Gold bugs were raving at the end of January that new all time highs (>$850) were coming very soon. Seminars on gold options made bull market debuts. Despite being a long term gold bull (15 or more years to go), it's clear to me that wild exuberance leads to pullbacks.
The $50 pullback in gold in December barely registered on the XAU gold stock index. But the second correction of $40 in February coming so soon after the first did get gold stock players' attentions. In fact the percent decline in XAU in February was 14.8% compared to the last meaningful pullback of 12.4% last October. It is a market maxim that the first pullback in a bull market which exceeds the last largest correction is grounds for alarm that a change in trend is due.
Further old gold market wisdom comes from looking at the ratio of gold's price to that of the XAU. Since the gold bull market began in 1999, tops in XAU have been made when the gold/XAU ratio had weekly closes under 3.75: 3.63, 3.66, 3.73, 3.64, 3.81. On February 1 the ratio had an intra day low of 3.66, but by Friday the ratio had rallied to close at 3.81. However, on this ratio basis one could make a case for not only a larger correction--which we've had--but also for a longer one. Other reasons were outlined in my brief December article for Gold Eagle.
XAU itself has recovered very little of its 14.8% drawdown, and the daily MACD of XAU--not shown--remains negative. Even so the ratio of unhedged Newmont Mining (NEM) over hedged Barrick Gold (ABX) shows that gold stock buyers have not given up on their bullish views. On a daily basis the MACD of the two stocks prices has given a buy, while the weekly MACD remained bullishly unphased since last August.
It's possible that the 23% pounding give to XAU stock FCX by several Indonesian government prounouncements, while XAU as a whole was down but 14.88%, might account for this disparity between the preference for NEM and the gold/XAU ratio spike. I still feel that the fundamental and technical ideas discussed in the Gold Eagle article still apply. However, this is a long term gold bull market, and I have sold nothing, since surprises in bull markets tend to be to the upside. Both the NEM/ABX and gold/XAU ratios convince me that gold market sentiment is still quite exuberant which makes the market vulnerable. It would take new highs in gold and XAU to convince me that a longer and/or deeper correction isn't coming this year.
The market sentiment background has filled in nicely in the past two months, but technically I wasn't seeing the setup for a sell. Because of that I expected next week to be a low. But the market simply refused to sell off, or when it did so, it came right back up.
As of late today I feel most of the pieces are in place. We have a four point RPW (Reverse Point Wave) continuation pattern in place in SPX and SP futures underneath the January high. This is a continuation pattern setup for a downward move. There are also the 77 and 11 week cycles due early next week, which I had expected to be a low. If it works, it will be the first time since March 2000 that the 77 week has been a high.
Also on the same day next week there is an important timer line to the January SPX high. (See the daily SP futures chart below which does not have today's data on it.) It is more valid or commanding for a turn when it comes a bit early, so tomorrow before a three day holiday (in the US for Washington's and Lincoln's Birthdays) would be good for a high and on ly one trading day from the "appointed day". Also today's high is on the bisect, or Andrews median line, of the late January high to last week's low on SPX drawn from the last week of January's low (see the SPX 130 minute chart below).
Finally my Scottish trade entry system is set up for a sell. It will need actual confirmation tomorrow, but with all the rest coming into play I will take a first short futures position tonight on globex with a fairly tight stop. The cash accounts, as I have mentioned, are fully hedged and weeded out and heavily in cash, so the futures positions will put me short
Martin Whitman and Third Avenue Funds are among my favorite money managers. They are devoted to rooting out values the olde way and sticking with them: green eyeshades, ten key calculators, tire kickers. Nor are they ignorant of modern finance, being liquidation and ultra-deep value experts. These are not technical analysts and market timers, and that's why I've liked them for some of my money
On a total return basis Martin's fund, TAVFX has done as well as any one of the greats over the past ten to fifteen years of wild ups and downs, including another New York favorite of mine, Societe Generale's (now First Eagle's) Global Fund (SGENX).
The recent Third Avenue Annual Report has some of the best market-based discussions of real economics and real world regulation that you ever will see: in Martin Whitman's report (pages 6-12). Then further on in the report (pages 20-25) see Michael Winer's seminar with Martin and three of the giants of the securitized real estate market: Sam Zell, Milton Cooper, and Charles Ratner.
Bear in mind also that Whitman and Winer are now finding great conservative real estate values in pricey Hong Kong which Marc Faber and others are abandoning. A great read for "real" estate securities investors.
Also don't forget Alpine Funds' EGLRX if you have the, ah, yen for non US real estate securities in fund form.
