"Sex is one of the most wholesome, beautiful and natural experiences that money can buy." -Steve Martin
Two things to cover initially – the above Steve Martin quote relates to the current market because we are getting a market reaction created by an over abundance of money and credit. The second thing to be aware of is the shark, i.e. is this really a great time to be jumping back into the market? Let us not forget that the market works the opposite of other vehicles with respect to attraction. If Sears wants to attract you to its store, it will have a sale. It will advertise lower prices or “specials.” If the stock market wants to attract you to purchase stocks, it will raise prices. Think about that for a moment. In one case, you are getting a value or a bargain; in the other, you are paying a premium.
So, what is the significance of a new all time high in the Dow Jones Industrial Averages? There isn’t one. The reason is that it is not a new all time high (even if the price is higher). The only real meaningful new high is one that is a new real high. When you look at the U.S. dollar chart below, you will understand.
The U.S. dollar has lost 1/3 of its value over the past five years. U.S. dollars are our medium of exchange. The dollar’s value has “real” meaning. We are, and have been, consistently losing global purchasing power. It is not a new real all time high in the Dow Industrials; your home hasn’t “really” doubled in value, etc. Try to “get” this picture. This is an illusion and the financial news networks aren’t telling you what is really going on. Can the market go up in the face of a lot of negative things going on? Well, of course it can – that’s what it has been doing and that is exactly what it did leading into the top in 2000 and the top in 1987. The current period is a lot like the period leading into the 1987 top. You have a two term Republican president in the middle of his second term; you have an overdue four-year cycle low; and you have a solar eclipse that occurred on Sept. 22 (as was the case in 1987 just before that crash). What is the significance of a solar eclipse? There may not be any significance, but many of the major historical collapse have tended to fall near solar eclipses (it certainly doesn’t mean that has to be the case this time). My point is that rather than this being a time for irrational exuberance, it probably should be a time for rational evaluation.
There is an old market adage “Buy Rosh Hashanah, Sell Yom Kippur.” It is self explanatory and may be something to keep in mind. Interest rates and earnings, or at least the perception of interest rates and earnings also affects the market. Currently, the interest rate atmosphere is positive with rates unchanged and a strong rally in the bond market showing anticipation of lower rates. Earnings, in general, are not disappointing. Therefore, the groundwork is in place for the market to be positive and supportive. Its current price action bears this out. Let’s look at some charts: The chart below is my long-term indicator chart.
As long as the Red line is above the Yellow line, things are bullish. The vertical dotted white lines show when four-year cycle lows are due. Since a four-year cycle low is due, we need to be cautious. Let’s look at the big picture on the monthly chart: There are two things that one really needs to be aware of on this chart:
The first is that the market has broken out above the upper red channel line. In my work, two bars where the closing price is in breakout territory evidence a valid breakout. This means that the month of October will also have to be above the breakout line in order for the breakout to be valid. So, this is interesting, as the market has exhibited a good deal of recent strength in a seasonal time period where most market veterans would anticipate weakness. The second observation is that the market has been in a very well defined bull market since the October 2002 low. Simple logic would say that we are very due for at least a correction; however, I do not have a sell signal yet. In fact, nothing on a weekly or daily chart suggests a sell signal is due, other than extended prices and exuberance.
If we rally for another week, it will be a total of 12 weeks for this rally. Three months is a long time for a rally at this stage of the market. There were down weeks during that time, but never back to back down weeks. Therefore, the uptrend was intact throughout. September is usually the weakest month of the year. This September was strong and strong Septembers are usually followed by a correction in October. That is what I would expect this year, but it doesn’t have to happen right away. I think we may have one more rally higher – and, very likely, to a new high in the Dow Industrials. This could cause a short covering rally and even bring in new buyers, which could rally this market higher than most might expect. There is only one Fibonacci price retracement in the way and it is a 76.4% retracement that comes in at about 1368 on the S&P 500. That, in my view, is a best-case scenario. Look at the daily chart below:
The daily S&P 500 chart shows a potentially completed pattern, so a correction could begin immediately. This market is extended – there is no question about that. A good argument can be made for a correction and one more thrust higher into late this week or early next week. I have a few trend lines and cycle lines coming together at that time. The point is that we are extended now and it is important to be very cautious. This is all about reward vs. risk – currently, they are about equal in my view, which means that the reward potential does not justify the risk for a long side trade unless one has a very well defined discipline.
