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Monday, August 29, 2011


I've been warning bears for a couple of weeks that the market was due for an aggressive bear market rally. That rally has clearly begun.

I have often referenced the Rubber Band theory in my nightly reports. For those not in the know the rubber band theory is nothing more than the tendency for any market to regress to the mean. And the further a market is stretched away from the mean the more violent the snap back tends to be once the pressure is released.

In the case of a rubber band, the further you stretch it in one direction, the harder it snaps forward once you release it. Simple action and reaction.

Markets are really no different than a rubber band. The further you stretch the stock market the more violent and persistent the snap back tends to be once the turn occurs. At the recent yearly cycle low on August 9 the stock market had stretched to ridiculous levels, both sentiment wise and technically. This should generate an extremely convincing bear market rally.

A normal bear market rally will typically last from 4 to 10 weeks. (They have to last long enough to reverse extreme sentiment levels.) Generally speaking that takes a minimum of 4 weeks, and 6-8 weeks is about average.

A bear market rally out of a yearly cycle low (other than a four year cycle low, the move into a yearly cycle low tends to be the most damaging decline in the stock market. This year was certainly no exception) will quite often tag, and occasionally penetrate the declining 200 day moving average. I tend to think that will be the case this time also. My best guess is the market will rally up to the 200 day moving average, then dip slightly into the next daily cycle low around the end of September. That should be followed by an extreme left translated daily cycle that tops slightly above the 200 day moving average (I guessed at about 1300 on the chart below) and then moves down into the next intermediate bottom due in late November or very early December. At which point the market will make a lower low, confirming a new cyclical bear market.

Actually the market has already met all three confirmations that a new cyclical bear market has begun.

1. Dow theory sell signal.
When the industrials and the transports both broke below the March low a Dow theory sell signal was triggered.

2. A move below a previous intermediate bottom.
When the S&P broke below the March low it triggered a new pattern of lower lows and lower highs.

3. The 50 day moving average dropping below the 200 day moving average, and the 200 day moving average turning down.

Investors need to be prepared. This is going to be a very, very convincing rally. The tendency is going to be to buy into the media hype, that this was nothing more than a severe correction in an ongoing bull market.

This was not a correction. This was the first leg down in a new cyclical bear market. And like all bear markets it will be subject to violent countertrend rallies that toy with traders emotions, and ultimately cause investors to ride the bear all the way to the bottom.


A portfolio change has been posted to the website.

Friday, August 26, 2011


A possible portfolio change has been posted to the website.

Thursday, August 25, 2011


That portfolio change has been made on the website.

Wednesday, August 24, 2011


A portfolio change has been made to the model portfolio.

Monday, August 22, 2011


As I have been warning investors for many months, stocks have now entered stage III of the secular bear market. Gold on the other hand is now in the final parabolic phase of a 2 1/2 year C wave advance. 

My best guess was that we would see a Dow:gold ratio of between 5-6 before this C wave ended. The ratio was at 5.71 as of today. For reasons explained in the nightly reports I think we may still have a little further to go on the downside for stocks and a little further upside in gold. So it's entirely possible that we could see a Dow gold ratio of 1:5 before the trends reverse.

However the low risk, large potential trade is now in the stock market, not playing chicken with the gold parabola (also explained in the nightly newsletter).

Cyclically the stock market is now in the middle of the timing band for an intermediate bottom. Presumably a sharp bear market rally in stocks will trigger a regression to the mean, profit-taking event in the precious metals market (the D-wave).

D-Wave's almost always test, and sometimes marginally penetrate the 200 day moving average. I've illustrated in the chart above a rough guess as to where I expect the countertrend  rally in stocks and the D-Wave correction in gold to retrace.

Keep in mind that the fundamentals for gold have not changed. A D-Wave is simply a profit-taking event triggered by an unsustainable parabolic rally. It has nothing to do with fundamentals. Once the D-Wave has run its course gold will enter a sharp snapback rally (the A-wave), after which it should consolidate for the remainder of the bear market in stocks.

