As you know I am a firm believer that the 54 year economic cycle of Kondratieff made its low from 1999 to 2003. The previous top formation ran from 1974-1980. Based upon previous cycles, the next cycle top could be as early as 1999 + 20 = 2019 or as late as 2003 + 27 = 2030. This would depend upon the schematic wave shape of the cycle which I have shown before:
Long term bull and bear markets do, of course, have large and sometimes lengthy contra-trend moves. An example during the great stock bull market from 1982 to 2000 was the 1987-1990 bear market.
During this Kondratieff bull market the prices of crude and finished goods and interest rates will be in a bull trend for a long time to come. But they will have one or more lengthy and painful (for bulls) bearish contra-trend corrections. If we were to take 1999 as the beginning of this bullish Kondratieff cycle, as it was for gold and crude oil, we have already lived through a bit more than 25% of the total bull market for this cycle. Thus it would not be surprising if a larger correction were to occur at any time.
Although there are shorter cycles (Juglar, Kitchin, etc.) which some analysts and historians have used to time or predict these contra-trend or corrective movements within the long cycle of Kondratieff, I do not find them convincing. Also different commodities or finished goods will have different patterns within an overall bull market for physical assets. For example, cotton had four distinct bear moves in the long Kondratieff bull market from 1949 to 1980, one of which lasted four years and another which lasted five years!
There are important lessons to learn from behavior like this:
First, and most obviously, Kondratieff bull markets are not linear. They are volatile. Uptrend lines are drawn through lows. This is almost too simple to mention, but pondering it briefly is worth while. This means there will be lows, and that there will be highs before these lows.
Second, we shouldn't chase after rising prices since we will know that there will be contra-trend bearish periods when the market we missed becomes attractive again.
Third, when prices have risen dramatically we should take some profits from time to time. We are not compelled to buy everything at the very lowest low and hold for two decades to sell at the exact high. We may want to keep a core position throughout, but few will want to sit through multi-month or multi-year contra-trend moves fully invested.
Fourth, for most people it will be too dangerous to short physical assets even in fairly clear cut contra-trend bear moves. The better way to play it for investors, as compared to speculators, is to consider long positions in the dollar and/or in dollar bonds during contra-trend bear moves in long term Kondratieff bull markets. If or when you have taken partial or substantial profits on gold or in energy stocks or real estate, you can begin to watch for times when bonds and the US dollar rally strongly. Normally during the Kondratieff bull market, both the dollar and bonds will be declining. By catching rallies in bonds and the dollar we are making profits during contra-trend moves and also hedging our remaining core positions on gold and other Kondratieff bull market assets.
At this time I can identify price patterns in bonds and the US dollar which could result in intermediate term bull markets for both. These patterns are usually accompanied by extremely bearish sentiment, and it's hard to find anyone who is bullish on the dollar or dollar bonds these days.
I'm showing the dollar via the chart labeled DM_EUR/USD. Western Europe (except Switzerland, Sweden, Norway, and the UK) has adopted the DM_EUR or peg their currencies to it (Denmark). Greece and new world possessions of Euro members also use the Euro.
The governing bearish pattern for the Euro (bullish for the dollar) is a four point expanding triangle **below** a long term high. On the chart the major high was in 1995, and the triangle ("spando" is what Don Wolanchuk calls it) is labelled in large blue numerals. A smaller degree spando below a higher low began last year and has formed its own 4th wave (small red numerals) recently. Even numbers are at the extreme contra-trend spando points and odd numbers at the extreme trend direction spando points. Thus at 4 or 6 points a continuation of the trend which carried into point one is likely to resume. And at 3, 5, or 7 points a reversal to a new trend is likely.
The pattern for bonds is more complex but employs the same principles. The blue numbers of 2001-2002 heralded a continuation upwards, and the 2003 top in bonds could be labeled 5. In 2003 bonds reversed down in a new trend. Then a new 4 point spando was formed under the 2003 high. This was the first such 4 point since 1981! As such it was a very bearish setup. The subsequent small red letters show a 5 point (reversal) into the larger degree blue 4, reinforcing the bearish evidence.
