|
I have decided to post the weekend premium report to
the blog this week. In this report I'm going to take a look at what has
transpired and what is likely to come as the third leg down in the secular
bear market begins to intensify.
Back in April
of this year I warned investors to get out of stocks in their 401(k)
accounts. At that time the dollar was moving into the timing band for a major
three year cycle low. It has always been my expectation that the rally out of
that major bottom would correspond with the stock market moving down into the
third bear market leg of the secular trend that has been in place since 2000.
As we now know, the dollar did bottom in May of this year and that did
correspond with the top of the cyclical bull market that began in March of
2009. It has also been my expectation that the next four year cycle low would
occur in the fall of 2012, and that 2012 would be one of the worst economic
years in human history.
This is
already starting to unfold across the globe as social unrest that began in
the Middle East has spread to Europe and now the United States. Economic data
has been steadily eroding for months now. We should expect this trend to
continue and intensify as we get into 2012.
As most of
you know I use cycles and sentiment analysis to determine likely timing bands
for major turns in the stock market, gold and the dollar. This is what
allowed me to anticipate a bottom in the dollar cycle at a time when everyone
was expecting the dollar to collapse, and a top in the stock market when
everyone was bullish and expecting a move back to new highs.
An interesting
development in the yearly cycle for the stock market has now emerged.
Generally speaking most yearly cycles run about 12 months, trough to trough.
However, the Fed's quantitative easing programs have stretched the yearly
cycles from March 2009 into June of 2010, and this year the yearly cycle has
stretched again to arrive in October. The market is now set up for the next
yearly cycle low to occur in the fall of 2012 which, not surprisingly, is
exactly when I have been expecting the next four year cycle low in stocks to
bottom.
I have also
indicated the expected timing bands for the next three intermediate degree
cycle lows. For reasons explained in the nightly reports I don't think the
current decline is going to move below the October low. I expect we will find
a bottom sometime in the next 1-4 days followed by a Santa Claus rally into
the middle of December.
If the market
avoids making a lower low it will embolden the Bulls to continue holding long
positions. Their hope for a miracle will be misplaced though as the market
will almost certainly begin to roll over before making higher highs and by
the next intermediate degree bottom in February/March we will see the October
lows broken, and the summer 2010 lows tested.
The recent
rally out of the October low will undoubtedly prove to have been the most
powerful countertrend rally of this bear market. Any further countertrend
rallies (and there will be several) are likely to be short-lived and weak.
The window of opportunity for these long side trades is probably going to be
too brief for the average investor/trader to successfully trade. From this
point on investors should keep 401(k) accounts solely in money market funds
until we reach the bottom sometime in the fall of 2012.
This brings
us to the topic of gold. Despite what is happening in the stock market gold
is clearly still in a secular bull market. That being said the days of easy
money from the gold bull are probably over for the next year as stocks move
down into their four year cycle low. In the chart below you can clearly see
the affects QE1 & 2 had on the gold bull.
The QE
programs drove the largest C-wave advance of gold's entire secular bull
market. However, and for reasons I will explain below, I think the C-wave
topped in September and gold is now going to enter an extended consolidation
phase for the next year.
That begs the
question if the C-wave has topped then where was the D-wave? Well, I think we
just saw it in September. Let me explain.
Because of
the massive liquidity floating around the world I now think the D-wave
terminated with the overnight spike down to $1535 on September 26. I'm now
seriously considering that the last D-wave was exceptionally mild because of
the extreme global liquidity. If that is the case then gold has now entered
an A-wave advance.
As most of
you know A-waves don't tend to make new highs. So my best guess is that gold
will test the $1900 level sometime in the next three weeks followed by an
extended corrective move down into an intermediate degree bottom in February
(B-wave). That bottom should hold above the $1535 level. What should then
follow will be a year-long frustrating and whipsawing consolidation that
should terminate slightly before the stock market bottoms in the fall of
2012.
At that point
gold will start to sniff out the next round of massive quantitative easing as
the Fed and central banks around the world go into full panic mode and begin
printing unimaginable amounts of money in the attempt to halt the global
sovereign debt implosions and economic depression that will have developed.
As usual
central planners will not account for the unintended consequences of their
actions. This time quantitative easing is going to have the opposite affect
that it did in 2009. Yes, it will put a bottom in stocks, at least
temporarily, but it is also going accelerate the cancer that has now infected
currency markets. And as currencies start to collapse so will global bond
markets. This is the recipe for the final bubble phase in the gold bull
market.
While gold is
in this long consolidation phase/bear market phase for stocks, trading
strategies will be vastly different than they were during QE1 and QE2. Trades
are going to be shorter and there will be long periods of time where the
correct strategy is to just sit in cash. I started to make the transition to
this new trading strategy back in July. The recent breakdown in stocks has
now eliminated any reservations I had about the bear market. With that
confirmed, there is little doubt that gold has now entered an extended
consolidation and that new trading strategies are called for.
Make no
mistake; we are now entering what will be one of the toughest markets ever to
make money in. So far the model portfolio is performing admirably even in
these tough conditions.
Toby Connor
Gold Scents
|