Gold
My favorite gold chart is the weekly chart because it provides such an effective look at the big picture for gold. One of the obvious points on this chart is that you can see the price trend that gold remained in for over three years from its low in 2001. This price action is defined by the thick brown channel lines. In December of 2005, gold broke out of this channel and embarked on a new “price vector” at an elevated angle. This new price angle is in the process of being defined. It should define the range in gold prices during this next period of ascent for gold.
Over the next six months, gold ran to a high of $732. It is currently in the process of retracing that advance. Once this action is completed, we should have the new price vector for gold fairly well defined. The price advance from the breakout took almost six months and it is likely that the price retracement from that high will take a similar period of time. On the weekly chart, the advance took 23 weeks. We are now about to begin the 21st week following the recent high in gold prices. It would appear that gold might have a few more weeks of decline before this pattern is complete. It would appear that we are getting close to a point where gold should be once again considered for accumulation. Gold has been on a weekly sell signal for the past two months. The support levels this coming week are 584, 564 and 548.
Closing Comments: There is a great deal more “information” available in the Information Age than there was in the Industrial Age. Communication is much faster and far more effective than at any other point in our history. This works to the benefit of those looking to support the market – at least during bull markets. We are at a time in our history where we have mortgaged our future. We are comfortable exchanging the equity in our homes to add to our debt so that we can continue to feed our spending addiction. It also seems to make sense to spend hundreds of billions on a war(s) that will have absolutely no financial benefit to us or have a prayer of ever being paid back. Note: in the old days, there were “spoils of war” i.e. if you won the war, you just took what you wanted (at least that was a payback for the expense of war). In other words, the war might make sense on some level if we were going to take over Iraq and access its oil fields. Obviously, it would be wrong, but at least there would be some misguided logic that we could grasp. We don’t even have that.
We have created debt, money and credit at the fastest pace in the history of our country. It is a prescription for disaster, but we move relentlessly along this path as if it was preordained – that, by the way, is the only answer that makes sense to me. Please note that I am saying this completely without respect to any political affiliation. In my view, our politicians have completely lost track of just whom it is they are supposed to serve. They are supposed to serve us – however, it is all too apparent that the ONLY thing they appear to be able to do with any effectiveness whatsoever is to serve themselves. They don’t have to worry about social security because they are on a separate system. They don’t have to worry about retirement or medical care because they have made sure that they are totally and completely covered for life. Did they somehow forget who they were supposed to serve?
With these wonderful “leaders” of ours, we are in debt up to our ears; at war; less safe than we have ever been; our educational ranking has dropped from #1 to #27 or so (and is falling rapidly); etc. The list of negatives is so long it doesn’t even make sense to attempt to make a list. The one ray of light in this mess is the stock market. Why? Because it is the single best predictor of the economy ever devised. The stock market leads the economy – and the stock market has been going up. Therefore, the economy should follow. That is the one ray of good news and maybe the market knows something we don’t. Rates are no longer going up and the earnings picture for some industries is decent. The trick is to make sure this continues.
The ultimate thing to keep in mind as we work our way through this process is the chart above. If a picture is worth a thousand words, this picture has to be a masterpiece. Keep in mind that the stock market is always in the process of moving from one extreme to the other. While the market was extremely overvalued in 2000, there will be a time in the future when the market will be extremely undervalued. The chart above is saying the same thing – in its own way. Somewhere down the road, the debt bubble will implode and when it does all the air will be let out of this balloon we have been blowing up for decades. Prices will go to levels we can’t even imagine. Is this currently happening in the real estate market? Maybe, but it is a good bet that the Fed will create as much money as is needed to keep the bubble alive – at least for a while longer.
Historically, this is why people have purchased gold at such times. As stated earlier, gold may be getting very attractive again.
NOTE: THIS ARTICLE REPRESENTS THE VIEWS OF THE AUTHOR AND IS INTENDED FOR EDUCATIONAL PURPOSES ONLY. THERE IS RISK OF LOSS IN FUTURES TRADING. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.
