SUSTAINABLE TRENDS & UNSUSTAINABLE ONES

Today I’m going to start off with a look at the big picture. The next chart pretty much says it all.

 
There is a fundamental reason why gold has been going up for 13 years. That same fundamental is driving the cyclical bull markets in stocks.

For gold the fundamentals are sustainable and that’s why the gold chart is rising almost parabolic inter-spaced with normal corrections/consolidations along the way.

For stocks the fundamentals aren’t sustainable. You can’t drive a true bull market in stocks by printing money. It just creates bubbles and crashes. That’s why each one of these bull markets is followed by a devastating bear market. It’s why the stock market chart has gone nowhere in 13 years while gold has gone up, up and away.

Until the fundamentals change this pattern isn’t going to change. Pretty soon the stock market is going to stagnate and start to drift sideways (followed by another bear market, probably due to bottom in 2016). Pretty soon gold is going to generate another C-wave leg up (followed by another sharp move down into the next 8 year cycle low, also due in 2016).

Gold:
Did we bottom two days ago or not? I don’t know. What I do believe is that the QE4 manipulation has basically created a double B-wave bottom. As we saw last summer, B-wave bottoms are frustrating SOB’s that whipsaw back and forth until everyone is knocked off, or dizzy and ready to puke. Then they take off and leave everyone behind.

 
I think gold is in the process of breaking the manipulation but as we have seen it’s been tough to get a sustainable trend going. That is the hallmark of a B-wave bottom. Ultimately I think the manipulation just stretched the precious metals markets much further to the downside than would have occurred naturally, so once gold breaks free of this volatile bottoming process the rally will be just as aggressive if not more so than the rally out of the first B-wave low last summer.

As we saw last summer, B-waves can churn to the point were it’s pretty difficult to determine correct cycle counts. It appears to be happening again. Considering the current daily cycle is left translated it should drop back below $1555 before bottoming. That being said today’s move looks like the cycle low may have come on Friday. I wouldn’t count on gold to give us a clear signal in this environment though. So it’s anyone’s guess if we now  have a strange left translated daily cycle that bottomed above the prior low.


For those of you trying to hold on to positions during this mess let me put up two more charts.

On the gold chart you can see the level that triggered a 99 and a 98 Blees rating on the COT report. Historically that kind of extreme only occurs when price is at, or very close to a final intermediate bottom.

You can also see that this price level generated an 88 million buying on weakness day in GLD. Again this is almost always a sign that price is about as low as it’s going to go. Let me emphasize I said price, not time. Just because price has reached a level that halts the selling doesn’t necessarily mean that a sustained rally will start immediately. As we have seen the market may still have to chew up a significant amount of time before it’s ready to take off.
In our case I think gold is waiting for the stock market to stagnate before hot money starts to flow back into the sector.


So we may have one more lower low to endure before this is over, and we may not, but two years from now traders will be knocking their head against the wall saying “all the signs were there, why didn’t I buy?” Or; “Why didn’t I hold my Old Turkey position?”


 
This bottom is going to be too complex to time perfectly, and even if it did bottom on February 20th it’s already shown that it can still throw most people off just by chopping back and forth for a month. Maybe that chop has finally ended. Maybe the daily cycle is still going to make one more trip below $1600. I’ll let others compete to see who can second guess the next wiggle in the precious metal markets. All I can say is that the signs are there. Save your head the abuse two years from now and pay attention to them.

THE DOLLAR AND THE REAL INFLATION STORY

I can’t tell you how many talking heads I’ve watched in the media recently touting the strong dollar. Sometimes I really wonder whether Homo Sapiens are an intelligent life form. Remember this is the same species that created the Tulip mania … and the tech, and real estate bubble.

Folks in the real world it just isn’t possible to have a strong dollar if you are counterfeiting 85 billion of them a month. That’s just basic common sense, which seems to be an extremely rare commodity in the world today.

Yes, markets can be irrational, because humans are driven by emotions. When something goes up or down for a long period of time, our emotions invent reasons for why it’s happening. We convince ourselves that a tulip bulb really is worth more than a house. We justify skyrocketing housing prices far above average income levels by inventing a fantasy that we are running out of land. Of course no amount of fantasy means we can escape reality, just that the longer the illusion extends the bigger the bubble grows before is pops. But there is never any doubt it is going to pop.

