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Friday, November 18, 2011

HAS THE BEAR RETURNED?

The recent market action has me wondering if the next leg down in the cyclical bear market has begun.

I always expected that we would see a very convincing rally out of the October yearly cycle low. I thought it even possible that we would test the 200 day moving average. Most bear markets do rally out of the initial leg down and test the 200 day moving average.



Recently the S&P made two attempts to close and hold above the 200 day moving average. They both failed. That was a pretty loudly warning bell ringing.



As a matter fact every index, except the utilities, is now trading below its declining 200 day moving average, and that includes all the major European and Asian markets.

At the moment the major concern is that the market is now moving into the timing band for a major daily cycle low (due in the next 5 to 10 days). The current daily cycle is left translated (topped in less than 20 days). That is relevant because most of the time left translated cycles move below their prior cycle bottom. The last cycle low occurred in October at 1075. Now I'm not suggesting that the stock market is going to crash below 1075 in the next 5 to 7 days. However the S&P has broken below the 1220 support zone. When support was broken in July it led to a seven-day 17% crash.



I don't know if breaking of support this time will lead to another climax selling event or not. I do know that the market is now in the timing band for some serious selling. I know that this is beginning to look like a counter trend rally in a bear market that is in the process of topping. And if that's true then we are in the period of time when the next leg down should begin.

Confirming this is the fact that the dollar index has rallied back above the 200 day moving average and completed an intermediate cycle bottom. The dollar index is currently on only the third week of this new intermediate cycle. Those cycles tend to run about 20 weeks, so there is potentially many more weeks of upside left before the dollar moves down into another significant correction, which presumably would drive the next bear market rally in stocks.

The safest position at this time is to be in cash, and that's exactly what I did with the model portfolio yesterday morning.

83 comments:

  1. The daily cycle bottom bounces in left translated IC's are short lived, 3-4 days and the daily is failing and rolling over already.

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  2. TLT really wants to go down from here next couple of weeks..

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  3. Veronica,
    We sure keeping getting awfully close to that 1711 stop. :) Thanks for sharing your signals.

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  4. I Know this question has been asked before, but what is the significance of a period in lieu of a response involving actual words? It seems strange and silly, but, of course, I'm wrong. Enlighten me please, someone. I'm in a bad mood today, so sorry.

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  5. MarkF

    I havent used this method, so I may say this wrong...but

    The dot is not in lieu of a response involving actual words. Its not their approval or any communication pertaining to the post.
    I BELIEVE Its when they use a smart phone to retrieve the post, I believe it's necessary to get in. (they can use a 'word' or a 'dot' or an 'exclamation mark'-

    -and the wise guys will use your name if you ask again :)

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  6. Most option ex damage occurs by THURS in a week. Not fri as might be thought. Fri frequently just drifts.

    The damage to GLD options is already done. However I suspect gold might find a rise into close (or the 5:15pm futures close) due to people buying based on possibility of some central banker or EU action this weekend. Clearly they prefer weekends but nobody knows if it's in a day, a week, or months when they make their next move.

    Still...I don't think we break any lower today.

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  7. VER,

    Wanted to address your response to my "GDX isn't outperforming" argument.

    I've mentioned this before. Your response was equivalent to pointing to a winning table in a casino that has maybe been hot for an hour or so and saying "See...GDX is outperforming".

    My response (and the basis of my argument) would be to pull out the ongoing, smooth, continuous P&L of the ENTIRE casino over a reasonable period of time and say "See the profits? That hot table doesn't matter and how do you know when and where to pick a hot table anyway? It is only evident in hindsight whereas the casino profit is much more certain. And if and when the casino's profit changes on a PERMANENT or EXTENDED basis you will see it and have time to act anyway.

    GDX has not been 'beating' CEF since 2004. That you point to a 'hot table' for a small period of time doesn't change the larger observation over a SMOOTHED, ONGOING basis.

    And if/when GDX does change and outperform the rational argument is that it wont' outperform in a single week and then stop. It will outperform for weeks and months and years perhaps as the whole market shifts. So waiting for that CLEAR change in trend and then jumping in will only cost you a few weeks or maybe a few months at worst.

