It's gotten mighty lonely in the bear camp and the bulls have
certainly had their way with the bears since the March 2009 lows. It has been
a rally for the ages and the subsequent pending drop will also have this
distinction. In looking through a long-term chart of the Dow Jones Industrial
Average, I found an encouraging fractal pattern for the current bear market
rally. Markets don't repeat precisely, but they do rhyme.
The number of people calling for a new bull market, saying the
recovery is upon us and saying that the stock market "sees" a
future recovery and is discounting it is funny to me. Funny in a sad way,
because I know what comes next and how upset many retail investors are going
to be in a few short months. I have taken my licks and learned a lot about
trading bear market rallies over the past few months, to be sure. Mr. Market
never fails to humble.
But to say that this bear market is over is ridiculous in my
opinion. Granted, when trading short term it really doesn't matter whether we
are in a bull or bear market, it matters if you get the short-term trend
right and trade it effectively. But there is a longer-term investment horizon
that is of great concern to me as well, which is why I made the decision to
buy physical Gold and sit this one out with a large portion of my savings.
Until the Dow to Gold ratio is
back to 2 or less, general stocks are a TERRIBLE longer term investment.
Though this ratio has come a long way since its peak in the 40s around the turn
of the century, it has a long ways to go with the current ratio sitting
around 10. In other words, if one ignores the intermediate-term swings, those
who hold physical Gold will be able to buy 5-20 times the number of stocks
(using the Dow as a proxy) in a few short years relative to today, using the
rational assumption that the Dow to Gold ratio will bottom between 0.5 and 2.
I choose Gold over fiat currencies because it is stable and
predictable, unlike the actions of governments and the apparatchiks who run
them. Those who think Gold is no longer money will change their minds over
the next decade, when Gold is used to re-liquefy the system and restore the
confidence lost due to over-subscribed and over-issued hollow paper promises.
It's Gold versus paper and Gold will win during this business cycle (paper
won the 1980-2000 cycle and Gold will win in the 2000-(?)2015(?) cycle).
Anyhoo, back to the fractal pattern in the Dow. We need only
turn to the last cyclical bear market from the early 2000s to get a similar
appearance of a bear market rally. Here it is in context, using a 12 year
weekly log scale chart:
As a close-up, here's the daily chart of the action in the Dow
during the 2001-2002 time up to the day of the high for this bear market
rally:
And here's a current 1 year daily chart of the Dow Jones
Industrial Average:
And, of course, the obligatory chart of what came next back in
2002 on a daily chart:
I, for one, don't intend to lose the forest through the trees
here. Just as bear market rallies are fast and furious, so are the subsequent
declines. You don't start new bull markets with trailing 12 month PE ratios
over 120 during the middle of a housing market crash and banking system
collapse (and no, neither one of these trends is close to being over). Even
general stock puts and shorts initiated at the June highs with an eye towards
the long term will look good 6 months from now.
Adam Brochert
GoldVersusPaper
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