom.
About this time we will see the conspiracy theorists start blaming a mysterious gold cartel for what in reality is just a normal correction within an ongoing bull market, and one that happens like clockwork about every 20 weeks.
So the bottom line is we are on the verge of getting one of the best buying opportunities we ever get in a bull market sometime in the next week or two. The question you have to ask yourself is, will you take it or will you let the "technicals" talk you into missing another fleeting chance to accumulate at bargain prices in the only secular bull market left? Let's face it, at intermediate cycle bottoms the technicals are not going to look like a bottom. Instead, they are going to look like the bull is broken.
Only those people who can think like a value investor and keep the big picture firmly in mind are able to buy into an intermediate cycle bottom. You have to make a decision. Are you going to seize the opportunity or are you going to let the bull trick you into losing your position?
July 14, 2010
Rich Kolon sends this link to 'John Lee: Focus on Junior Miners' on SeekingAlpha.Com. I quote the article below.
...Keep in mind, China is very centralized; it's not a free economy. The government has $2.2 - $2.5 trillion in their coffers so they can easily weather any sort of a storm and dictate the pace of progress. For example, they're spending around $1 trillion building high-speed railways; in three years time they're going to have more high-speed rails than the rest of the world combined. Any short-term corrections are not going to dissuade them from their plans. And they're building buildings, a lot of them. Their low occupancy rate is not going to stop them from trying to deploy as much of their $2 trillion as they can before the dollars go bad.
Here is a link to 'Are We Trending Toward Deflation or Already in It?', by Mike Mish Shedlock on MinyanVille.Com. I quote the article below.
I doubt it.
Bernanke is far more likely to be worried about home prices and commercial real-estate prices, neither of which is in the CPI. Next up, Bernanke is seriously concerned over falling bank credit and marked-to-market valuations of debt on the balance sheets of banks. Those aren't in the CPI either.
No doubt Bernanke is also very concerned over the falling yield curve, which signals risk avoidance. Of course Bernanke is very concerned about jobs.
I don't know how to rank those concerns other than to say everyone of them is far more important to the Fed than whether the CPI drops an essentially meaningless point from here.
...Given that consumer credit is plunging at unprecedented rates, given that credit dwarfs money supply creation, and given that marked-to-market valuations of credit on the balance sheets of banks is again falling, I propose we're back in deflation again."
Verily, Mr. Shedlock. The FED led that horse to water. The horse won't drink.
What a lot of pundits miss right now, or completely dismiss, is the importance of sentiment. Those that do incorporate sentiment into their thinking often do not differentiate between long term and short term sentiment.
Short term sentiment can differ wildly from the long term, and visa versa. I can be bullish about markets over the next month or two, while being strongly bearish about the markets over the next year or two.
The FED/Fed can not have it both ways
The FED/Fed can and did come in with $Trillions to bail out financial institutions. That relieved short term fears (sentiment) about those institutions. But, from a longer view, those actions spell nothing but trouble (sentiment) ahead. The FED/Fed can and did act. But they can not now retreat from the implications of those very same actions. When investors (of all sizes) look at those actions they have to ask themselves:
Are these the actions of policy makers who are confident in the economy --- or are these the actions of policy makers scared senseless by what they see looming on the horizon?
Oh yes, Bubble Boy Ben, you can do the deeds. But you can not escape the implications of those deeds.
The FED/Fed may as well have spelled out the long term implications in neon. And that is just one of the reasons I say we are in a Depression. The FED/Fed's own behaviors would indicate that that is where we are. No wonder banks are loaning a lot less now and consumers are borrowing a lot less right now. And the markets? A lot of private investors are simply out of the markets...leaving the big boys in the ring to bash each other's brains out.
Oh yes, Bubble Boy Ben, you can do the deeds. But your deeds kill any long term positive sentiment.
July 13, 2010
Tobby Connor sends along this posting:
In my last article Bear's Beware I warned that shorts were running the risk of getting caught in an explosive rally as the intermediate cycle was due to bottom. Well, it did bottom and bears have watched their profits quickly evaporate as the market has surged out of the intermediate cycle low.