However, while most (estimated at 80%) of 4 point spandos result in a continuation of the trend, 20% do not. And now bonds have put in a smaller degree 5 point. Although it is not required, this new smaller degree triangle or spando (red) is contained by trend lines across the extremes, and bonds have just touched the lower line at the same time as making a 6 point. In a bad week for most assets, bonds rallied two points from about 105 1/2 to 107 1/2, so there is a reasonable chance for a good rally in bonds and lower odds for a longer term reversal upwards. The fact that the dollar and bonds are showing similar patterns while gold and other comodities are looking toppy is helpful.
The fairly conservative mutual fund portfolio I outlined recently ("Current Portfolio", May 7, 2006) is down 2.2% from its peak on May 10, down 1% for the month to date and up 3.3% year to date. It is up 13.6% for the past year and up 14% compounded annually (before taxes) since Labor Day 2003 when I first set it up.
Most of my analysis is done on the S&P 500 index. This week it came down to the up trend line from March 2003 through the October 2005 low, and it almost touched the 61.8% level of the entire bear market of 2000-2003 from above. At the same time, sentiment measures are extremely bearish, hence bullish, as they were in October last year. Until the SP makes a failure high (lower than the recent high) and then a lower low than whatever this one turns out to be, the trend will not have changed.
There is a possible timer line for Monday and a bagpiper buy on, but lows often take several weeks to develop if it is to be.
I'm just back from a whirlwind tour of lower Sonora, northern Sinaloa, and western Chihuahua states. I saw a lot of mining startups, many of which are reworkings of mines originally from the 16th to 19th centuries. Even in southern Arizona we are seeing the same phenomenon, particularly in copper.
Although the gold juniors and flyers are getting development funds by banks and venturers, they have a lot of competition for stock price support from the very large gold and silver metal ETF's in the US and elsewhere. Metals stock investors have long and bitter memories of the scams and failures of the 1980's and 90's, so even if penny stock traders are willing to risk it on golds as well as on techs, the gold majors are losing support as their costs rise and large portfolios get re-balanced. Holding the metals instead of always problematic stocks is appealing to those who are hedging portofolios rather than going for lottery-sized payoffs.
For nearly a year and a half I have expected to see a third wave high (second upwards push) from the 1999 low in gold. Gold's action has extended greatly, and the move from a year ago has comprised two thirds of the entire run from the 2001 secondary low.
From my perspective Elliott Wave is a way of describing events rather than being a highly probable predictive tool. Nevertheless it is a useful schematic diagram of where gold has been.
Since then we have had two major waves up with a corrective wave down from 1999 to 2001. I believe we are in a new bull market since 1999 which will likely last another 15-20 years. However, with the recent retest of the orthodox high of 720 at the September 1980 high, one must acknowledge that very long term bears have a point in calling this current spike an X or B wave in a continuing bear market.
Given convincing evidence from all markets that the Kondratieff Wave bottomed from 1998 to 2003, I give the bears very low odds.
The second chart is a closeup of the bull move from the 1999 low with my Elliott description. (The gold data are continuous one month forward COMEX gold futures.) If this labeling is correct, I would expect gold to decline at least to 560 at the end of the correction, and it could go lower during some part of the correction, and it could last many months. Recent sentiment, which I have discussed, suggests some sort of correction which may have begun this past week or two. One must be aware of the fact that runaway markets can subdivide their last wave and keep going after minor corrections, so it is never wise to close one's mind on a wave label.
I did lighten up on metals stocks in the week before last but did not and will not sell metals holdings.