There is one reason and one reason only why the dollar index has the illusion of being strong (let’s face it at 82 the dollar is hardly strong. In 2000 the dollar index was at 120).

 
The dollar is strong lately because the yen, pound, euro and Canadian dollar have all been dropping sharply into major intermediate and yearly cycle lows.




 

This is pushing the dollar index up. It doesn’t mean the dollar is strong, just that most of the currencies that the dollar index is measured against are exceptionally weak at the moment. But that may be changing.

On Friday the dollar broke down and breached the intermediate trend line. This is often the first warning sign that an intermediate cycle has topped.


 

If the last daily cycle pivot is broken (lower low) it will almost certainly confirm that the dollar has begun an intermediate decline.

 
There is now extreme risk that the second daily cycle has topped on day 2. That is one of, if not the most extreme left translation I can remember, and is likely to lead to a very large decline over the duration of this daily cycle. Keep in mind there should be another 2 or 3 daily cycles down after this one before the final yearly cycle low sometime in June or early July.

If the dollar daily cycle has topped on day two, then the dollar is setting up to take a real beating over the next couple of months. I’m afraid reality is about to return to the dollar, and the consequences of printing a trillion dollars a year are about to be begin.


Next I want to discuss another subject that should be easily visible, but again a lack of basic common sense prevents most people from seeing what’s right in front of them.

I’m talking about inflation. Now if you believe the governments ridiculous CPI numbers, or the talking heads on TV, you might come to the conclusion that printing 85 billion dollars a month has no long term side effects. You would of course be 100% wrong. It causes inflation. Money printing always has, and always will cause inflation. This time is no different than any other time in history. I can assure you that Bernanke hasn’t been able to repeal the natural laws of the universe. As a matter of fact we have had massive inflation ever since the bottom in 2009.

Because the Fed targets asset prices, it tends to start in those areas that we don’t normally associate as inflationary. Let’s face it, no one is really going to freak out about a rising stock market, but that is the first sign of inflation. The Fed’s liquidity has to land on something, and it usually starts in the stock market first. Unfortunately it always eventually ends up in the commodity markets.

Folks no matter what anyone one tries to tell you, it’s not possible to print 10+ trillion dollars and not get inflation. The Fed would like the inflation to stay in the stock and real estate markets, but as we all know it’s not possible to escape reality, and the reality is that eventually that liquidity is going to leak out of the stock market and real estate markets and find it’s way into the commodity markets. It happened in 2008 and it’s going to happen again.

 
As you can see in the long term chart above inflation began in the stock market and real estate markets in the early 2000′s. It culminated in a massive parabolic spike in commodity prices in the summer of 2008 that destroyed the global economy and spiked oil to $147 a barrel, and gold above $1000 an oz.

This time will be no different. We have massive inflation in stocks, and even an echo bubble forming in the real estate markets. Ultimately the story is going to end the same way as it did in 2008, with a stagnating stock market, a second crash in the housing market, and another parabolic move in commodities. It absolutely will drive another C-wave advance in gold just like it did in 2008 and 2011. Only this time the move will be even bigger. As I’ve noted in several past reports, I’m confident that gold is forming a midpoint consolidation in a very large T1 pattern that should ultimately target about $3200-$3300 at the next C-wave top.

It doesn’t matter whether sovereign central banks impose short term manipulation or how irrational the short term movements get, nothing is going to alter reality, and the reality is that printing a trillion dollars a year is going to drive another C-wave in gold’s secular bull market. End of story.

DOLLAR TOP, COMMODITY BOTTOM APPROACHING

While I suspect this is probably the furthest thing from what most investors expect, I think the dollar index is very close to forming another major top, and once it does it should release oil, gold and the rest of the commodity index from their extended corrections. Granted no one believed me when I called the major three year cycle low in the CRB last summer either.