The initial thrust out of one of these major cycle bottoms will usually gain 6-10% in the first 8-13 days. We are now 6 days in and up 6.9% so far. I expect we will see a test of the 200 day moving average before we see any significant pull back. These initial moves out of intermediate bottoms don't tend to wait around as smart money smelling blood in the street pile in quickly.
It's only the little guy, who doesn't understand what has just happened, that continues to fight the trend change. This is usually about the time that I see the technicians start calling for this or that resistance level or trend line to put a halt to the rally. They are, of course, assuming this is a bear market rally and it will soon be over.
First off, let me say I'm not convinced yet that the cyclical bull is dead. I would need to see the market come back down and break the recent lows first. If both the transports and industrials do that then yes, we will have a Dow Theory sell signal and at that point I would have to assume that the market has begun the third leg down in the secular bear market that started in March of 2000.
Now let me say this, bear markets don’t begin because of lines on a chart. They begin because something fundamental is broken in the economy or financial system. Now we certainly do have a broken financial system, no doubt about it, but then again this cyclical bull was never built on the foundation that we had fixed anything in the financial sector. We certainly haven't fixed anything in the economy with unemployment remaining above 15% if one counts everyone out of work. No this cyclical bull was built on a foundation of massive liquidity. I'm not convinced yet that that fundamental base is broken. Only time will tell.
But even if this is a bear market rally let me assure you that bear market rallies don't end because of lines on a chart. If you think you are going to spot a top in a bear market rally by drawing a few trend lines or some meaningless resistance level you are just kidding yourself. It ain't gonna happen. It never has and it never will. Lines on a chart don't halt bear market rallies anymore than they initiate bear markets.
I'll tell you exactly what halts a bear market rally. Sentiment! Sentiment, at every single one of those rallies during the '07-'09 market, reached bullish extremes. Not one single rally was halted by a pivot point or resistance level prior to sentiment reaching extreme bullish levels.
Even after the recent surge, sentiment is still so depressed that it's at levels lower than most of the intermediate bottoms during the last bear market. So let me tell you, if you think the market is going to turn tail and run because it hits the pivot at 1130 or the 200 day moving average, or because you think earnings aren't going to be rosy, you are going to be sorely disappointed.
If this truly is a bear market then before you even begin to look for a technical turning point you first have to wait until sentiment does a 180 degree turnaround. That just doesn't happen quickly after the kind of beating we just got.
Trust me, it's going to take a while for investors to forget a 17% correction and dare to become bullish again. If I had to guess I would say at least 8 to 11 weeks. Even longer if the next half cycle (due around day 15-20 of the rally) and full daily cycle correction (due around day 35-45 of the rally) are strong enough to scare investors again.
The problem with the move out of the February bottom was that we got no corrections and it quickly turned into a runaway move. Those kind of rallies tend to end with some kind of mini-crash. I started telling subscribers there was a high possibility of that back in late March and early April. It happened in Feb. of '07 with the China crash and sure enough, it happened again in May with the flash crash.
Traders become extremely complacent during one of these runaway moves. At the April top sentiment had reached levels more bullish than at the top of the last bull market. As usual, we paid a heavy price for that complacency. But now we've swung 180 degrees back in the other dierection, with sentiment so depressed it even makes the '09 bottom look positively giddy. That my friends is the base for another powerful rally.
Actually I won't be at all surprised if the market rallies back to new highs ... even if we have begun the initial topping process of this cyclical bull. Remember the bear market had already begun in the summer of '07 but that didn't stop it from rallying back up to marginal new highs in Oct. before finally rolling over into the second worst bear market in history.
This idea that the markets can somehow magically look into the future is just ludicrous. I can assure you no one can see the future, and that includes the millions and millions of investors that make up the global markets.
