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In the case of Richard Russell the answer is
certainly not. This is because Richard Russell is right most of the time,
especially over the longer-term outlook, despite, or perhaps because of being
an octogenarian (in his 80's). Of course nobody is right all of the time, not
even Maund, so he could be wrong and so could I.
Russell's scenario for the Summer is set out in this brief but interesting blog on King World News. With regards to Goldman Sachs
the answer is a little more complicated. With them it is crucially important
to distinguish between their clients and the world at large which they sell
stuff to. That said they do appear to have been remarkably accurate in the
advice given to their clients over the past 6 months, as the following, set
out in an Email received by me, and written or posted on 25th May, appears to
attest. What is interesting about this mail is that it attributes almost
godlike qualities to the employees of Goldman Sachs and even goes so far as
to suggest that Goldman Sachs may be able to move the markets to fulfil their predictions - if this is true then they have
truly "arrived" and all those stories about market manipulation
could even be true!...
Goldman Sachs turns bullish on commodities
Founded in 1869, Goldman Sachs (GS) is one the
world's leading investment banking and securities firms. Goldman is famous
for the work ethic it demands, its ability to attract the brightest minds and
that indefinable X-factor that comes from being acknowledged as the best game
in town. The predictions and opinions of their employees are widely followed
and have been known to influence the market. Alumni of the company include
former US Treasury Secretary Robert Rubin, former Governor of New Jersey John
Corzine, former US Treasury Secretary Henry
Paulson, and famed TV show host and investor Jim Cramer.
However, over the past few years Goldman's
reputation has been damaged. Besides the very public civil-fraud lawsuit
filed against GS by the SEC in 2010, much of the American public accuses GS in
playing a major role in causing the 2008 financial crisis, which even in the
midst of GS paid its top managers multi-million dollar bonuses. Many people
also claim Goldman was relying on its alumni network in Washington to
insulate it from the consequences of the failure of AIG.
Now, instead of just looking at GS with awe
and deference, people are suspect of the investment bank. Within the past six
months GS has changed its investment opinion three times concerning
commodities. While this is commonplace for an active retail trader, it's not
necessarily typical for an investment bank.
In December 2010 GS advised their clients to
invest in crude oil, copper, cotton, and platinum (CCCP). Four months later
these commodities had gained about 25% when on April 12th, 2011 GS published
a report advising their clients to close out on the trade. Although we
believe that on a 12-month horizon the CCCP basket still has upside
potential, in the near term risk-reward no longer favours
the basket," said Goldman's commodity team in a research note. The
company argued that the high oil price, and the economic damage caused by the
Japanese earthquake and tsunami, was likely to dent demand for copper and
platinum.
That same day, April 12th, Brent crude oil and
US crude oil each dropped about $3, on the back of this GS report. The market
did seem to temporarily shake off GS predictions for the next three weeks,
yet during the first week of May oil plummeted more than 15% in just a few
days. Though they might have been three weeks early, that's still some
impressive timing.
Yesterday, on May 24th, 2011 GS reversed its
tune on commodities turning bullish once again. GS suggested buying oil,
copper, and zinc. The risk/reward once again favours
being long commodities, Jeffrey Currie, head of commodities research at
Goldman Sachs in London, wrote in an e-mailed report. Economic growth will
likely be sufficient to tighten key supply-constrained markets in the second
half, leading to higher prices. Yesterday, Brent crude oil advanced as much
as 1.5%, US crude oil closed up 1.64%, and copper was up 0.6%.
The question I put to the Stock Enthusiast
readers today is: Do you think that GS simply employs the smartest research
analysts who are able to time the market with impressive precision? Or do you
think they are using their power and influence to actually move the commodity
markets themselves?
Our view regarding the outlook for commodities and stocks concurs more with
that of Richard Russell than that of Goldman Sachs. While we are looking for
a short-term rally as is Goldman, after that our charts suggest either a
period of Summer doldrums or more likely a correction.