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  8. GDX is the same as $HUI basically but you should ALWAYS use a tradable security or chart when measuring things vs something that isn't tradable. Tradable means the price is LEGIT.

    As Bob Hoye likes to say, the GDP or CPI numbers are not tradable, therefore they are mostly to be dismissed cause nobody is putting money on them for accuracy.

    $xau is simply a crap index to use as any sort of measure cause it is neither tradable nor composed well of typical gold mining stocks.

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  9. Anyone see that transaction in GDX for 58 mil.? 1,014,294 at 13:53?

    Just after I sold my last remaining 10% shares of GDX.

    That's a lot of money...

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  10. My GDX isn't beating argument is against CEF which is simply a 50/50 mix of gold and silver conveniently available on most charting services (whereas it is almost impossible without custom software to do a similar ration by combining $gold and $silver prices at any major charting service).

    I use 50/50 becuase they clearly trade off leadership and each have pros and cons (as clearly seen by how we switch between them). So I simply say a mix of the two is:
    a) easy for someone to buy even if they just put in a safe deposit box.
    b) probably a better 'security' to take advantage of the pros and cons of both together
    c) the more accurate measure to ratio something against to argue 'performance' or not since they take turns leading.

    That's why i use cef instead of just $gold. And I think it is the correct choice.

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  11. It is possible that mathematically there is a more optimum ratio of silver and gold to hold in order to have a better return vs. volatility. I haven't explored that and just said, eh...50/50 is good enough.

    CEF isn't exactly 50/50, but close enough. And CEF's premium varies a bit also which will throw the chart some, but again it is good enough for government work.

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  12. A final part of my argument is that if something can't CLEARLY and CONTINUOUSLY beat a LUMP of 50% gold and 50% silver sitting in a highly secure vault: allocated, insured, and doing absolutely NOTHING of interest, then why would you want to own it?

    Everything else you could possibly own has company, country (nationalization), management, disaster, riot, etc...risk.
    So to own such a thing you want CLEAR and EXTENDED outperformance. A month or two of "it's sorta doing better if I bought it just right at the lows" doesnt' cut it for me.

    You can't much beat two hunks of metal sitting doing nothing.

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  13. I will note that the last time gary used a similar argument to buy GDX he used a chart of $hui vs $gold...not CEF.

    CEF outperforms gold and by redoing the chart it would have shown a general ongoing trend of GDX underperformance which has not net changed by my metrics. TRUE...that seems to MAYBE be changing and if anybody can catch the turn and ride it it will be gary. But a similar turn could have been imagined many times before to no avail. I prefer to let the mkt show me.

    If someone wants to post a NON LOG chart of $hui:CEF from stockcharts for the last 10yrs you can see the downtrend (with "hot casino table" periods in between which I do not count for reasons I've said before)

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  14. TZ:

    Fair enough re: CEF, I thought you were more intentionally using this as a baseline for comparison.

    So in essence, we agree that we need time for the outperformance to play out. I certainly agree (and think I said as much) that the recent window of outperformance hasn't been long enough.

    The key question then, to make your view concrete, is how long is long enough? You can easily miss most or all of the moves if you are waiting for timeframes on the order of months or years (certainly if you're measuring from 2004 to now) before considering taking a position.

    Silver is one example. It chopped around relative to gold until Aug. 2010 and the move was done by May 2011. I don't have access to decade-long charts so perhaps silver looks different on the charts you'd use but I'm just illustrating my point above vs. trying to comment on silver specifically.

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  15. >The key question then, to make your view concrete, is how long is long enough? You can easily miss most or all of the moves if you are waiting for timeframes on the order of months or years (certainly if you're measuring from 2004 to now) before considering taking a position.

    A) you won't 'miss the move' cause you will be in silver and/or gold instead. They will still be going up so maybe they go up 40% and GDX goes up 60% and you miss that 20% during the time you are waiting for the 'outperformance' to be clear.

    B) You can easily leverage the gold/silver position up a bit to EQUAL any outperformance the GDX might make - at less risk and taxes because....