On balance in life I am an optimist. Lots of bad things do happen both to and around us, and we all die. But as Maya Angelou, the poet, said, "I am convinced that the negative has power, and if you allow it to perch in your house, in your mind, in your life, it can take you over." I think she meant this on several very important levels.
In daily and intermediate term life, including investing, I'm an optimist, most of the time. Given over 200 years of rising prices of investment vehicles in the US, the last 100 years of which are very well documented indeed, it is well to have a bullish bias for the longer term. For some quite substantial meat to put onto these philosophical bones, see "Triumph of the Optimists: 101 Years of Global Investment Returns" by Dimson, Marsh, and Staunton, Princeton University Press, 2002.
Given my preference, beliefs, or bias, I generally do not pay much attention to those whom we might consider to be "perma-bears" on economies and markets. They will be right on occasion, as even the old broken clock tells time exactly, twice each day. My opinion is that John Mauldin falls into that group, given his mentoring by Gary North and his close friendship with Bill Bonner, both great marketers of gloom and doom.
Nevertheless, Mauldin's gloom and doom sound brilliant to me when I am in one of my "could go down" periods of analysis. In Mauldin's latest free weekly letter http://www.frontlinethoughts.com/printarticle.asp?id=mwo021006 he presents a fascinating sentiment indicator from James Montier of Dresdner Kleinwort Wasserstein.
Mauldin quotes from Montier: ""It is really a measure of relative risk adjusted momentum between global equities and bonds. When the risk adjusted performance of equities is high relative to the risk adjusted performance of bonds, then investors start to forget about the concept of risk altogether; they become totally focused on return. Irrational exuberance reigns (shown as a reading of above 1 in the chart below)."
"In contrast, when bonds have performed well in risk adjusted terms relative to equities, investors tend to forget that things will generally get better at some point, so this creates the 'end of the world is nigh' kind of feeling (a reading of -2 in the chart below). Effectively, the measure captures the tendency towards extrapolation of the recent past/current situation into the indefinite future. Thus it serves as a contrary indicator."
Given Montier's interpretation of his own indicator there were some questionable top calls (>+1) on his chart from 1984-2006, all of which you can see yourself below. However if one draws a line at +2 (as I have done on his chart) there have been only three tops calls (and a famous near miss) since 1984: 1987, 1996, and now in 2006, with the very near miss in 2000. If you weren't investing in 1996 you may wonder about that one. But after an amazing year of marching up all through 1995, early 1996 was wildly bullish. Even with the pretty severe correction that year, Greenspan was moved to make his "irrational exuberance" comment late in 1996.
My point is that Montier's indicator has good "genes" and a great performance history at tops. The >+2 cutoff is signalling a reversal to bonds from stocks. Personally I am not a fan of bonds due to where we are in the long term Kondratieff Wave cycle of inflation and interest rates. With short term rates as high or higher than 30 year bond rates, anything farther out than tomorrow in a money market fund seems very risky to capital. But I am not a bond trader, and perhaps that's what bond lows are like. I"ll need to see some bond low confirmation to get long in bonds, although my own work on gold and commodities generally suggests a decent pause in the commodity bull market. In the Long Wave cycle, bonds and commodities will trade in opposite trends, but pauses and corrections occur in all trends, so a bond rally isn't at all impossible.
The other side of the momentum indicator is the irrational exuberance for stocks which I have been seeing and showing you for a while in several different ways. My own fairly conventional market-based sentiment indicators have gone wild and topped in late December and again in January. Chairman MaoXian's media-based sentiment indicator reached an extreme point, not seen since 2000, in the last days of December. Loekke's cycle work, which I see as a sentiment measure, Terry Laundry's T's, and other cycle studies are pointing to the same outcome.
Two of the prior sell signals for stocks on Montier's indicator (by my >+2 interpretation) were HUGELY rewarding, but 1996 was not. Nor do I know his model or parameters. So I would say that Montier's is predicting a stock correction but not necessarily a huge one .
I promise: this is my last cycle post for a while! But while looking at some blog sites that refer to this site I found a NASA sunspot cycle site which has a phenomenal cycle curve of the current sunspot cycle # 23.
Most cycle buffs are well aware of the history of sunspot cycles in market prediction. The ~11 or ~22 (double) cycle of dark spots on the sun, due to turbulence, have been observed by astronomers at least as long ago as 800 BCE in China and as early as 1100 AD in Europe.