As you can see in the next chart, as soon as the dollar began to rally out of its last intermediate bottom, commodities, including oil and gold, all began to move down into major intermediate degree declines. For gold this has turned out to be one of the most difficult yearly cycle lows of the entire bull market, other than the eight year cycle low in 2008.

I know it doesn't seem like it but I can assure you that the gold bull market is not dead. This is just a very severe move into a yearly cycle low. Granted it is one that was exacerbated by some short-term manipulation right after QE4, but still just a normal cyclical decline that tends to occur most years in early spring. Since this particular yearly cycle low has been so severe it should act as the spring board for the next major leg up in the secular gold bull market.

As we have seen in the gold market, a move down into a yearly cycle low tends to be the most severe cyclical decline. Now it is the dollars turn to move down into a yearly cycle low. Over the next 2-3 months we should see the dollar retest, and then break through the 79 support zone. When it does I expect to see a waterfall decline similar to what has transpired in the Japanese Yen and the British pound recently.

This should drive the next leg up in the CRB's rally out of its three year cycle low, and trigger the first real inflationary surge, which I think will culminate in a massive spike in commodity prices sometime in late 2014 or early 2015.

I also think the expected hard move down in the dollar will trigger a violent rally in the precious metals market. 

Conversely as the move down into a yearly cycle low tends to be the most severe, the rally out of a yearly cycle low is often the most aggressive.

Considering the extreme oversold technical, and sentiment levels in the precious metals market, we now have the conditions necessary to power a violent rally, at least to test the 2011 highs over the next 2-3 months. Once that test is complete we should see gold break out to new highs on its way to an expected final T1 PATTERN C-wave top somewhere in the neighborhood of $3200.

Since currency cycles often turn on the monthly employment report, I think there's a good chance that the dollar index is going to put in its intermediate top either Thursday or Friday. I think the odds are about 50/50 that gold has already completed its yearly cycle low slightly ahead of the dollar on February 20, and oil & the CRB may have formed final intermediate bottoms on Tuesday. If not then they may wait for a final top in the dollar, although usually commodities will sniff out a currency turn a few days early, and gold often by a week or so.

Based on the COT reports, commercial traders are already positioned for the next leg up in gold, and institutional money has been entering the precious metals market in a big way as evidenced by the buying on weakness numbers in GLD on February 28.

It shouldn't be long now before all of the traders that have given up on the precious metals sector get reminded that this is still a secular bull market. And secular bull markets continue to rise until the fundamentals reverse.

In the 70s and 80s gold rallied until Volcker reversed monetary policy 180° and raised interest rates to 20%. Bernanke is still stuck in Keynesian monetary theory and is showing no signs of reversing policy any time soon. Until Fed policy changes the gold bull market will remain intact.

MAJOR TOP IN STOCKS & MAJOR LOW IN GOLD

For months and months now I've been warning traders that QE3&4 were going to have a major effect on stocks. I knew that analysts claiming that each new QE was having less and less affect would not apply to this latest round of quantitative easing.

I was confident the latest counterfeiting operation by the Fed would push stocks to at least test the 2007 highs, and I really expect we will see a marginal break above that level sometime this year. Probably by the end of the month. My current guess is that we will get a sell the news type of event as soon as the sequestration can is kicked down the road and that will mark the top of this particular intermediate cycle.

Make no mistake though we are still in a secular bear market. Stocks are testing their all-time highs at the same time earnings are in decline, GDP has turned negative, and unemployment is starting to tick up.

It has been my expectation that the stock market would put in a final top sometime this year. I also expect this will be a very extended and difficult topping process lasting months if not a year or more.

During this topping process I expect to see an inflationary surge very similar to what happened in the oil markets during the 2007 top.

Notice the breakdown in early 2007 that convinced everyone that the bull market in oil was finished. This set up a massive parabolic move into the 2008 blowoff top.

This time however I don't think it's going to be oil leading the inflationary charge. In order to generate that kind of move we need something that has formed a long consolidation similar to what happened in oil, and preferably an asset that has declined long enough and far enough to push sentiment to negative extremes capable of convincing everyone that the bull market is over. Those are the conditions necessary in order to generate a massive parabolic move over the next two years.