Now let me say this - we already know where the cancer is. Does that mean the stock market will now start to discount the next bear market? In the summer of '07 we knew the cancer was in the credit markets, initially beginning in the subprime mortgage market. Did the market look into the future and discount the unraveling of the global credit markets at that time? No it did not. The stock market rallied to new highs.
Well, we already know what will eventually bring this house of cards down, it's already started just like it had already started in the summer of '07. We are going to have one sovereign debt implosion after another and that is going to lead to the cancer spreading through the global currency markets eventually infecting the world's reserve currency.
But don't expect the market to look ahead and begin discounting the unraveling of the global currency markets. Markets don't do that. What they do is slowly recognize the fact that the fundamentals are broken. Once enough traders realize that, the markets begin to roll over, usually in an extended process taking many months.
I doubt this time will be any different, especially since the central banks of the world are going to fight the bear with a blizzard of paper. Don't make the mistake of thinking the markets have to act rationally. They don't and won't. If the Fed prints enough money markets are going to rise even though the global economy is crumbling all around us.
If you are bearish and determined to pit your stash against Ben's printing press I'm afraid you are signing up for one very difficult time ahead. I seriously doubt we are going to see another credit market implosion like we saw in '08. Without a severe dislocation like that there will be no market crash this time. When the bear does return (and he will eventually) the next leg down is going to be a long drawn out process with multiple violent bear market rallies. Selling short in that kind of market isn't going to be easy. As a matter of fact I doubt 1 bear in 10 will even manage to make money in that kind of environment.
Bears should be careful what they wish for. I suspect the next leg of the secular bear will manage to destroy both bulls and bears alike."
July 12, 2010
John Townsend sends this article titled 'Can the Stock Market Continue Rising? Gold, Too?', originally on TSI Trader.
And a good stock trader should always be asking him/herself, are we at an extreme now and if so, which one?
This chart is my attempt to communicate that we are at an extreme in sentiment. And it turns out that the extreme at this time is FEAR, not greed.
The upper portion of this chart is the weekly SPX for the past four years. The lower portion of the chart is data from Investor's Intelligence and graphically measures their weekly readings of bearish investment advisors.
You will notice that each peak in the percentage of bearish investment advisors marks an important low in the stock market. And, we observe that from bottom to top, each cycle of emotion is not able to stretch more than about 20% in a given period of time. It would seem that human fear can be pushed just so far and then it seeks relief - no matter the perceived fundamentals of the stock market. And likewise, emotions of confidence and downright greed can only be stretched so far before the sentiment cycle bottoms and turns back up.
The current situation is that bearishness has been stretched about 20% in the past 10 weeks and should be getting close to beginning a roll over towards bullishness. Of course, this means that the stock market should be generally going higher over the next many weeks.
As current bears begin to throw in the towel and become buyers, the cycle progresses through its natural course. This alone is what will propel the stock market higher into the foreseeable future.
I have identified a range on the chart where we could expect the stock market to start running into trouble - the next top - and that would be when the percentage of bears finally drops back down to somewhere around 20%. As that is likely to take quite a while, this current rally could last quite a while, weeks and weeks.
Here is another chart to observe the timeless pendulum swing of human emotion. This is a chart of the Put/Call ratio of Equities from 2005 to the present.
What I have done is identify the price of the SP-500 at the major peaks and bottoms. Notice how the Put/Call bottoms are always highs in the stock market. Notice how the peaks are always lows in the stock market.
We observe that the pendulum rarely swings more than .20 in one direction or the other. At present, we have swung about that far from the previous bottom and appear to be deciding where to go next. My feeling is that the pendulum should now swing downward and thereby pull stocks upwards
Gold is in a secular bull market and going to go much higher over time, particularly as it is still in the process of the C wave advance of its ABCD characteristic pattern, and should be delivering a parabolic advance in the upcoming months.
But gold has got itself in a bit of a tough situation at the moment, and I do not see how it will be able to wiggle free until it first heads south. The following chart is an hourly chart of GLD for the past 5 or 6 weeks. I use the True Strength Index (TSI) indicator to generate buy and sell decisions and the indicator is shown below the GLD price action.