    C) using GDX means you can't trade 2/3 of a 24hr mkt. You will have gap risks when you need to get out in an emergency (or at a top..witness the silver issue earlier this year.) You will also have worse taxes (US) unless you hold over 1yr - which we aren't doing much of lately. You won't be able to have stops you can rely on due to that gap risk also

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  16. While we're on the topic, GDX looks like it's in the hurt locker! Is it sniffing out more weakness for PMs and/or something more painful to come in the stock market?

    No conviction buying today. Feels like we're setting up for another drop before we'll see aggressive bids under metals and miners.

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  17. what about daily cycle low in dollar which should occur in 5-10 days - is it possible that DX will go as low as 76 ?

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  18. To answer your question of 'how long' to determine outperformance I have developed my own rough metric such that it only takes a month or so to start getting an idea that things have changed. So it isn't that bad, but I won't say exactly what my metric is.

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  19. Regarding the 'miss it' remember that I am roughly breaking even on metal futures just like you guys roughly broke even on GDX. I didn't miss anything (and had huge gains at the top unfortunately).

    But the futures have allowed me to be reasonably sure I have stops that will work and that I'm covered for the 2/3 of the day that you guys are LOCK IN to your trade and can't change.

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  20. We didn't break even. We added 3% to our total portfolio, with no leverage and no sleepless nights.

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  21. TZ:

    Re: B) and C), here I agree with you as well (see my original comment). In my mind, the benefits of futures (taxation, leverage, and near 24/7 trading) *alone* make the case for trading and levering up on gold/silver vs. using miners. But for a variety of reasons people can't or won't use futures, which is why I'm pushing you on A).

    I read your response to A) as basically saying you're OK with missing the move of the outperforming asset, in which case we're not really debating anything. Though for a point of reference, in the silver move I mentioned, gold moved 36% while silver moved 287%. I think the reason folks here are excited about miners is that there's the potential for the same kind of move as well.

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  22. Yes, I'm saying you will miss some initial outperformance.

    However the contrary calculation is how many times SINCE 2004!!! that 'outperformance' was nothing more than a hot casino table that started losing again.

    There were MANY times since 2004 that GDX failed and returned to underperforming. If you lost on each of them and then finally caught the real 'turn' then I would still argue your gains from FINALLY catching the real turn didn't exceed the loss of all those false starts.

    Of course if a person can sucessfully trade those false starts and just ride the small period of outperformance, then go right ahead.

    The argument is that that is hard to do and it's better to just stick to what is showing ongoing strength.

    In other words, why try to constantly pick the 'hot table' at a casino when the ENTIRE casino is clearly always producing losses on average. Why not find a 'casino' (for lack of a better example) where the average of all the tables is continual winners. Then even if you are the worst table picker in the world it is likely you will still have your boat lifted by the rising tide.

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  23. Remember, I'm only making my arguments as I see them and they work for me at this time. Doesn't mean they will work well or work in the future.

    There are a brazilian :-) ways to make (and lose) money in the market and I'm just saying this approach is my angle for now.

    I'm describing the various arguments for the sake of those who wish to know them (since I comment on GDX every now and then).

    Gary pulled out a nice gain and did nothing wrong. He's very good and I'm a happy subscriber to the benefit of my strategy which differs a bit.

    When he went long GDX I, basically, just went long gold and silver. Same thing..different instrument.

    PS: I didn't konw the gdx gain was 3%. Didn't check. Just assumed it was roughly even and, for me, 3% is actually roughly even - no offense.

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  24. www.grouchyoldcripple[PUT.DOT.HERE.TO.FIX]com/archives/006273.html

    First joke on the page for my 'brazilian' reference

    :-)

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  25. I'll be checking in from Disney, Stay thirsty my friends!

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  26. TZ, just wanted to say I appreciate your comments, as I am sure many do.

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  27. Thanks Alex. I feel foolish now for asking such a question. I have no such phone either, so I am left out of the tech loop, but I like being left out.

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  28. This little side-chop on gold only helps to clear some of the near oversold readings, not good if you're playing a DCL already in.

    Typically DCL's are either sold and/or bought more aggressively, one or the other.
    It's highly suggestive of more weakness to come before any DCL.

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  29. be in cash on the brink of a historic inflationary period ? I'm confused..

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  30. Haggerty, Have a great time, say hi to Mickey!