We will start by looking at the 3-year chart
for the Reuters CRB Commodity Index. On this chart the key point to observe
is that there is no sign of an end to the long-term commodity bullmarket, despite the recent toppy action in this
index. The expanding nature of the trend channel on this log chart suggest
that there are even bigger things to come for commodities than we have see
thus far, hardly surprising considering the "print or die" dilemma
facing governments and Central Banks around the world. That said, however,
the sector has clearly gotten tired after its big runup
from last Summer. After hitting a trendline target
the index has run off sideways into what looks like a developing intermediate
Head-and-Shoulders top, and if this is what it is a breakdown from the
neckline of this pattern will project a correction back to the lower trendline of the major uptrend channel. Here we should
note that if the Fed contrives to create a scare over QE3 not being
forthcoming, in order to sluice funds into the dollar and Treasuries and drum
up support for a later QE3 rescue, the index could break down from the
channel and plunge 2008 style back to the important support level shown. This
ruse by the Fed was discussed as a possibility on the site some weeks back,
and Richard Russell also sees it as possibility for the same reasons.
 
The 6-month chart for the Reuters CRB
Commodity Index shows a scenario for how the Head-and-Shoulders top may complete
and lead to a drop back to the channel support line shown on the 3-year chart
above. There are 2 very important points for traders to note here. The first
is that if this pattern completes in a symmetrical manner with a Right
Shoulder forming that is similar in duration and magnitude to the Left
Shoulder, then the rally now in progress should continue for a while, perhaps
for 2 or 3 weeks before the index rolls over and drops. The second point is a
corollary of the first, which is that moving average alignment strongly
suggests that it is too early for a significant drop to occur. The
danger will increase dramatically once the 200-day moving average has caught
up with the index and the gap between the 50-day and 200-day has closed up
significantly, and this is going to take time, probably a month or so, which
fits with our projection for a leisurely Right Shoulder to form in coming
weeks. Here we should note that another scenario exists which is the one
where the Fed comes clean and admits it's going to do QE3 anyway and the
pattern morphs into a rectangular consolidation which is followed by another
major upleg probably in the late Summer going into
Fall. If things work out as planned we will be looking to short the Right
Shoulder peak with a close overhead stop.
As you are probably well aware, everyone has
gotten complacent over the broad stockmarket, with
premature top callers continually getting burned as it has somehow stayed
levitated, but as we will now see the situation is getting more and more
dangerous with passing time. This is because the market is rounding over
beneath the large parabolic "Distribution Dome" shown on our 1-year
chart for the S&P500 index below. Few traders understand these Dome
patterns or what they portend. The rounding nature of the pattern is evidence
that profit takers are increasingly overwhelming fresh buyers whose efforts
to drive the market higher are blunted to the point that they have no effect
at all and once the Dome starts to roll over, as is happening now, the bears
have gotten hold of the ball, and it only takes the re-emergence of fear in
the market to precipitate a potentially severe decline. Add into the mix that
the market has just broken down from a 3-arc Fan pattern as pointed out by
Richard Russell and also shown on our chart, which usually precipitates a
drop, and you have the recipe for a potentially heavy selloff. Here we should
note that Domes don't always lead to bearmarkets,
as they can simply be a form of rounding correction - sometimes the market
breaks suddenly above the Dome boundary and a new major upleg
ensues, but here the situation is complicated by the Fan breakdown - so it
will take not just a break above the Dome boundary, but a break back above
the 3rd fanline to turn the market bullish again.
On the 3-month chart for the S&P500 index
we can see how the slight but definite convergence of the shorter-term
downtrend channel in force from early May, which is bullish, is increasing
the chances of an upside breakout from this channel, especially as the MACD
is showing a rather oversold condition, that would set up a run at the Dome
boundary, which is a point at which to short the market with a close overhead
stop. Such a short-term rally fits with the short-term term rally scenario
for commodities.
A very similar Dome has earlier been
indentified on the oil stock indices, which is hardly surprising as oil
stocks have been slavishly following the broad market.
Silver has been following our script for weeks
now and still looks set to complete a 3-wave A-B-C correction, with a likely
scenario being shown on its 6-month chart below. Silver is now
underperforming gold which is to be expected given how silver speculators
have just been steamrollered by the plunge that followed huge margin hikes.
Like the survivors of the Battle of Waterloo they are showing rather less enthusiasm to get back
into the fray, which is why we are not expecting silver to make new highs on
the current B-wave rally and have adjusted our target downwards slightly for
this move to the $43 area. This is different from gold which could easily
make new highs on its B-wave rally before dropping back.
Clive Maund
Trading the precious metals and Energy
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