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This past week we saw an
expected bounce in the stock market. But per my last commentary, we are not out
of the woods when it comes to this sell-off. I typically have CNBC on in my
office, and it never ceases to amaze me the continual assertion by pundits
that we are in the midst of a goldilocks economy and that the stock market is
undoubtedly going to head higher over the next several months. Whether or not
you subscribe with my 20%+ decline in the market, you have to at least
understand that we do not have a goldilocks economy.
Friday's job numbers are yet another example of Wall
Street simply focusing on the positives and failing to acknowledge the
problems that will face us in the future. While the unemployment rate
declined from 4.6% to 4.5%, jobs created in February (97,000 jobs) was the
lowest increase in 2 years. And even the jobs that were created occurred in
primarily the health care and service sector. The service sector jobs, however,
often lags behind the economy. For instance, the consumer will continue
spending and buying until they no longer can afford to do so (because of job
loss, rising interest rates, higher mortgage payments, etc.). When the
consumer curbs back on their spending, you will then see job loss in the
service sector. If Mr. Jones decides to put off buying a new car because he
recently lost 10 % of his stock portfolio, the car salesman will likely not
make the additional car sale. In turn, he might not go out to dinner as often
or spend money in the local economy. As you can imagine, this will result in
a trickle down effect and service sector jobs will likely get slashed.
On the other hand, the jobs that are already getting
slashed are those in the housing and manufacturing sector. The recent report
showed that construction employment fell by 67,000 jobs and the manufacturing
sector (think automobile industry) lost an additional 14,000 jobs. This not
only foreshadows a declining real estate market but also an economic
contraction in the United
States (recession).
Since 2001, more than 40% of the private sector jobs
were directly or indirectly a result of this housing bubble (real estate
agents, mortgage brokers, construction workers, appraisers, home improvement
stores, and many more). This is why the housing market is such a big factor
in the future direction of our economy. As I have stated previously, I
believe that a housing led recession is more than likely (View My Real Estate/Recession
Article From January 2006). Naturally, as the housing market continues
its decline, the jobs that were gained will be lost.
Not that this projection is anything new. Take a
look at the following chart that shows the correlation of housing prices to
employment.
Source: itulip.com
What you will notice about the above chart is that
in the past, declining home prices have signaled an
increase in the unemployment rate. And of course, this makes perfect and
logical sense. Not only will the investor's psyche (once they see falling
home prices) translate into less spending, but job loss will weigh heavily on
the US
economy. Thus, if you want to keep an eye on which direction the economy is
heading, focus on the job numbers in the housing and manufacturing
industries.
What's Going On With Gold?
What exactly is going on with gold? Several weeks
ago I mentioned that gold's decline was fundamentally unwarranted. I continue
to believe this is the case. I sent this comment to several reporters earlier
this week:
"It seems to me that gold is looking to form a
base around the 640 level. The recent decline from the highs has put gold in
an oversold position and I would expect any type of stability in the global
marketplace to spur an onslaught of fresh buying, especially out of Asia. Investors that blink might be surprised to see
the price of gold back at last month's highs within a relatively short period
of time. In light of continued inflationary pressures, a weak US dollar, and
geopolitical tensions the decline of gold was fundamentally unwarranted.
Additionally, there has also been a lot of talk
regarding gold not acting as a safe haven. And while the decline in gold
prices alongside a declining stock market might initially trigger this
thought, investors should not forget the longer-term historical significance.
Throughout history, gold has acted as a safe haven in times of political and
economic stability. It has served as a hedge against rising inflation, and it
has preserved wealth for thousands of years. These ideas are not easily
erased in one week. Gold as a safe haven is branded on the minds of investors
across the globe. Investors should see the recent sell-off in gold as a
buying opportunity. The longer-term bullish fundamentals are still in tact
and prudent allocation to this market is justified."
In a couple short weeks, the price of gold went from
an overbought situation to an oversold situation. One of the indicators that
I use to determine whether a market is overbought or oversold is the relative
strength index or RSI. Take a look on the daily chart on April Gold futures
contract.
 
As you can see from the above chart, whenever the
RSI has moved towards an extreme oversold position, gold has responded with a
rally. However, it is important to note that this is just one indicator. Also,
there can be situations where a market which is oversold can continue to be
oversold. My outlook, however, is that gold's oversold position coupled with the
above mentioned fundamental bullish factors, will likely result in a sharp
move up within the next week or so.
If you are
interested in learning more about the commodity bull market, I urge to
pre-order my forthcoming book, "Commodities for Every Portfolio:
How To Profit from the Long-Term Commodity Boom".
Emanuel Balarie
Senior Market Strategist
Wisdom Financial, Inc.
Direct toll free: 866-465-0017
International: 949-548-2021
Emanuel Balarie is the Senior Market Strategist at Wisdom
Financial. As an expert on foreign markets, foreign currencies, and the
precious metals industry, Mr. Balarie often speaks
at public engagements and his research is regularly published in investment
newsletters. You can find out more about Mr. Balarie
and his services at www.wisdomfinancilinc.com
The risk
of loss in trading commodity futures contracts can be substantial. You should
therefore carefully consider whether such trading is suitable for you in
light of your financial condition.
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