Gold was grossly overhyped, and 720 was the orthodox Elliott Wave top of the last bull market in September 1980. 723.45 is 35 times the pre-Roosevelt gold price from 1824 to 1934. Perhaps gold will just go on up anyway, but I cut back to 60% of peak price levels both on the metal stock fund and energy fund. No gold bullion was sold, nor will it be.
Practically every asset class went down yesterday and today, except GM. :) George Slezak, an ex CBOT bond pit trader, says it reminds him of the 1980 top when everything went down for weeks. I was trading commodites then, and I remember it vividly. Personally I think it's facile to compare that market and this one, although there are superficial similarities for sure.
My guess is that in the US stock indexes we are in Elliott wave c of a larger degree running wave 2 after the completion of wave 1 up from last October. I read and listen a lot, so I know all the arguments about valuation, commodity wars, geopolitics, derivatives, US politics, the real estate flop, etc., etc. And there is no accounting for human panic. But I remain positive on the markets until we would see a low, a failure rally, and a new lower low.
Technically, yesterday and today in the SP500 futures June contract we had what's called a "three gap play" where three inter-day (overnight) gaps have been left behind in a rush to the highs. Old timers from a hundred years ago knew that these will often get filled in a short term smash. Two were filled today. The third gap is from 1292.90 in the June contract, just below today's low of 1293.50. If my Elliott and "three gap play" ideas are correct we will fill that gap Monday, and maybe even take out the bottom of that April 17 daily bar at 1286.70, and then go up.
I'm gone to Mexico for ten days tonight, so I'll miss all the fun of the market next week. I feel fairly comfortable in funds which have all weathered previous severe bear markets pretty well, the bulk of which are themselves hedged in some manner. I feel better having cut back or "re-balanced" 40% of energy and metals stock funds.
A good place for ideas in markets like these is Carl Futia's site. We don't always agree, but he trades a variety of markets and stocks I don't trade, and we use a lot of similar methods from the past. He's also very steady and reliable under stressful conditions, a must. http://www.carlfutia.blogspot.com
Generally people are content to let gold bugs rave in their specialized padded cells and internet niches. The only reason to do battle with them is that they recruit innocent but ignorant new people to join their radical visions, much as islamists recruit "martyrs". I know this because I operated on the fringe of goldbug-ism in the 1980's and 1990's. I was ignorant and angry and attracted to gold.
Gold is still important to me, and I own it as a part of my investment portfolio, and gladly so today, but as I got deeper into economic history and the approximately half century long inflation cycle, I got a better perspective on gold as simply another inflation sensitive asset like cotton and soybeans, crude oil, and zinc, real estate and artistic collectables. Stocks and bonds are inflation sensitive too but in different ways. But gold goes up in bull markets during inflation and down in bear markets during disinflation.
Two events made me see the silliness of goldbug-ism. One was the about face performed by goldbugs after 1996 when gold went crashing down. All at once the "bugs" went from being inflationists to deflationists so they could still love gold above all else. The answer to this absurdity was that there had to be a cabal of conspirators preventing gold from pricing higher as it "should have".
One by one writers and sellers in the field of gold converted to the conspiracy theory rather than accept the fact of a disinflationary bear market that was also going on in most other commodities. Gurus and writers and sellers had to talk the talk of their rabid buyers or find a new profession. Many had put in decades on gold and simply had to mouth the new mythology in order to make a living.
The other awakening came through re-reading 18th and 19th century history, particularly with regard to politics and economics. It became clear to me that the gold standard was part of the entire 19th century bourgeois reactionary regime which came into place on the final defeat of Napoleon and largely sketched out at the Council Of Vienna in 1815: very tight credit and very limited democracy. Credit busts were frequent and deep. Economies were easily strangled.
There was and is no way now of going back to an economic world tied to gold in our age of social democracy and integration of the world's poor.
Dr. Eckart Woertz, Program Manager Economics, Gulf Research Center, Dubai, UAE has written a very succinct article for Financial Sense which further explains the dead and absurd concepts still propagated by goldbugs.