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  31. TZ:

    Helpful as always to get your thoughts. Hope you understand that I'm not setting out to prove anyone wrong vs. wrong as much as tease out the rationale behind different points of view.

    Nice bit of humor to top off a good discussion as well :) Have a great weekend.

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  32. Metoo,
    We will go back into miners and maybe silver once I'm convinced the stock market and gold have put in their cycle lows.

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  33. Four days ago you said the dollar was 'teetering on the abyss" at a cycle top heading down,,now it due for a " 20 week" rally? You never used to whipsaw like this Gary, It now seems like you feel the need to "feed" your subscribers and now over analyze everything exactly like you used to admonish folks for doing. And as to your last response no you never used TA,, you used to dismiss it completely and one only would have to revist the old blog to see that. But glad to see you've come around.
    By the way,,$CRB down again,,

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  34. I said:
    "Those cycles tend to run about 20 weeks, so there is potentially many more weeks of upside left before the dollar moves down into another significant correction"

    20 weeks is from trough to trough. That doesn't tell you when the top is goig to come. Cycles are worthless for spotting tops as I've pointed out many times.

    It's possible the top could come in a few days. If that happens then we are in for an inflationary spiral and the CRB has put in the 3 year cycle bottom.

    If the dollar continues to rally for many more weeks then stocks have begun the next leg down in the cyclical bear market.

    Right now I really have no idea which way it's going to go, that's why we are sitting in cash.

    On one side the 4 year cycle low for stocks is due in late 2012. That would suggest that the next leg down has begun and the dollar will continue to rally.

    On the other hand the CRB did bottom in the timing band for it's 3 year cycle low. That suggests that the dollar rally is going to fail to make new highs and roll over soon triggering massive inflation.

    The million dollar question is what is going to happen with the dollar index. If I could answer that one everything else would be clear.

    At the moment the odds are leaning toward stocks continuing down in a resumption of the cyclical bear. But that may all change next week. We will just have to see how far down they drop as this daily cycle bottoms and how strong the rally is out of that low.

    What I am confident of is that gold remains in a bull market and there should be another leg up after this cycle bottoms. The next leg should at least test the highs around 1900.

    So for now I'm just biding my time until I think gold has put in it's cycle low.

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  35. We are potentially in a bear market. Bear markets are volatile. Holding times for trades are short. One has to be ready to reverse 180 degrees at a moments notice.

    We just aren't in the kind of environment like we were last year where one could just take a position and go to sleep. That period is done and it's not coming back anytime soon.

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  36. To piggyback on JM's comment....I too have noticed the the 'whipsawing' as of late. One day it's an inflationary holocaust, the next, 2012 is going to be one of the worst ever because of deflation, the next, the miners are on the verge of a major breakout, the next, I sold out of the miners before the first DCL which I said I would ride out as to not give up strong hand status. Problem is (if u want to call it that) that your calls are so darn accurate that people genuinely hinge on your every word. But that may stop if you keep coming out with sensational headlines that serve no other purpose than to get people excited only to be nullified two days later because 'bear markets' are so difficult. Just some observations....take it or leave it....I'm just a dope with an I-pad and very little net worth!

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  37. Gary, well aware of the fact you do not entertain conspiracy theories but if you have the time and inclination the zerohedge post on MF Global might be significant. Essentially it says MF was a blatant takedown to scare specs out of commods. FWIW and I post not to annoy you but feel it has merit.

    http://www.zerohedge.com/news/guest-post-mf-global-was-it-hit

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  38. Unknown--I also saw that and it caught my attention as I had heard similar rumblings from other sources. The Ann barnhardt (sp?) thing is also very disturbing (basically shut her business down because she cannot honestly tell her clients their capital is safe/secure). I feel bad for the people who had $ at mf global...they are more or less screwed. Who's next????

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  39. Phil,
    Bear markets are full of whipsaws. There's just no way around that. They require one to change their views as the market evolves.

    I suppose some people don't like it when one has to change their mind. But I've found I usually make more money if I roll with what the market gives me rather than to try and force my opinion on the market. It's called trading in real time.

    That being said the model portfolio is up 20% just since July with no leverage and never investing more than 75% of capital. So something must be working.

    You can argue with my methods but it's pretty hard to argue with my results.