The only asset that qualifies in my opinion is the precious metals markets. 

The breakdown after the QE4 announcement, and now the extreme move into a yearly cycle low has, I daresay, convinced everyone that the gold bull is over. I would argue that it is impossible for the gold bull to be over as long as central banks around the world continue to debase their currencies. Gold is just creating the conditions necessary for its next leg up, similar to what oil did in early 2007.

A very similar pattern to what happened in oil is also unfolding in the gold market. I'm talking about the T-1 pattern that formed in oil during 07-08.

Here are the rules of T-1 pattern for those not familiar:

T1. A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move. Generally, when the second move from the sideways range has run its course, a counter move approaching the sideways range may be expected. 

I think the gold chart is setting up to produce a monstrous T-1 pattern with a target around $3200 sometime in the late 2014 or early 2015.

Investors just need to get through the bottoming process of this yearly cycle low. Considering that gold is now on the 15th week of its intermediate cycle, which usually lasts about 18-25 weeks we should be getting close. 

Actually we are probably closer than it appears by that previous statement. The last intermediate cycle ran a bit long at 25 weeks. Long cycles are usually followed by a short cycle. So I would expect this cycle to run a bit short at 16-18 weeks.

All in all, I expect a final bottom sometime in the next 5-10 days. And once that bottom has formed gold should be ready to break out of the consolidation zone it has been in over the last year and a half and get busy delivering the second leg of that T-1 pattern.

THE REST OF THE STORY

I see a lot of people lately agonizing over what we should have done. By that I mean it’s obvious to all by now that the correct move was to buy stocks back in November instead of precious metals and miners. I mean seriously, it’s obvious that liquidity was going to flow into every asset class except precious metals. Well it’s obvious now in hindsight anyway.

Of course everyone has conveniently forgotten how tough it was coming out of that November low. There were ongoing concerns about the approaching fiscal cliff, not to mention a significant sell off as we approached the end of the year. Once the fiscal cliff was resolved the markets rallied violently. Of course no one was positioned ahead of the rally because there was the risk that politicians wouldn’t make a deal. So the upshot was almost everyone missed the first day, and virtually no one was expecting a second day of huge gains.

So by that time the market was overbought and right up against resistance at the September highs. It’s pretty tough to buy into an overbought market that is butting up against a major resistance level, so I don’t think anyone could be faulted for abstaining at that point. Once the market broke through 1475 it only took five days for it to reach the next resistance level at 1500. So if you didn’t buy immediately you missed that move also.

At that point we moved into the timing band for a half cycle low. Again, probably a dangerous time to be initiating long positions. Unfortunately the market didn’t give us a half cycle low and continued higher, with two strong down days thrown in to keep traders off-balance.

It’s easy in hindsight to rationalize the correct trade, but as I have just shown, tough to do in real time.

Next I’m going to show you a market progression. Imagine you are experiencing this in real time.

In August of 1990 the stock market stagnated, formed a double top, and proceeded to plunge sharply below the 200 day moving average. At this point, as we’ve heard many times, chartists were screaming that the market was clearly headed down.

 
Imagine your emotions on that Thursday in August. Realistically, how many people would have been able to pull the trigger and buy at that point? The answer is, not many.

But buying on that Thursday, even though one’s emotions were screaming sell, was the correct move.

 
Or was it?

Well after two weeks the market certainly appears to be building a base for another leg higher. At this point, although almost certainly nervous, one could probably rationalize adding to positions.

 
So let’s see how that worked out.

 
Holy crap! That was a mistake. A huge freaking mistake. Sell, sell, sell!

Whew, that was a close call.


Son of a b***** no sooner did the market break down then we get a strong reversal candle followed by another reversal candle five days later. I have to say, it looks like we finally hit a bottom. Buy everything back.

 
You’ve got to be kidding me! Wrong again. This is obviously a bear market, time to sell short.

 
A couple of days later; Time to add to shorts.

 
A week later; This sure looks like we finally made the right decision, as this is clearly a bear market, and obviously about to begin the next leg down.

 
But did one really make the right decision? Remember this was a secular bull market.
As Paul Harvey used to say, now let’s look at the rest of the story.

