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February 7, 2010

Getting a Clue

Friday's late-day fireworks provided a lot of excitement... not to mention relief... for those sitting on long positions. The reversal certainly has the look of something significant and occurred in the neighborhood of both the potential support pivot we were watching and the timing band for an intermediate cycle low.

s&p 500 daily chart

Naturally, the market gods could not make the outlook too easy, so they threw in a robust $673M of selling-on-strength in the spyders just to cloud things up. Now, whether or not the market has set its final low for this correction, we received a huge clue as to just where the money will flow once we we turn the corner:

gold miners stock chart

Just think what these shares will do when the general market explodes out of this correction. I suspect we'll have days where GDX gains 10% and many of the juniors, 20%. In my opinion, mining shares have printed their bottom, even if the S&P 500 has not.

I also frequently see comments from traders who expect gold to suffer from another deflationary event (On other blogs, of course. Readers of The DOCument are too smart for such nonsense!). But let's review what gold did in the great deflation of 2008-09:

gold daily price chart

Since that meltdown, the Federal Reserve has printed many trillions of new dollars. What do you think would happen if some drastic event came along and bashed the stock market again? First, gold would likely resist gravity even more fervently thanks to the printing presses. Second, smart money would correctly assume that the Fed would simply juice up the response. Where do you want your money if another $10 trillion is going to hit the digital presses? That's right. The flight-to-safety trade would not be to the dollar or bonds in a second deflation. It would be to gold.


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