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  40. Fair enough...thanks for the reply. Have a burrito and relax!

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  41. Gary,

    so you're saying gold is in a bear market now?

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  42. Stocks are in a bear market. Gold is still in a secular bull market.

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  43. But you now believe that this DCL could turn into a D-wave, right?

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  44. I'm confused now. So if you believe that gold has not bottomed and you will only go back into gold when stocks bottom, and stocks will probably only make a major bottom in the fall of 2012, and the dollar is likely to keep rallying and it is above the 200 dma, does that mean that gold will follow stocks into the major bottom along with everything else except if Bernanke decides to go all in?

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  45. I think you need to get a subscription. The posts on the free blog are only a very small part of my analysis.

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  46. I'm too god damn cheap, Gary.

    After I get out of my latest trade, I'll give the trial a try.

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  47. This comment has been removed by the author.

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  48. Gary, have you any particular comments on McClellan's recent article: http://www.mcoscillator.com/learning_center/weekly_chart/one_to_three_years_left_for_golds_run/

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  49. TZ,

    Any difference in the tax treatment between the GC and a mini-GC contract? I assume both are Sec. 1256?

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  50. Posted on the subscriber blog:

    On the daily fractal charts, every day this week including the three bad down days showed as consolidation, not a new trend. Friday even showed an uptick in consolidation, just because we didn’t go down. The S&P closed right at the 1217 level, a very important attractor/repeller level this year.

    I add this because Friday was Day 1 of the new 86-day cycle, and it appears to have stopped the decline. The daily fractal dimension is fully consolidated and ready to support a new trend. Usually, the new trend is in the same direction as the previous trend before the consolidation began. Not always.

    More important, the weekly fractal dimension also is fully consolidated, and can support a move hundreds of points higher (or lower).

    So something big is about to break. Safest to be out, per Gary, until the direction of the trend is clear. If it breaks up, GDXJ looks good. Might require a very fast reaction to get on the new trend early, regardless of the direction.

    If you are interested, you can read more about fractals at http://www.fractalmarketreport.com/fmr-analysis.php or in Benoit Mandelbrot’s book, The Misbehavior of Markets: A Fractal View of Financial Turbulence.

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  51. My guess is that any market sell off next week will be fairly muted.

    In July the S&P lost both the 50ma and the 200ma within a few days, leading to a horrific crash.

    But since then, the S&P did its time under the 50ma and finally regained it. Then it tried to regain the 200ma. It hasn't quite done that yet so naturally it slid back down to the 50ma. Will it find real support there? Good question. I think it's actually possible but no one can say for sure.

    Looking at the RSI and Stochastics indicators and the orderly way they are moving lower, you get the impression that this pullback is of a far less violent nature (so far).

    I also see the dollar rolling over a bit here. So far it has lacked the strength to ride the upper Bollinger Band. It did not even reattain the upper Bollinger Band. The price action looks more like May 2011 than Sept 2011.

    The shorter term S&P setup today is also more bullish than the setup back in Aug 2010 IMO.

    No one needs to tell Gary he is correct to move into cash. That is the smart thing to do during such an extremely tricky period, especially if you are advising other people. Trading is a form of gambling. You only place a bet when the odds are highly in your favor.

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  52. Thanks Farmgirl,

    Fractal cycles are valuable input too , I.M.O. :)

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  53. Farmgirl - thank you, I will check that out.

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  54. Joseph,
    Why don't you unwind your latest trade, and get a subscription and start over your portfolio with Gary?

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  55. Jim Rogers view on Bernanke, hint - he thinks Bernanke is a disastrous to America.

    Jim Rogers : If Obama wins Bernanke will stay , if Obama loses Bernanke is gone ,may be wrongly they will keep him , I do not think any of the rest of them will keep Bernanke he certainly has not been good for America Everything he has done in Washington over the past seven or eight years has been totally wrong and a total disaster and he has never been right about anything,CNBC should do a study about all the times he has been wrong in the past 7 years ....

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  56. This explains the slaughter in silver on Thursday. Probably sniffing out possibilities of increase at CME.