On this chart I demonstrate the technique of trend line breaks to give me sell signals when the upward momentum of gold cannot be sustained. At present, it appears that gold is in the precarious position of having drained its battery over the past five sessions and looks ready to drop. There is a gap below Friday's trade that probably needs to be filled anyway.
Once gold falls through that white trend line I drew using the True Strength Index, it will be interesting to see if the indicator then continues to fall below its ZERO level. When the TSI indicator is falling below ZERO, price is also falling and will continue to do so until the indicator reverses.
The other thing I will be interested to see is what kind of positive volume comes into GLD. So far it appears that some big volume players have taken their chips off the table and when they come back to play, they could put in a bottom for gold.
At my website you will find these charts and many others with details on how you can use the True Strength Index (TSI) indicator at www.FreeStockCharts.com. There are 5 or 6 techniques for deriving buy/sell signals using the TSI and I freely make this information available for your use. If interested in learning more, or just reviewing the history of the gold secular bull and its repetitive ABCD pattern, please visit my site: TheTSItrader.blogspot.com or Email me at: TSITrader@gmail.com"
July 8, 2010
Keith sends this article titled 'How Low Could the S&P 500 Go?', by Hao Jin on SeekingAlpha.Com.
The Orange Section sends this note.
Past performance would indicate that both parties believe in big government. Democrats want more programs that make the world 'better and safer' for the unfortunate. Republicans want programs that make the world 'better and safer' for big corporations.
But you are right about the middle class extending their lifestyles/luxuries on borrowed money. That is what happened. I too have hopes that the Depression we are living through will change people's attitudes toward debt.
What has struck me lately is just how bad the State Governments are. Without being able to print money out of thin air, like Washington, the various states still managed to create complete debacles of government finance. Impressive in a strange way. But this is not your old man's recession. This thing is going to go on many more years and the State Governments will hit the wall hard. Then, and only then will honest discussions occur about the true and propper role of government in our lives. It will be this discussion, held in 50 different venues, that will perculate ideas up to the Federal level. I hope it will be a mild but broad sweeping revolution of sorts.
July 7, 2010
John Townsend sends this article titled 'SP-500, GLD and GDX - Down More or Now Up?', originally on TSI Trader.
With that backdrop, how about we ponder some charts and see if this market correction is likely to stay with us for infinity and beyond or if perhaps it has not only worn out its welcome, but is also close to having its flame extinguished.
Let's begin with the SP-500 hourly chart. I made this chart online at the website www.FreeStockCharts.com.
The indicator displayed below price is the True Strength Index, commonly referred to as the TSI. It is an elegantly smooth and responsive momentum indicator.
First off, we’ll note that both the SP-500 and the TSI indicator have a trend line of lower highs connected by a white line. The TSI trend line spans the entire 11 days of the SP-500 correction from 1131 to this moment. Click on the chart to Enlarge
The exact midpoint of this SP-500 down leg is around 1,071 where we conveniently find an open gap that is begging to be filled. Price today rallied up to the white trend line and has since been repelled lower. It would be easy to conclude, at this moment, that the stock market will continue to fall apart except that the True Strength Index indicator is suggesting something quite different.
The white trend line of the TSI has already given a BUY signal – as it was broken to the upside when price was just 1,017. Since early Friday, the indicator of momentum has continued to rise and actually reached the ZERO level before being turned down an hour or two ago.
When the TSI indicator is rising ABOVE zero, price will absolutely be rising simultaneously. That is how the indicator was designed to work. As we are now very close to crossing the ZERO level, I take that as a bullish sign.
The other thing the True Strength Index is showing us is a favorable divergence. The indicator is making higher lows while the SP-500 price is flat. This indicates that a critical shift in momentum has occurred or is about to occur.
Next, let's look at GLD and see if we can figure out if it is likely to continue falling. This is a 30 minute chart of GLD.
