As of Friday’s close, the Dow is already in the red for 2010: Three down days erased nearly 11 weeks of gains. And gold has been falling like, well, a gold bar in water. As Bob Prechter says – and as recent market action proves – “Bear markets always bring constricted time frames and breathtaking movements. You have to be ready for them.” The best way to “be ready” is to read The Elliott Wave Theorist and The Elliott Wave Financial Forecast as each month of this year unfolds. The latest issues include specific advice for gold bulls and aggressive speculators in stocks. You can now start a subscription to both monthly letters at an incredible 26% discount. With 6 of the latest issues (plus 3 interim reports) available to subscribers right now, you’ll get instant access to 9 issues for just $29 today. LEARN MORE
Attention all MarketClub Members:
A Weekly “Trade Triangle” flashed a sell signal on long positions and entry signal on short positions in spot gold this morning at $1,086.00. The market is currently trading at $1,086.00. Please use money management stops and be aware of the risks involved.
If you are not a MarketClub Member click this link for your free report sent to your inbox. You can monitor how the trade unfolds.
Earlier this month, we argued that it was time for Treasury Secretary Tim Geithner to go.
Our logic was simple:
- Geithner’s save-Wall Street-at-any-cost policy has failed (the banks aren’t lending), and it is distorting fairness and competition throughout the economy
- Geithner’s role in the AIG bailout and cover-up continues to undermine confidence in the current administration (and makes it impossible for the current administration to blame AIG on the last administration)
- Geithner’s “too big to fail” bailout policy has led directly to today’s Wall Street bonus fiasco: There’s no “bonus problem” at Lehman or Wamu.
- Geithner’s insistence on always putting Wall Street first has contributed to the populist rage that is now sweeping the nation and bludgeoning Obama in the polls.
We still think Geithner should go. But we’re startled at how quickly Obama seems to have come to the same conclusion.
Judging by yesterday’s Get-Tough-On-Banks press conference, it seems like Geithner is on his way out the door.
Recall the opening words of Obama’s short speech:
Good morning, everybody. I just had a very productive meeting with two members of my Economic Recovery Advisory Board: Paul Volcker, who is the former chair of the Federal Reserve Board, and Bill Donaldson, previously the head of the SEC. And I deeply appreciate the counsel of these two leaders and the board, that they’ve offered as we have dealt with a broad array of very difficult economic challenges.
Note the immediate shout-out to Paul Volcker and Bill Donaldson. Note the glaring omission of Tim Geithner and Larry Summers. What Obama was telling America was “I just had a meeting with two new advisors, and, based on what they said, I’m launching a new policy.”
Note, too, that the new get-tough-on-Wall Street policy is explicitly called, “The Volcker Rule.” (That in itself is shocking. Volcker is just an advisor. Tim Geithner is Obama’s Treasury Secretary.)
Tim Geithner was at the press conference, way down the line — but, by some accounts, he spent most of it staring at his shoes. He is also said to disagree with the new policy (we have problems with it, too).
At the very least, yesterday’s press conference seemed designed to tell America that Tim Geithner has been marginalized, that Obama is now (finally) committed to change. More likely, it was a prelude to Geithner formally being shown the door.
Evan Lazarus of T3Live
Take a look at a chart of Goldman Sachs (GS) and you can see the formation of a large head and shoulders on the daily timeframe. Traders need to pay attention to this ominous reversal pattern in GS. The pattern suggests a move down to the $130 area over the next few months (if not sooner). While we believe short-term, the stock may bounce, this is something that needs to be watched closely as GS has been a market darling and can be a driving force for the market’s direction moving forwards. “As goes Goldman, so goes the market.”
(Interviewed by Louis James, Editor, International Speculator)
L: So, what’s on your mind this week, Doug? I understand you’ve had a “guru moment”…
Doug: Well, it’s nothing but a gut feeling, but I think the stock market is riding for a big fall this year.
Everyone was afraid the world was going to come to an end a year ago, and it almost did. But governments all around the world stepped in and printed up trillions of their various currency units – it’s not just the United States. And still, retail price inflation hasn’t blossomed. It seems that governments are bent on keeping asset prices up to avert panic. They focus on controlling perception instead of fixing the problem. It stems from an economic version of the theory that all we need to fear is fear itself. As long as we have the right psychology, everything is going to be okay – total nonsense.
L: That old saw: as long as there’s confidence, all is well.
Doug: Yes. It’s the Wile E. Coyote theory of economics. As long as you never look down after running off a cliff chasing the roadrunner, you can keep treading air. Unfortunately, although the power of positive thinking may help in many ways, it’s of zero use if you continue living above your means and making stupid decisions.