Stocks on the other hand, after what should be a very convincing bear market rally, will roll over and continue down into a final four year cycle low, probably in the late summer or early fall of 2012. 

Depending on whether or not the Fed tries to fight the cleansing process stocks should either test the March 09 lows, or if Bernanke tries to stop the bear market with another round of quantitative easing, we could see the March 09 lows breached.

Either way I expect that 2012 will go down as one of the worst years in human history. Certainly in the same category as 1932 if not worse.

Friday, August 19, 2011


A portfolio change as been posted to the website.


A possible portfolio change has been posted to the website.

Thursday, August 18, 2011


A portfolio change has been posted to the website.

Wednesday, August 17, 2011


A possible portfolio change has been posted to the website.

Saturday, August 13, 2011


"Liquidity will eventually find its way into undervalued assets" Gary Savage

I think it's time for liquidity to drain out of gold and flow back into a severely beaten up stock market. Depending on how quickly the market tests the 200 day moving average will likely determine whether or not it can make marginal new highs before resuming the cyclical (and secular) bear trend.

More in the weekend report...

Tuesday, August 9, 2011


A portfolio change has been made.

Monday, August 8, 2011


We are truly seeing history being made as the stock market moves down into its yearly cycle bottom.

The last time the market was this oversold was after 9/11.

Breadth has moved to levels even more extreme than the crash of 2008.

When this bottoms, and I think it is days, if not hours away, we are going to see a rally unlike anything we have ever seen before. A rally back up to the 200 day moving average is almost a certainty. Plus the degree of stretch we are seeing right now probably even guarantees a move considerably above the 200 day moving average.

It seems like a great many folks have got it into their head that one is only allowed to make money in the precious metals market. Take a look at the long-term chart of gold though.

This has now become the steepest parabolic move of the entire secular bull market. As we found out in May, parabolic moves are prone to crashes. At this point I have no desire to be in the gold market. I could care less whether it goes to $1800, $1900, or $2000. The risk of getting caught in the crash when the parabola collapses has become too great.

I don't care where I make money. Gold, silver, or stock market, it's all the same to me. Profits are profits.

At this point I would rather put capital at risk in a severely oversold stock market than a parabolic gold market.

Sunday, August 7, 2011


A portfolio change has been posted to the website.

Friday, August 5, 2011


I apologize for the title, but I think we will all agree Beanie deserved that one. Now that I've gotten that out of my system, down to business.

I said in the Thursday night premium report that we would see manufactured economic data as this bear market progressed, but I had no idea it would start so quickly. Does anyone really believe we created 117,000 jobs last month and that unemployment decreased? I suppose with the markets in free fall it probably wouldn't do to publish the true number, which was almost certainly negative. I suppose it was irrelevant though, it took the market less than 5 min. to figure out the numbers were a sham and sell off.

However, I think the decline is probably done at this point. In my last post I took a guess of 1200 to 1225 as a possible bottoming level. It looks like the government's pathetic attempt at deception drove the market down a little further to 1175. We should now see a violent, and very convincing, bear market rally. 

On average the S&P will rally about 90 to 110 points in the first 8 to 15 days out of an intermediate cycle bottom. And those are the statistics for intermediate bottoms in a bull market. Bear market rallies are much more violent.This one could be exceptionally so as I expect the powers that be will try to manufacture another rally similar to what happened at the end of June. This time though there will be true demand behind the rally. If the Fed turbochargers the move we could see 125 to 150 point rally over the next 2 to 4 weeks.

I'm positive after that kind of rally our friend Beanie will return with more talk of Dow 36,000. However he will be wrong again. We are, and have been, in a secular bear market since March of 2000 and in a cyclical bear market since May. Until stocks reach insane levels of undervaluation they are going to remain in a secular bear market. It's possible that we may reach that bottom in the fall of 2012. That is when the next four year cycle low is due.