We notice that price is currently behaving in a manner curiously similar to a multi-day patch of time beginning 8 sessions ago. There appear to be two prior instances when a divergence of GLD price with respect to the True Strength Index i ndicator preceded a run up in price. Perhaps the current divergence in place signals a bottom, as before. The trend line of the TSI has not yet broken out to the upside, so the jury is still out on how this will be resolved. But the clues look very favorable for GLD having bottomed today.
If gold is about to bottom, or has already bottomed, one would think the miners would somehow confirm that possibility - so let's now take a look at GDX to see what we can find.
I made this chart online at www.stockcharts.com. On first blush, I saw those big red candles and it was difficult to emotionally get excited about what I saw. Then I thought it curious that the lows across the chart seemed rather repetitive ...like maybe they were cycles, or something.
At StockCharts.com you can select 'Annotate - Flash or Java' and then be able to use some interesting measurement and drawing tools on the chart. I selected a tool that displays on the screen with vertical lines and you pull the indicator left and right across the screen to make the lines more or less frequent and therefore, closer or further apart. Each line is equidistant from the other - and looks like a series of blue parallel lines.
The application for this tool, of course, is to explore whether a price chart displays cyclical characteristics.
I pulled the tool across the GDX chart, creating blue parallel lines equidistant one from the other, and nearly could not believe my eyes. Plain as day, there were the cycles of GDX. Sometimes a cycle bottoms a few days early, sometimes a few days late. But after the cycle bottomed price always exploded higher. Could it be that our recent horrible red candles are occurring right on schedule and about to turn into white candles exploding higher and higher?
I invite you to visit my website at www.theTSItrader.blogspot.com. I usually offer a few posts each day on my market observations, often comment on the particular stocks I am currently trading, and try to show ways to use the True Strength Index indicator to make some sense of where the precious metals and their miners are heading. You may comment at my blog or contact me at: TSItrader@gmail.com
Thank you for reading my thoughts. I look forward to reading some of yours.
John Townsend"
.............
Here is a link to 'Behind the Scenes Analysis of Economic Headlines', by John Mauldin on Minyanville.Com. I quote the article below.
...If you haven't looked for work for four weeks, you're not counted as unemployed. If you add those who were taken off the rolls back in, the unemployment number would have risen to 9.9%. In the past two months nearly 1 million people have dropped out of the labor market.
...I'll finish with this thought: This financial reform bill should be thrown out and they should start over. So much has been tagged onto this bill that has nothing to do with reform but is all about political agendas. It's also far too vague. Essentially, they create all these new committees or empower the bureaucracies that missed it last time to come up with the actual details of regulation. For all intents and purposes, a small number of unelected individuals will be given almost total control to write new rules overseeing a huge part of our economy. No matter how well-intentioned, this isn't something that should be done in closed rooms.
We need major reform, of course. And when are we going to get to Freddie (FRE) and Fannie (FNM), which are totally ignored but will cost the taxpayer the most? Congressman Jeb Hensarling has it right. He estimates there are about three unintended consequences on every page of that 1,200-page bill."
July 6, 2010
Keith sends this link to 'Corporate America sits on cash hoard', by Joanna Slater of TheGlobeAndMail.Com. I quote it below.
At the end of March, non-financial firms had accumulated a record $1.84-trillion (U.S.) in cash and other liquid assets on their balance sheets, according to the latest figures from the U.S. Federal Reserve Board. As a percentage of total company assets, which include factories and other investments, cash is at its highest level since the early 1960s."
...The real question for U.S. companies is what business climate lies ahead. Recent data suggest that economic growth in the United States is slowing markedly. If firms 'weren't nervous last quarter, they're nervous now,' says Howard Silverblatt, a senior analyst at Standard & Poor's who tracks the firm's trademark stock index."
In response to this article, the Orange Section sends this note:
'Six Months to Go Until The Largest Tax Hikes in History', by Ryan Ellis on ATR.Org.