L: Insolvency doesn’t seem to matter; as long as everyone has confidence that things will keep going, the experts believe they will. But in the real world, you can’t remain insolvent for long, even if “you” are the United States as a whole society.
Doug: Exactly. My thinking about the stock market is this: corporations have done as “well” as they have mainly by cutting expenses. Laying people off, that sort of thing. So the bottom lines have not fallen as far as we might expect – but the top line has been hit. Revenues are falling for corporations across the board.
L: And the market has to notice this reality sooner or later.
Doug: Yes. The world’s financial system has to adjust to a new reality, one with lower levels of consumption and differing types of production. The legions of unemployed are not going to go back to work anytime soon, at least not doing anything like what they were doing before the bubble burst. The economy is going to continue deleveraging. There’s going to be less debt to allow the purchase of all this stuff people have been buying, resulting in lower corporate earnings. So it’s hard to see revenues doing anything but continue to spiral downwards for years to come.
And then there are financial “accidents” waiting to happen.
L: Like the bank failures the government has admitted it expects this year? The FDIC says there will be more bank failures in 2010 than in 2009, with the spin being that 2010 will be the peak of the crisis.
Doug: Sure. But I also expect corporate bond failures. And there are other things out there. As Porter Stansberry (whose style as an analyst I really like) has pointed out, General Electric – which is really just a hedge fund disguised as an industrial concern at this point – is leveraged thirty to one. It’s a dead man walking. It’s the next AIG. When something like that happens, it really shakes Wall Street to its foundations.
So, I’ve been bearish on general equities for years, based on fundamentals. Whether they go up is no longer a reflection of prosperity – it’s a reflection of how much money the government creates and where it goes. But I am feeling particularly strongly bearish on Wall Street right now. That’s my gut. The social mood of the country is going to turn ugly and gloomy; people won’t want to call their brokers and “get into the market.”
The Greater Depression is going to be really serious. I can’t see buying stocks until dividend yields are in the 6-12% range. And people have forgotten the market even exists. Anyway, Baby Boomers, who own most stocks directly and indirectly, are going to be selling them to support themselves in retirement.
L: Would you recommend shorting GE?
Doug: It should be an easy bet, but the government is certain to try to prop it up, as it has other dinosaurs pursuing business models that no longer work, like General Motors – although it didn’t help their shareholders. “Too big to fail.” That makes shorting riskier. But GE still has a $179 billion market cap, so it should fall quite a bit from here, if not all the way to zero.
L: No way out for the stock market?
Doug: Well, the government has been suppressing interest rates for a long time now, which is exactly the opposite of what they should be doing. These artificially low interest rates discourage people from saving and encourage them to gamble, hoping to outrun inflation. But eventually the market will force interest rates to go higher, and that will kill the stock market, because the stock market does tend to fluctuate inversely with interest rates. High interest rates almost always mean a low stock market, and low interest rates tend to mean a high stock market. So it seems to me that there simply is no good news on the economic front. Interest rates are headed way up, both out of a need for capital and as a reflection of the high price inflation ahead.
L: This doesn’t sound like a guru moment – a flash of the famous Casey inspiration. This sounds more like a well-reasoned argument to me.
Doug: Well, when you get a really strong gut feeling, it’s usually because you intuit many things that are out there, subconsciously if not analytically. Look, dividends are dropping across the board. Top line earnings are dropping. Where net earnings have been maintained, it’s been by expense cutting.
L: Even if margins are maintained, the companies are getting smaller, and people are making less money, on the whole.
Doug: Right. And interest rates are at all-time lows. That’s the short sale of the decade, if you want to short something. Bet against bonds. And there’s more.
[Doug Casey is one of the few investment visionaries whose forecasts have been spot-on. Don’t miss what Doug predicts for 2010 – to read the rest of this FREE interview, sign up here.]
Goldman Credit Default Swaps have surged by over 20% on the day the firm may have finally lost its trading “edge.” With a 5% decline in the stock, the company default risk has jumped to a 5 month high at 121 bps. The last time its was here was on September 14th, when the stock was $177/share.
Yet a relative value comparison since September 2, 2009 (if one belives in such things) indicates that the Company CDS is rich by about 16%. If traders believe today’s stock price as indicative of the true value of GS, we anticipate a widening in Goldman CDS to a level in the upper 130s/low 140s.