    Increase margin rates at shanghai exchange.


    http://www.examiner.com/finance-examiner-in-national/major-drop-silver-due-to-another-rise-margin-rates-at-shanghai-exchange

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  57. Farm Girl,
    My post was not a response to yours. I was still typing when you were posting. Thanks for the valuable input! :)

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  58. Intel blue 2000

    Some can't come to grips to drop the ten bucks on a sub.

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  59. This comment has been removed by the author.

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  60. Very interesting....

    I noticed that in both the 02' and 08' bear markets after the right shoulder bottoms below the neckline of the head and shoulders top we see in both bears, there is roughly a 40 day consolidation (I will refer to this as the 1st daily cycle after the waterfall decline) that ends in a new low and intermediate and daily cycle bottom. The 2nd daily cycle is then right translated (first decent bear market rally) but the move into its DCL is the beginning of the next waterfall decline, which is followed by a 3rd extremely left translated daily cycle that tops in 2-3 days.

    Currently we are in the 2nd daily cycle after the waterfall decline that is due to bottom in 5-7 days, and should drop in sharp fashion (possibly taking out the previous Oct 4th low, certainly achieved in the 3rd daily cycle) if the last two bear markets are any indication...followed by an extremely left translated 3rd daily cycle that bottoms and spawns the next decent bear market rally.

    Wonder how gold and miners will hold up as the market moves into its 4 year low.

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  61. Just sharing a thought-

    I know this isnt "cycles" , but just for a quick snapshot of the markets from a T/A perspective and some "internals"...Not ugly (YET) LONG TERM.

    DAILY
    http://www.screencast.com/t/HYhTSlz5r

    WEEKLY
    http://www.screencast.com/t/yIiHqqr9WFM

    SIDENOTE: Internals (FWIW)

    We had a NYSE McClellan Oscillator reading of -158 Thursday(which has indicated a bottoming area on (9) bigger pullbacks this year -THERE WERE 2 EXCEPTIONS- the EXTREME drops in March and AUG) - and the Summation Index was over 3000 Thursday.

    So we should be close to a bottom I.M.O. in SPX

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  62. W.W.

    If you're correct and we fail big...that ruins everything I just posted LOL

    I should just delete my post & wait and see :)

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  63. BTW, the 02 bear market was worse then the 08 at this point, the move of the 2nd daily cycle after the waterfall decline into its DCL took out the previous low(which today would be the Oct 4th low)14 days after it topped. In 08 it was during the 3rd (extremely left translated) daily cycle that the market dropped to new lows. I would think that the market wont drop to new lows until the 3rd daily cycle, being this daily is due to bottom in 5-7 days, but its possible if the floor falls out.

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  64. This comment has been removed by the author.

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  65. W-W

    I have kindly re-drawn my Market outlook . please notice the odd and dreaded W-W pattern ;)

    http://www.screencast.com/t/4foqfWCKQTMT

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  66. Alex,

    LOL! I guess we will see next week, we have to see what the dollar plans on doing, right now its just sowing mass confusion.

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  67. Alex,

    If it were to play out that this daily cycle bottoms in 5-7 days and then we get a small 3 day or so bounce and continued drop lower to take out the Oct 4th low, you can remove half of the first "W" and put the two togther, just extend the first leg of the second "W" so that it reaches the lower trendline :)

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  68. Alex,

    Take a look at this also...if you draw a Fib retracement on the SPX daily from the 09' low to the 11' High you can see that the waterfall decline that bottomed on Aug 9 was right on the 61.8% level....then the top of the trading range throughout that daily cycle and months long consolidation was the 78.6% level, it also acted as the first level of resistance on the way back up when the market was rallying out of the Oct 4th low. Another reason I mention this seemingly important 78.6% Fib level is because, as you'll notice, the S&P broke back below that level and back tested it Friday.

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  69. Recently this bull is doing the exact opposite of what we expect it to do.

    To state the obvious, sentiment on this blog has now turned neutral-negative.

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  70. Nigel Farage dressing down Von Rumpoy and the EU Council:


    http://t.co/F9ZxA0AW

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  71. Silver is fighting for its life to hold the $31 level. When we break back down below $30 I think a low $20's or $22.50 comes into play.

    http://finviz.com/futures_charts.ashx?t=SI

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  72. This comment has been removed by a blog administrator.

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