The obvious place to focus is the tax rates and the bracket change, which suck, but the real damage is the removal of the tax credits and the AMT. Things like Dependent Care credits and education credits will have a massive impact on family incomes. Smart people will seriously curtail their spending before April 15th, 2012. However, my guess is that the real impacts will be felt in Q1/Q2 of 2012 when people get their tax bill. This net result of this is a massive incentive for consumers to keep paying down debt and to stop spending.
Some Corp. Finance humor: The author of that article was going on about the concept of 'expensive cash'. Yeah right. Sure a 1% return is a lousy return vs. some arbitrary WACC, but how much does bankruptcy cost? My guess is those CEOs and business owners and looking at the horizon and weighing survival as more important than growth, hence the war chests.
The scary thing is that despite all of the incentive to be in cash there is a very real threat of inflation. I really wish I had a gold option in my 401K..."
............
I find it interesting that the period we have just witnessed was a period where we had, thanks to heavy-handed government interference, both Deflation and Inflation simultaneously.
Housing devaluation and mortgage deleveraging have caused, and are still causing, huge asset deflation. Meanwhile, thanks to the largess of Uncle Sugar, stocks have shown rebounds in prices that are completely unwarranted...asset inflation. What a weird world we live in.
Here is a link to an article where I think the author got it wrong. Perhaps he can not read a chart.
'Why Are Home Prices Falling Again?', by Andrew Jeffery on Minyanville.Com.
When Mr. Jeffery says:
This sort of analysis isn't wrong, per se, but all too often discussions about home prices and the real estate market ignore the most fundamental of all economic indicators: confidence.
Shifts in confidence are closely tied to movements in the stock market. And, as I've written previously, the stock market is the most widely used barometer for the country's economic health. It stands to reason then that the relationship between stocks and home prices could be similarly close."
I could not be in more agreement with his words. But do take a close look at the chart he presents about the relationship between the S&P 500 and Home Prices. When I look at that chart, what leaps out at me is that the declines in Home Prices lead the declines in the S&P, not the other way around.
That really is fitting. Even the guys running the funds, the guys making the big bucks are watching their own Home Prices decline. That can not be encouraging, even to them, let alone to the masses in the middle class. You lose value in your biggest asset, and it has to hurt.
And the corresponding rise in the stock market...and your 401k?
Well, that is iffy, isn't it? We all know that markets can swing wildly, and that the old 401k could be in the toilet next month. But the house, that was something you could always count on. Its value always inched up. Now it inches down.
July 5, 2010
If deficit spending is so great...
O.K., let's follow the assumption that deficit spending by big government is wonderful, a panacea, a cure-all for everything that is wrong.
Who got the money...the real money...lots of it....and go ahead and do what you would normally do with it kind of money:
THE BANKS.
The banks got the dough alright, many large manufacturing corporations are sitting pretty, with lots of cash on hand. But nobody has cash like the banks have cash when Uncle Sugar is throwing it at them by the barge-load. Compared to small business, like Roma Pizza, a small pizza establishment, about a block from my house, the banks are swimming in cash.
What are they doing with it?
THEY ARE NOT LOANING IT.
But loaning money is how they make their money isn't it?
Well, yes, kinda sorta. They also make substantial money playing securities.
THAT IS WHY WE HAVE ASSET INFLATION RIGHT NOW IN THE STOCK MARKETS...AND WHY FALLING MARKETS ARE GOING TO HURT THE PROFITS OF MOST BANKS.
So, banks have tons of cash, but are sitting on it and/or playing the markets with it.
RIGHT.
And the consumers who make up 70 percent of the economy can't get/or don't want loans.
RIGHT.
And the banks themselves, how has the 'rescue/stimulus' affected them internally? Have they been hiring?
No, actually, like other really big businesses, they have been using the grace period given them by the FED to become leaner and meaner.
They have been laying off? They have fewer employees than when this thing started?
RIGHT.
It seems that the most stimulated businesses (banks) in our economy have not been positively affected by the 'rescue/stimulus' at all. Huh? Is that how stimulus is supposed to work?