For the past few weeks I have been expecting the market to correct. By looking at the price action on the weekly and daily charts we can see that there has not been any real pullback since November and that is important to note. Without regular market corrections stocks start to become over bought meaning everyone has/is buying them and no real sellers have jumped off the trend. So when the price in an over bought market starts to slide lower we generally see everyone rush to hit their sell buttons. This is what causes the high volume breakdowns similar to the GLD (Gold) breakdown last December.
Another way of getting a feel for the market to know if it is over bought is to look at market sentiment for bulls vs. bears (buyers vs. sellers). Currently almost everyone is bullish and with this high of a reading we must start protecting our positions by tightening stops and/or get ready to play the coming correction with a short term trading strategy.
We can add another level of analysis to assist our understanding of the market if we look at the 60 minute charts of the SPY & IBM.
The chart below of the SPY (SP500) clearly shows we are in choppy times. With the majority of investors buying up stocks left, right and center because they are bullish on both the economy and individual companies, we have continued to see the index crawl higher. This has been going on for almost 3 months now but the more recent price action in the SPY chart clearly shows there are some BIG sellers unloading positions into this buying pressure. When the big sellers slow their selling we see the price drift back up until selling kicks back in. This is a warning signal for lower prices in the coming days.
The IBM chart shows a perfect example of the ‘Buy on the Rumor – Sell on the News’ saying we all know. The share price of IBM ran up into their earning news as traders know IBM is great for beating estimates. Once the great news came out which actually beat the estimates, the price sold off. This is happening everywhere with stocks.
In short, the market looks top heavy and has also rallied into earning season. These two points really have me on edge for taking a long trade at the moment.
Gold Stocks and the Dollar
The HUI (Gold Stock Index) has been on fire the past 10 months. Both gold and gold stocks have been leading the market higher. But the past month we have seen gold stocks under perform the SP500 and as of today are testing a key support level. Only time will tell if it bounces or breaks, so keep a close eye on your positions.
I use the UUP etf of the US Dollar to show the price action of today’s price move. The US Dollar is now above a key resistance level and has started to move higher. If the Dollar continues higher commodities across the board will have downward pressure. This could trigger a large sell off in the gold and gold stocks which I think are still over bought using a short term time frame.
Gold & Oil Futures Trends
The trend of gold and oil has been down the past few days. Gold broke down in the past 24 hours in overnight trading which triggered a wave of selling when the US market opened.
Gold and oil are currently trading between key support and resistance levels. I am looking for gold to drift back up to the $1130 level where I will look for a short setup as the current price action is not bearish on the intraday charts.
Oil is still bullish so I am not really looking to short it at this time. I will wait for another low risk buy signal.
Commodity Trading Conclusion:
I feel the broad market could be ready for a large correction ranging from 5-10%. I am calling it a correction as I want to stay positive thinking. But it could be the start of a major market top. Market tops tend to be a process and take several months to roll over. So let’s focus on protecting our money and wait for a pullback that will allow us to load up with some great positions in the coming weeks.
Patience is how money is made in the market. Waiting for the market to come to you is vital for success. Also having the patience to let winners run by scaling out (selling a portion) of a position when the price reaches a support or resistance level makes it easier to let them run. Each time you sell some of a position you are locking in a profit and lowering your risk for the balance of that trade.
If you would like to receive my Free Weekly Gold Reports please visit my website:
Chris Vermeulen
www.GoldAndOilGuy.com
I fully recognize that the crowd usually outsmarts the remnants and that the momentum in health care stocks and in the overall market has been strong.
The conventional view is that the Massachusetts election result will kill health reform and, thus, is bullish for health care stocks and for the market as a whole, but, for several reasons, I think that the crowd could prove mistaken on this one. I would not be surprised to see both health care stocks and the major market indices sell off over the short term.
A Scott Brown Senate win was growing more likely over the course of the past week.
Atrocious earnings from Bank of America to get the day started. (NYT)
Steve Forbes: We’re All Bloggers Now. Very cool way of looking at things, bravo Steve. (Forbes)
Morningstar sees opportunity in Big Pharma stocks this year. (Morningstar)
SBA makes its first small business loan of 2010. (CNNMoney)
Meet James Gorman, the man who’s following Mack at Morgan Stanley. (NYT)
David Merkel reviews Wealth, War & Wisdom, the new book by Barton Biggs. (AlephBlog)
Eric Dash: Pandit’s time for cleaning up Citi is running out. (DealBook)
“Brown’s win was a complete repudiation of ObamaCare.” (Mish)
So there’s this breed of cat with a flat head and webbed feet that swims like a fish and they probably won’t exist for much longer. (NewScientist)
Killer lineup at Coachella this year, with Vampire Weekend, De La Soul, Faith No More and Jay-Z (see below). (LaughingSquid)
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