Stock Market Rally Failure Whilst Gold Rally Continues
Stock-Markets / Financial Markets 2010 May 16, 2010 - 10:21 AM GMTBy: Steve_Betts
“I wouldn't call it fascism exactly, but a political system nominally controlled by an irresponsible, dumbed down electorate who are manipulated by dishonest, cynical, controlled mass media that dispense the propaganda of a corrupt political establishment can hardly be described as democracy either.” --- Edward Zehr
This may come as a shock to you but we are now living in interesting times. These interesting times are being brought to you by the folks around the world who created massive debts that can never be paid. At first it was difficult to catch on because they disguised the debt in the dual forms of derivatives and fiat currencies.
Derivatives were clever because no one could understand them and yet everybody bought them. Fiat currencies were even more clever because they convinced the world they were money, when in reality it’s just more debt. Anything that is backed by nothing but a promise to pay is debt. Until recently the market didn’t seem to care all that much about the combined printing/debt mania that gripped the world, but last week that changed. I view last Thursday’s massive sell-off as a coming attraction.
Last Thursday the market took an intraday tumble of 1,000 points in less than two hours. Then it recovered 650 points of that decline before the close. Even before the final bell the financial news networks began to attribute the massive sell-off to an “erroneous trade”. By Friday morning this was upgraded to a glitch and now we have “commissions” created to assign blame and legislate solutions. The truth of the matter is that for several minutes there were absolutely no buyers on the NYSE, and that should be food for thought. Also, any intelligent person would tell you that you can’t legislate buyers! Last week’s sell-off goes beyond the decline which is a result, and now I want to examine the cause which can be found in the following two charts for the money supply in Euro land:
and in the US:
The not so subtle message found in these charts is that the world is printing huge supplies of fiat currency, but it is not filtering out into the general public. Instead the money is flowing into a very small number of financial institutions that would otherwise have to close their doors. This money enters these institutions in the form of what for all practical purposes are interest free loans. These institutions then deposit the money back into their respective central banks and earn a huge spread.
That brings us to the problem: these loans are all unproductive as they add nothing to GDP. It’s just more debt piled on top of massive amounts of debt, for the most part backed by highly inflated “assets” that can’t be liquidated for more than twenty cents on the dollar. It solves nothing and actually aggravates the existing problem. If this money had flowed out to the general public, they more than likely would have produced something that adds value to the economy as a whole. Unfortunately the public never saw a dime, and that was actually the intention from the beginning. “You” never figured into the equation!
The fact that all the major central banks went on a printing spree prompted most analysts to automatically call for increased inflation, and some even projected hyperinflation. What they all forgot is money supply is one thing and the velocity of money, the speed with which a dollar moves through the economy, is something altogether different. It is this velocity that determines inflation and not supply. Velocity is falling through the floor and that is why we are seeing deflation and not inflation. Signs of deflation abound if you only care to look and I want to use oil as an example:
Here we see the initial bear market decline from the 147.90 all-time high back in mid-2008, to the 35.13 low posted in December 2008. From there we saw a bear market rally back up to the recent 87.26 intraday high, and well below key resistance from a 50% retracement of the initial decline at 91.51. On Friday oil was trading all the way back down as low as 71.50. This is due to deflationary pressure and I believe it will take oil down to a retest of the December 2008 low and maybe even all the way back down to the 14.00 level that initiated the bull market for oil in particular and commodities in general. In case if you are wondering copper looks a little better than oil, but not by much, and grains continue to look horrible.
Every since Bernanke and Co. announced their massive bailout in March 2009, the stock market headed higher as if none of this mattered. We saw two corrections along the way of 10% each, and the rest were just hiccups. Until last week! Actually we saw a hint of a problem the last week in April with a change in character in both the Dow and Transports. Ever since the Dow bottomed in March 2009 it has pulled the Transports higher, making new closing high after new high, and then waiting for the Transports to confirm. Then the last couple of weeks in April the Transports began making new closing highs while the Dow struggled to confirm. Finally the last week in April saw the Dow fail to confirm the last two closing highs in the Transports. That is a significant change in behavior, and to date I have read nothing about it. Then we saw fireworks last week, and after a three day reaction, even more fireworks on Thursday and Friday with triple digit declines on both days.