These are holdings in a current portfolio I manage. Those marked with an asterisk are held in a taxable account, the others in a tax-deferred account.
"Hedged": HSGFX, DODBX, VWINX 35.7%
"Hot": FAIRX, VSTCX, SGENX, TAVFX, VHGEX 17%
"Niche: VGENX*, VGPMX*, gold coins* 22.3%
Income: VWALX*, HSTRX, money market fund 25%
If I count the amount of the "hedged" funds which are in bonds, the "hedged" category becomes 26.8% and the income category 33.9%.
This is a portfolio for someone who is several years from retirement. The normal level for the inflation "Niche" segment is 15%, so when it is rebalanced the excess will be reallocated to VWALX which is a high yield municipal bond fund.
It may appear that there is little or nothing in foreign stocks, but if one looks at the percent of foreign stocks in many US funds today one finds surprises: steady old VWINX for exmple has 16% of its assets abroad, HSGFX 12% and DODBX 11%. TAVFX has 34%, FAIRX 16%, VGENX 36%, VGPMX 88%, and VHGEX has 57%. Most of these were calculated at year end and may be higher or lower now, but my last calculation was that this portfolio has 21% of total assets in non-US stocks plus 11% in gold coins.
Some of the goals were diversification but relatively low price volatility. The inflation niche has the highest volatility and that is why it needs careful attention to "pruning" or rebalancing. If one has thirty years to retirement, volatility can be a benefit long term. But if one is going to need the money soon, the worst thing is a big drawdown just as one begins drawing funds.
Attention has been paid to tax efficiency by keeping taxable dividend payers in the un-taxed account and putting high yield munis and the inflation hedges in the taxed account.
The five funds in the "hot" segment could be reduced to just two or three for smaller accounts. One of those should be SGENX/FESGX or VHGEX which do largely the same things.
The Scotsman or Bagpiper is a system I was taught over 25 years ago for trading daily price bars. I have made a lot of money with it. Recently I decided to attempt to codify it more precisely to make it "idiot proof". I decided to do so publically.
Often the system gives "pretty good" reversal or continuation indications at the open of the day, but the signals may not be definitely confirmed until the close of that day or sometime during the following day.
I have learned in this recent choppy market environment that this excellent system cannot be made idiot proof and requires an informed judgement when it is issuing a "probable" buy or sell signal. This I do for myself by relying upon sentiment and other trading information.
For example, there was a "probable buy" on Thursday's open (May 4) which was not completely confirmed until 3/4 of the way through Friday. That's not good enough for utilizing the Bagpiper's strengths. A full intra-day service could do it, as I do for myself, with stops or watchfulness. But I do not want to run such a service.
I'm sorry for the distraction this has caused you and me. But at least I've learned a few things from this exercise. One is that what good traders or investors do cannot easily be taught as a simple skill or reduced to a mechanical signal generator. Secondly, really good advisors are worth the money if they provide timely and winning investment or trading advice. It's very hard work to do it and get it to you in a truly timely manner.
This experiment of mine has detracted from my overall message on this blog, and I am discontinuing it. I will be travelling a lot more as well, and it would be difficult to keep the Bagpiper going. So he is going to retire to his rocking chair next door and give me a toot when he thinks we could get the next reversal.
For purposes of a a final record, the last sell was at 1213 SPM6 and the last buy 1329 for a 16 point or handle loss. This reduced the record from December 1 2005 to a 87.5 gain. On a cash basis the SPX gained 61.1 points from the December 1 2005 close to Friday's (May 5) close, so the Bagpiper had a ~43% better yield than a simple buy and hold position over that period on that basis and despite his whipsaws and late signals.
Another sell on the Bagpiper system was confirmed on today's CME pit close of SPM6. It will be booked as sell the long and reverse to short at 1313. This is a two point loss and brings the total gain from December 1 last year down to 103.5 SP points or handles.