NO, BUT IT IS THE BEST WE HAVE, THE BEST HUMAN MINDS HAVE EVER BEEN ABLE TO DEVISE...
July 4, 2010
Sean Blair sends this article:
The S&P took a real dump on Tuesday. Closing near its lows, I expect one more bump down, to clear out any sell stops below Tuesday, and then a short term recovery back toward its moving averages. The S&P cleared out long term stops below the 1032.25 area and after a move to clear out anything hanging below Tuesday’s lows, I expect the market to turn its attention to knocking out the buy stops from people that have been selling / shorting / chasing the market down. The S&P is far away from its moving averages and I expect it to make a move back toward them.
Below is an example of a market (Cocoa) that got far away from its moving averages and then retreated back. On this particular chart the market got far away on the upside, then went down.
(Remember, there’s no guarantees with any strategy though.)
(Below) I'm looking for the Canadian Dollar to act the same way as the S&P... Retreat to its moving averages. If not already long, buy new lows (or perhaps around the 9423 area) for a nice short term spring back up toward the MA’s. Don’t get greedy on the upside, we're in a downtrend (at least for the short to medium term).
The word, believable or not as it may sound, was that there were a lot of people short the Euro Currency, hence its long term drop, and when the World Cup started people covered their positions so they could focus on the Soccer tournament. That was the move we saw when the EC bounced from its lows in the 118.84 area up to around 124.77. Notice that the move started when the EC was far away from the MA’s.
The arrows point out a magnificent row of sell stops (beneath the lows of the bars) that can be taken out as the market resumes its downtrend. Perhaps as the teams leave the tournament the stops will get taken out and the market moves lower. (Hey, fundamentals are fundamentals, but “technically” those lows / stops are goners... in my opinion.) The anticipation of further crumbling of the Euro zone might have something to do with it too.
Discussion of strategies and analysis is welcome. My door is always open.
Sean E. Blair"
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Tobby Connor sends along this posting:
"I'm going to go through some signs that rabid bears might do well to pay attention to because I think the market is very close to a major bottom. (That doesn't mean we are guaranteed to make new highs, although we might. Just that we can probably expect an explosive rally soon, even if it ultimately turns out to be a counter trend rally in an ongoing bear market).
First off, way too many people are counting on the head and shoulders pattern taking the market directly down to 850. Folks, historically these head and shoulder patterns have a success rate of about 50%. A coin toss, in other words. Didn't we learn that lesson last July?
Let's go now to the charts. We have a large momentum divergence that has developed on the daily charts.
Also, notice that the market dropped down to the 75 week moving average yesterday and bounced strongly. You can see this same support during the prior bull. The 75 week moving average acted as final support during the entire bull market. That level also happens to be the 38.2% Fibonacci retracement of the entire cyclical bull move. Not an unusual correction in an ongoing bull, on both counts.
Next, we are now right in the timing band for a major intermediate cycle low.
At 21 weeks it's just way to late to press the short side. You risk getting caught as the intermediate cycle bottoms initiating a violent short covering rally.
And finally, breadth is diverging massively during this final move down. As you can see the NYMO often diverges at these intermediate cycle bottoms. The divergence at this point is the largest in years.
Finally, I'll point out that the February cycle bottomed on a reversal off the jobs report. I think it's safe to say the market has already discounted a bad number so we could see shorts begin covering in a buy the news type trade, even if the number is bad. And if the number is good, we will see the market gap higher huge, trapping shorts and throwing gasoline on the fire of a short covering rally.
It's just too dangerous to continue pressing the short side at this point. Better to just step aside and not risk getting caught in the intermediate bottom that WILL happen sometime soon, maybe even on today's employment report." ...............
Others, besides Paul Krugman, are now coming around to my long held view that we are in the modern form of a Depression. Here is a link to 'In the Midst of a Depression, Consumer Confidence Plunges', by Mike Mish Shedlock on Minyanville.Com. I quote below.
