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December 1, 2009

To Top or Not To Top?

Back in May a series of heavy selling-on-strength figures distracted me from the big picture and brought me to look for a downturn prematurely. The "big picture" was described in early March when I called for a rally longer and larger than most bears could imagine. Indeed, the rally has exceeded even my own imagination as I was looking for the SPX to labor back up to the 950-1000 range over 6-8 months.

We are once again seeing heavy selling-on-strength figures, and it's important we not be fooled again. Are they important this time? There are a lot of signs that this round of SoS means big money is exiting rather than stooging for further bull action. First, the banks are still failing to participate.

banking stock index chart

Bank of America appears to be in particularly dire shape:

stock chart

Also, the latest bounce on the SPX barely made new highs.

s&p 500 daily chart

We saw similar action in the Russell in the last cycle before it set a lower low this go-round.

There are a few observations to share regarding the action in precious metals. First, part of the driving force behind the metals move today was accredited to the announcement by the central bank of Japan that more disastrous policy... namely heavy money printing... would follow 19 years during which the same policy failed miserably. Note the tone of sarcasm. However, news like this is too obvious to be tradable. Money printing equals higher gold prices, right? Great insight, Sherlock! Rather, obvious news draws the public into chasing a move, usually at the end. The JCB announcement is more likely a sell-the-news event than not.

Second, there is no way we're going to see gold go straight to $1600 (or more) with the public comfortably aboard. It just isn't going to happen. We will at some point get a violent shakeout before precious metals kick on the afterburners. No one knows whether the shake will begin now or from a higher level, but markets... not just gold and silver... seem to be brimming with confidence at the moment. Combine it all with contemporary news, SOS data, COT extremes, and Gary's cycle analysis, and I've got to think we're on the verge of a minor earthquake.

I am remaining hedged with index future shorts against my heavy precious metals longs.


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