Wednesday, August 3, 2011


Just as I expected, when the market failed to rally on the debt ceiling resolution, panic set in. As I have been telling people the stock market is not dropping because politicians are debating whether or not to spend more money. They have a long record of raising the debt ceiling whenever it threatened to interfere with their spending spree. So the resolution to the debt ceiling was never in question. We knew from day one that Washington would add another trillion or so to the deficit without any real attempt to cut spending. The market has been in trouble since May because it is starting to price in the next recession.

The S&P has now breached the March intermediate cycle low. In a mature bull market that is almost always a signal that a new cyclical bear market has begun.

I've been warning investors since late April that this was coming. Many were fooled by the phony manufactured rally at the end of June. I knew at the time that the Fed's pitiful attempt to manufacture a momentum move as QE2 came to an end would fail.

All that being said, the market is now moving into the timing band for a major intermediate cycle bottom. My best guess is that the reversal today will probably trigger a weak bounce up to the 200 day moving average, followed by one more leg down. That should mark a more lasting bottom and trigger a 6 to 8 week bear market rally. That rally is going to look very convincing and I'll tell you why in just a second. But just like the rally in June it is going to fail.

Folks, a recession is unavoidable at this point. The piper is going to have to be paid for printing trillions of dollars and bailing out the financial system. Unfortunately there's no way around that. The question is will Bernanke make the ultimate blunder and initiate QE3? I'll explain in a second.

Next we need to take a look at the dollar chart. It's not a pretty picture. With the market in free fall the dollar should be rallying violently. If May marked the three year cycle low like I originally thought then the dollar should be rising rapidly by now.The fact that it's not is a very ominous sign.

I'm starting to worry that Bernanke is going to initiate QE3 and he's going to add a currency crisis on top of the economy sliding back into recession.The combination of both of these at the same time will trigger a collapse much worse than what we went through in 2008.

If the market decides that QE3 is in the cards that would be the trigger for our bear market rally. Unfortunately it would also be the trigger for another spike in commodity prices at the very time that the consumer is least able to withstand them.

What Washington and the Fed don't seem to realize is that the problem isn't the size of the dose, it's that we are using the wrong medicine. We've already spent trillions to save the economy and it failed. Let's pray that the powers that be have enough sense to recognize that more trillions are not going to cure the problem, they are going to exacerbate it.

Unfortunately what no one wants to admit is that there is no cure for our problem. We can't stop it. It can't be "fixed". All we can do is make it worse. We desperately need to face reality and initiate the painful policies that are required to halt the car before it drives off the cliff. Failure to do that will mean that the market will force reality upon us as a major global economic collapse.

Before this is all over and done I fully expect the Keynesian economic model will get tossed into the trash heap where it belongs. If it wasn't for politicians desire to spend more than they can afford Keynesian policies would have been discarded decades ago.

Portfolio change activated


A possible portfolio change has been posted to the website .


Here is the link to an interview with Tekoa Da Silva of ContraryInvestorsCafe.com.

Monday, August 1, 2011


Let's face it, gold bulls have had it pretty easy the last 2 1/2 years. During that time QE1 and QE2 drove a gigantic rally out of the 2008 eight year cycle low.

Folks, at some point a move like that has to enter a lengthy consolidation.

With quantitative easing coming to an end (and QE3 not politically feasible at the moment), the economy likely rolling over into recession, and the dollar possibly setting up for a powerful rally out of the three year cycle low, I think the next deflationary period is now upon us.

The last two deflationary episodes forced a severe (2008) and a moderate (2010) correction in gold.

I do think demand is strong enough in the gold market that gold should hold most of its gains. However, I suspect it's going to be a lot harder to make money during the next year and a half as I expect that gold will be locked in a volatile trading range as it consolidates that gargantuan rally.