The Dow registered a new closing high of 11,205.03 on April 26th and an intraday high of 11,258.01 on that same day, but neither was confirmed by RSI or MACD indicating technical deterioration. Also, the move up had been on consistently light volume, a sign that big money was not participating in the festivities. From there we saw a minor decline thru April 30th followed by a triple-digit rally on May 3rd to a lower closer high at 11,151.83. Then the wheels started to come off, highlighted by the move down to the 9,869.62 intraday low on May 6th. This was followed by another triple digit loss on Friday as doubts started to creep into the minds of investors. Below I have highlighted the movements over the course of this year:
Note that the Dow fizzled out right at the 11,245 Fibonacci resistance and then turned immediately down, and that all down days were on increased volume. After last week’s massacre the Dow tried to rebound back above the 50-dma but failed on four attempts to move through it. Also, the rebound was three days from the bottom and then we turned back down, capped off by Friday’s 162 point loss that could have been worse if it weren’t for a last minute rally. Where have we seen that before?
The Dow closed out the week at 10,620.16 and below what should have been strong support at 10,725 if it was still going to head higher. That means we now have a lower high and opens the door for a test of the 9,869.62 intraday low from last week. I believe the top is now in, we’ll see a test of that low within two weeks, and I don’t think the Dow will stop there. Good support is at 10,334, 9,706, and 9,461 while resistance is at 10,633, 10,725, and 10,817. I don’t think anyone out there has any idea as to what kind of downward pressure this second leg down in the bear market will put on prices. Before it’s all said and down I think we’ll see a day, just like they saw in 1907, where they’ll be absolutely no buyers! Think about that for a while and just let it soak in! All the Ben Bernanke’s in the world won’t stop that day from arriving. My target for the Dow is 4,123 by year’s end.
Another market reeling from the affects of deflation is the FX market. In particular, the US dollar seems to be defying gravity as it surges almost on
a daily basis. On Friday the spot US Dollar Index rallied another .90 to close out the week at 86.28, moving through resistance at 84.89 like it wasn’t even there. Why the surge in the greenback? It is not a move to a safe haven; rather it’s the need to have dollars in order to service dollar denominated debt around the world. As we know there are staggering amounts of debt out there, and with the world’s economy on the decline, dollars are not so easy to come by.
It seems ironic that the Fed is printing so many greenbacks and yet we don’t have enough to go around, at least over the short run. This can be attributed to an effect known as “crowding out” whereby all new funds are going to pay for government deficits and to a few select institutions that would otherwise be bankrupt. That means there is little or nothing left over for the general public, and that’s where we are today. Now as the government spends money this condition will be alleviated, the dollar will top, and then the excessive printing will have the affect of driving the value of the dollar down into the ground. Right now it is difficult to guess where that top is because the deflationary pressure is constantly increasing. I though the dollar would top out at 82.41, but I was obviously wrong. This week it went through good resistance at 84.89 like it wasn’t even there. Now we’ll encounter resistance at 87.25, 87.55, 89.97, and then 96.00. My bet for a top would be 89.97 since it was the last major top in a dollar rally, or 96.00 since it represents a 50% retracement of the entire bear market decline. In the meantime we’ll just have to watch and wait.
The one thing that has not disappointed me is the behavior of gold. In spite of all the comments and publicity to the contrary, and in spite of the fact that the general public remains completely in the dark about gold, the yellow metal continues to grind higher. This week the spot price made a new all-time closing high of 1,239.10 on Wednesday, and closed out the week at 1,232.60 in spite of numerous attempts to drive the price lower Friday morning. It should be mentioned that Friday’s close was also a new all-time closing high for a weekly chart. In the process gold has now made seven consecutive closes above what was critical resistance at 1,219.20, and that resistance now becomes good support. The longer we can stay above that resistance, the stronger it will become:
A usual many analysts are pointing to the fact that gold is extremely overbought and are calling for a top. If it were the Dow that was overbought, they would be cheering it higher! In any event I expect gold to consolidate gains above the 1,219.20 support and then rise as high as the strong resistance at 1,298.10 before we see anything longer than a three day reaction.
Over the longer run many of you are expecting gold to fall all the way back down to the 1,000.00 area, and some are calling for a decline all the way down to 854.00. I don’t see that as a viable alternative. I think we’ll rally up to 1,298.10 and then somewhere in that area we’ll see one of two things happen:
- A seven to nine day decline down to the 1,219.20 support followed by some sideways movement and then a massive move up to the 1,372.80 resistance, or
- A thirty day decline down to the neckline at the 1,137.60 area, again followed by a period of consolidation, and then a massive move up to the 1,372.80 resistance.
