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Friday's big rally on the better than
expected employment report has now generated the kind of euphoria that often
creates intermediate degree tops. This coming week will be the 18th week of
the current intermediate cycle. As you can see in the chart below the
intermediate cycle runs on average 18-25 weeks from trough to trough.
 
The time to buy "anything" is
when the stock market puts in one of these intermediate degree bottoms.
It’s way too late in the intermediate
cycle, especially with the NASDAQ stretched 9% above its 50 day moving
average, for anyone to be buying now. Now is the time for investors to be
taking profits. And by taking profits I don't mean selling short. I mean
moving to cash.
The simple fact is that selling short is
a fool’s game designed to take money away from retail investors. The
only people that will ever make any consistent long-term gains by selling
short are the very elite traders of the world, or big funds with massive
research departments that can ferret out and find sick or failing companies.
What most traders who try to sell short
fail to understand is that markets go down differently than they go up. This
fact makes it very difficult to make, and more importantly keep, any profits
garnered by selling short.
First off, tops are often a long drawn
out process. They tend to whipsaw short-sellers to death before finally
rolling over. I would say we have seen a very good example of that over the
last four weeks.
Then even if one does manage to catch
the top the intraday moves are often so violent that they knock one out
of their positions. And finally, if you mistime the bottom you will give back
most if not all of your meager profits during the first couple of days of the
new rally.
All in all, the best position for 99% of
traders is to go to cash when a correction is due. As you can see by that
first chart a correction is now due. That doesn't mean that it will begin
Monday morning or even this week. What it does mean is that it is now too
dangerous to continue playing musical chairs with a market that is at great
risk of a sharp corrective move.
The fact is that ever since the dollar
put in its three year cycle low in May, trading conditions have changed.
Trades have had to become much shorter in duration and profits taken much
more quickly.
Until the dollar’s major three
year cycle tops this trading condition isn't going to change. As you can see
in the chart below we still have no confirmation of a major trend reversal
yet. The dollar is still making higher highs and higher lows. It's still
holding well above a rising 200 day moving average and hasn't even turned the
50 day moving average down yet.
Once the stock market begins moving down
into its intermediate cycle low it will almost certainly force another rally
in the dollar, possibly (probably) back to new 52 week highs. That should, at
the very minimum, pressure gold to retest the December lows, and if the
selling pressure from the stock market is intense enough we could see another
marginal new low somewhere in the high $1400s to low $1500 level.
I should point out that gold still has
not broken the pattern of lower lows and lower highs despite the powerful
rally out of the December 29 bottom. Technically, gold is still in a down
trend. That down trend may be reconfirmed when the stock market drops down
into its intermediate degree bottom.
I know we all want gold to immediately return
to the days of strong trending moves, long trade durations, and easy money.
It's only natural for investors to long for the good old days. It's what
causes investors to chase (in vain) the last bull market. Think of all the
investors that are still chasing the tech bubble of 2000, or the millions of
investors still trying to pick the bottom of the housing market, or more
recently energy investors struggling to figure out why solar and oil service
stocks have underperformed so badly for the last three years.
These are bubbles that have already had
their day. They are never going to see those glory days again. Living in the
past never made anyone rich. The people that get rich are the ones that
figure out early where the next bull market is going to be.
That being said, gold is most certainly
not in a bubble yet. But the last massive C-wave obviously topped in
September. That was the largest and longest C-wave of this entire secular
bull market. Once something like that tops it takes months if not a year or
more to consolidate those gains before the next leg up can begin.
Analysts that are predicting $2000 plus
gold for this year are just kidding themselves. Gold is almost certainly
going to be locked in a very choppy, extended trading range till at least the
fall and probably into next spring before the next C-wave can breakout to new
highs.
As distasteful as it is, investors need
to accept the fact that it's going to be very hard to make money in the
precious metals sector this year, and the only way to do so will continue to
be with short-term trading strategies until we have confirmation that the
dollar’s three year cycle has topped.
At the moment precious metal investors
have the guillotine of the stock market hanging over them just like everyone
else. Historically the selling pressure from an intermediate degree decline in
the stock market will force an average decline of about 19% from peak to
trough in mining stocks. Right now the mining sector is in a weakened state
with the HUI holding below a declining 200 day moving average. That's not
exactly the best position to weather the intense selling pressure generated
by an intermediate degree decline in the stock market.
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