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August 13, 2008

Greetings, Strangers

Greetings, strangers. These pages have been unusually mute in recent days for two reasons. First, there is the jet lag to which I am usually not prone. Second, I simply wanted to be sure to regain a confident feel for recent action before shotgunning opinions into the ether. So, for what it's worth, here come some opinions.

The most important development over the past month pertains to commodities. It has become patently obvious (okay, so this is a strong opinion) that commodities have rolled over into a bear market... a cyclical bear within the secular one, I suppose it should be labeled. From the macroeconomic point-of-view, it makes sense that commodities should discount the global recession oozing down over this planet. It also then makes sense that we should not expect any spectacular gains from commodities until the planet starts pumping iron again (pun intended) and then we will see spectacular gains in commodities.

It is also my opinion that the mass of commodity bulls, particularly non-professional ones (which, of course, excludes present company), are looking at the current pull-back as just another large correction. As soon as we get any kind of violent rally, they will view it as a sign to jump back on board rather than for what it is: a violent counter-trend rally. For at least a year and perhaps two, these rallies are to be shorted.

So, we are now in the opposite situation we saw in years leading up to October 2007. Those years saw both stocks and commodities in cyclical bull markets. They are now both in cyclical bear markets. However, the greater picture has not changed. Commodities remain in the midst of a secular bull and stocks remain mired in a secular bear. Looking further down the road, I imagine that stocks will once again rally with commodities as the recession fades, but that after some time, stocks will once again fail as commodities blast so much higher than most can imagine. This phase will end with a true bubble in commodities and true despair in equities. Smart money will then be unloading commodities and buying gobs of the strongest companies in the world.

Okay, lets take a peek at some charts.

stock chart

The NDX has rallied sharply on declining volume. It has been rejected three days in a row at the important 1950 pivot point, and short-term RSI is quite overbought. It seems to me this rally is in the process of failing. I'm looking for the NDX to back-test 1875 at a minimum and perhaps outright fail to new lows.

stock chart

The S&P 500 likewise got rejected at resistance, in this case the 65DMA and the upper bound of its bear flag. Volume has been drying up during the rally. It will be interesting to see if the flag will resolve today.

stock chart

The banking index could not even reach the 75 pivot point before turning lower. Perhaps it will make another thrust, perhaps not, but if this index fails 60 before testing 75, it will be a major sign of weakness for banks and the general health of equities.

silver chart

Silver has been plunging along with the other PMs and commodities in general. I soon expect to see a snapback (sucker's) rally to around the $16.50 area (which may have begun today, by the way). Now, you all can make your own judgment about whether such a rally means is the start of a new major upleg, but my money will be shorting at that point.

oil chart

Crude oil is another commodity I want to short (probably sell OTM calls) on the back-test of a pivot point, in this case roughly $121. I do not know or care whether oil tests $110 first. I'm looking for shorting opportunities, not trying to guess every wiggle.

Now for a quick poll, which we can conduct via the comments section below. Would anyone be interested in receiving e-mail notification of new posts? It's something I thought may be useful since I don't tend to post at a consistent time of day.


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