Many of you are concerned that since gold has declined from May to September in previous years, it will do so again this year. I disagree. Gold has made a significant change in character that will produce corresponding significant changes in behavior. These changes are due to the fact that gold has now put in three consecutive head-and-shoulders patterns of various sizes, and has built a huge base in the process. That base is more than sufficient to support a move up to 1,500.00 by the end of this year. That doesn’t mean we’ll get there in a straight line because we won’t. I expect no less than two reactions of 10% to 15% along the way and volatility will only increase as each week passes.
SUPPORT RESISTANCE
SPOT GOLD 1,219.20 1,298.10
1,158.20 1,372.80
1,148.70 1,447.50
Although silver has been lagging gold for months it now looks like it’s ready to break out and take the lead. This last week spot silver finally managed to move and close above the December 2, 2009 closing high of 19.22, closing as high as 19.54 on Wednesday, before ending the week at 19.31. For almost a year silver had been struggling to break out of the 14.50 to 17.00 range as the bears would raid it in an effort to push the price of gold down. That strategy no longer works and I suspect we’ll have a massive short covering rally within a month or so. As you can see in the following daily chart for silver, this week’s intraday high touched strong Fibonacci resistance at 19.81:
Like gold, silver is trying to break out above the upper band of its recent trading range and that would be quite bullish. Unlike gold, silver has yet to reach the extremely overbought range in RSI and it could easily reach 21.00 before than occurs. Once through the 19.81 resistance, silver will not encounter anything until it reaches 20.98, and I would expect that target to be hit before we see a reaction that lasts more than four days. My price target for silver is 26.48 by the end of the year.
Now I would like to end this discussion on an up note and that means saying a few words about gold stocks. Back in 2004 I exited all of my gold stocks for a period of six months and then reentered the market concentrating everything in just four stocks I considered to be “blue chip”. I still hold them today and they are Buenaventura, Goldcorp, Royal Gold, and Silver Wheaton. Later I added Golden Star as a speculative investment. I bought the four in Canadian dollars or Peruvian Soles and do
to the fact they paid cash dividends. Over the course of the last six years I have made money through currency appreciation, share price appreciation, and cash dividends. Now the emphasis is on share price appreciation as the HUI powers higher, coming within ten points of last year’s all-time high. The HUI closed out the week at 487.47 as it consolidates its gains above the 473.50 support area. I suspect we’ll see a new all-time high within the next week or so and I have little to no doubt that the HUI will test the next
layer of resistance at 580.22, and I don’t think it will exhaust itself stop until it reaches a minimum of 640.76.
So there you have it folks, the world as I see it. Gold and silver are good while paper is bad. The only thing worse than paper is debt, and it is unfortunate that the world is drowning in it. There are more than US $600 trillion in derivatives floating around out there and no one has the money to back them up. It is even more unfortunate that the people we chose to govern this planet are hell bent on creating even more debt, knowing full well that it will never be paid. That’s why they are passing it off to taxpayers; if it were a good investment it would be in their portfolios and not yours. There is now a certain awareness that we have passed the point of no return as people like Ron Paul gain some national exposure, but I can’t help but feel it is all too little and too late. The government insists on
handing out money as a way of compensating for losses in personal income, but this has less and less affect with each bailout. On the other hand the tax base is shrinking so the government must print more money in order to fill the gap. This is a game all crumbling empires resort to when reality becomes too much to deal with. Unfortunately, this game always ends poorly!
With an access of five million vacant housing units across the US, there is no chance that we’ll see a return to the good old days of “refinance and consume”. Like it or not, we are all going to be forced to live within our means. Greeks are rioting in the streets in opposition to their government’s insistence that the average man on the street pay for all the excesses. That is a coming attraction of things to come throughout Europe and the US, and it could easily spread into Asia as well, in spite of their reserves. Civil wars will occur, governments will fall, and heads will roll. The real question is what will arise from the ashes when it’s all said and done. So far I have no clue as my crystal ball is surrounded by fog. The only thing I know is that gold will be there. Everything else is a question mark.
By Steve Betts
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