The German-British astronomer Sir Wiliam Herschel made one of the first modern attempts to relate agricultural prices to the sunspot cycle in the earliest part of the 19th century. The sun is obviously the most important seasonal variant for traditional agriculture, so it stood to reason that variations in solar output (surmised as an effect of the cyclical dark spots) would affect supply of field crops.
Rather than repeat a lot of archived information, let me suggest you Google ""sun spot cycle ancient china"" for a good list of sunspot specialist websites of all kinds. Or if you ever see in a used book store (or on Ebay or Amazon) a copy of the thin monograph, "Astro-Economics" by LCdr David Williams, snap it up.
In any event, here is the amazing chart of Sunspot Cylce #23 by NASA. Look at that with a stock market index chart along side it. What does it all mean? "Who knows", as my professor of European history used to say.
Despite losing sight of him once for about five years, I have followed Terrry Laundry's work for over 25 years. His method is deceptively simple but capable of subtlety and power. The basic principles are that price declines result in cash buildups, and that the length of time of the cash buildup will be the length of the subsequent price rise in time.
The name T Theory refers to the shape of the vertical centerpost on the low of the a cash buildup with equal horizontal arms to the starting times of the cash buildup and the end point of the subsequent rise. Laundry has used different indexes and different indicators over the years: generally a volume or price oscillator. Recently he has been working on interest rate oscillators as predictors of cash buildups and placements.
Laundry's current opinion for the next two years is quite similar to one I have been working out in synthesizing some longer term cycles, like the 77 week and four year, among others. As you know I have been looking for a decline into late February for some time, possibly to coincide with the 77 week cycle and possibly to become the four year cycle low. My own preliminary and experimental cycle shape looks like this:
Bear in mind that cycle amplitudes of the past did not match the price amplitude or change, but do suggest direction and timing. 2000 and 2003 were nearly exact. So if this has any merit at all, I would expect a choppy year after a late winter low, perhaps with an autumnal decline coinciding with the seasonal pattern for stocks. Then, and as Laundry thinks, based on the completely different methods he uses, there would be a rally into the late winter or spring of 2007 followed by a more substantial decline. Please bear in mind that this is an attempt to predict the future and is probably more like a parlor game or science fiction than serious technical analysis. My apologies to Loekke, Merriman, and others who do excellent cycle work. There are no guarantees on anything, of course, so take it as intended, as amusement or education.
Simon Ward kindly reminded me a month ago that Helge Sundar Loekke had resumed posting the WCA Model to his website after a hiatus many of us had feared would be permanent.
Loekke's Mega Cycle is based upon 100 years of cycle data, as I have understood it; but it is proprietary so I have no firm idea as to how it's done. However, one needn't know the details of internal combustion to enjoy and profitably use a Lexus or other competent automobile.
In the overall picture of technical analysis of markets, and especially so with my own long economic wave bias and belief, I see work like Loekke's as a form of recurrent "sentiment cycles" or supply/demand forces.
Both Loekke and Chairman MaoXian are performing unique services for investors. We can thank them by visiting their sites. I have never had and don't ever expect financial gain from them except for their insights which help me in my personal investing. Neither the Chairman nor Loekke give you an "all-in" or stand-alone system, of course, but the insights they give are of great benefit in planning, whether one is a long term investor or a weeks to months cycle swing investor.
The chart here is one of Loekke's showing his near term expectations for US Dow 30 stocks. See the rest at: http://www.wcamodel.com/
I have followed his work through most of the 2000-2003 bear market and since.
My cyber-friend CS, also known as Chairman MaoXian, is a US citizen working in China. The chairman was a sentiment mentor for me nearly a decade ago. He has found a way to tally what we all know as major information media market sentiment swings. The Time Magazine cover sentiment peak (or nadir) was well known to older market wizards, but the chairman has moved it onto new and much more impressive grounds.
The beauty of the chairman's method for those of us using market sentiment data or polling is that it gives a totally new window on market mood swings
MaoXian's 2 February 2006 publication at his blogsite http://www.maoxian.com/ finds that sentiment his way was at a bullish peak at year's end. This fits hand in glove with several my own indicators in the last few days of December.
Market tops in stocks are processes, not normally spikes, unlike those in commodities or interest rates. This means that various extreme measurements top out at different times, just as sectors and inividual stocks do. As I said the other day, one has to think of them as weather forecasts and not traffic signals.
Another reason to read the chairman's blog is for his stock picks. He is a child of the new media era, and his search and analytical skills distill a lot of the otherwise lost time of unfocused internet cruising when looking for good investment ideas.