 
As you can see, clearly this was the buy of the decade, although actually doing so and holding through that bottoming process was agonizing to say the least, or more likely virtually impossible.

So might I suggest that when the gold bull becomes too frustrating, and you’re ready to give up, you come back and review that 1990 bottom.

Bull markets never make it easy. Very few traders have the determination, stamina, foresight, and focus to make it all the way through one. But the rewards for the very few that can weather every punch the bull dishes out… are huge.

Weekend report

Considering the extreme complacency in the stock market, (I’m starting to hear multiple calls for a new secular bull market) it would probably be fitting that the next crisis is now sneaking up on us completely out of the blue as the Japanese currency begins to collapse. By the way secular bear markets don’t end until PE ratios reach extreme levels of undervaluation. Notice in the lower chart the extreme levels from which this bear market began (PE’s above 40). I think we can safely assume that this bear market is not going to be any different than any other one. 

It certainly didn’t end with a PE ratio of 15 when every other bear market in history ended below 10 and every one of them began from much lower valuation levels (usually with PE ratios about 20-25). This bear market has much bigger excesses to clear than any other bear in history. The rubber band got much further stretched to the upside this time. Normal regression to the mean forces will demand that the bear market should be deeper and more severe than probably any other bear in history.


So I don’t think we need to take anyone calling for a new secular bull market in stocks seriously. I think we all know this is about currency debasement, as there is no new technology to drive a new secular bull market yet.

I warned traders that we were about to enter the euphoria phase of the cyclical bull. This is an ending phase by the way. But the end of a bull can span many months and even a year or more, which is why I keep warning the shorts to be patient.

More in the weekend report. 

HAS THE FIRST CURRENCY CRISIS BEGUN?

As many of you who have read my work in the past know, I expect the eventual endgame to this whole Keynesian monetary experiment that has been going on ever since World War II, to finally terminate in a global currency crisis. I'm starting to wonder if we aren't seeing the first domino start to topple.

I'm talking about the Japanese Yen of course.

I think everyone just naturally assumes that the Yen is dropping in response to Prime Minister Abe's intent to imitate US policy and print it's way out of its troubles. The problem with this strategy is of course, eventually you will break your currency. Japan is in a particularly tenuous situation in that their debt to GDP dwarfs most of the rest of the world. The only hope they have of servicing this debt is for interest rates to stay basically at zero. 

Any move by interest rates above this artificially low level and Japan's debt becomes unserviceable, without resorting to a greater and greater debasement of the currency. Unfortunately that will also result in an acceleration of the collapse of the currency, which would just cause Japanese bonds to be sold even more aggressively. A nasty catch-22 situation.

At this point there is no way out for Japan. The only question is when will the endgame arrive. Japanese bond bears have been asking themselves that question for almost 2 decades. 

The recent move in the Yen has started me wondering if that end game hasn't now begun.

In the chart below I have marked the successive yearly cycle lows with blue arrows. As you can see this major cycle bottom tends to arrive between March and May most years. If the 2013 yearly cycle low arrives in the normal timing band, then there may be a big problem developing with the Japanese currency. The reason I say that is because the Japanese Yen is basically already in free fall and we may still have another one-three months to go before a final bottom.

Another warning sign is the fact that this decline cut through not only the 2012 yearly cycle low, but also the 2011 yearly cycle low and never even blinked. In an orderly decline both of these levels should have generated at least a decent bear market rally. In my opinion, it's very worrisome that the Yen didn't even slow down as it moved through these major support levels.

The next major support level is at the 2010 yearly cycle pivot. If the Yen slices through this support level also, then I think we have a major currency crisis on our hands.

Needless to say if the world sees a major currency collapse, which up to this point I think most people would consider to be an absurd idea, it's going to spark a panic for protection. Despite stocks entering the euphoria stage of this bull market, stocks are not going to protect one from a currency crisis. Only hard assets will do that, and the two hard assets that are best at protecting one's wealth are gold and silver.

Wouldn't it be fitting that at a time when gold and silver are about to be most cherished, they are now completely loathed by the market?