For sometime now I've noticed the similarities between the `02-`07 cyclical bull and what we've experienced since March of last year. The one difference is that this time we've truncated the middle phase of the bull. I suspect that was a direct result of the massive liquidity Bernanke ... and all central banks have pumped into the system.
Both bulls exhibited powerful moves out of the bottom followed by a 9% correction separating the second leg from the third. In the `02 - `07 bull we then entered a 2 year phase were the market ground higher. That phase is missing from the current bull.
What followed the `06 correction was a powerful runaway move into the February `07 top. That persistent rally skewed sentiment extremely bullish at the time. We saw the exact same thing develop as the market entered the runaway move out of the February 5th bottom. At it's peak sentiment had reached bullish levels exceeding what we saw at the top of the last bull market in the fall of `07.
In `07 the runaway move led to investor complacency and severely depressed put buying. The same thing happened at the recent top in April. Investors became terribly complacent. Protective put purchase fell off the chart. The market had no safety net under it. In that condition it was at risk for a crash if investors all tried to head for the door at the same time. They did, and we suffered a mini-crash in the spring of `07 and again in May.
In `07 the initial crash low was tested and broken followed by a 2b reversal.
Recently the S&P also broke to lower lows and bottomed with a 2b reversal.
Both markets experienced volatile swings as the market put in the intermediate term bottom.
Both crashes quickly moved sentiment back to extreme levels of bearishness. In `07 sentiment turned more dour than at any other time during that cyclical bull. At the recent bottom sentiment was blacker than at any time in the last 10 years as measured by a basket of intermediate term sentiment indicators.
These kind of extreme sentiment levels are the building blocks for powerful moves. In `07 the extreme bearish sentiment drove the market into a final double top that capped the cyclical bull.
If sentiment levels are any indication we should now be set up for at least one more explosive move higher before the fundamentals final overcome this market and drag it back down into the next leg of the secular bear.
The similarities are piling up:
Initial runaway move drives sentiment to extreme bullish levels? Check!
Protective put buying dries up leaving the market with no safety net and vulnerable to crash conditions? Check!
Mini-crash? Check!
Test and 2b reversal of the initial crash low? Check!
Sentiment depressed to extreme levels of bearishness? Check!
Volatile swings back and forth during bottoming process? Check!
If history is any indication we should now be on the verge of one more explosive move higher before this cyclical bull expires and heads back down into the next leg of the secular bear.
O.K. and I assume gold will rise into this next move up? What do you think might happen to gold later in the year if/when the expected crash materializes?
ReplyDeleteI doubt there will be any more crashes. The next four year cycle low isn't due till late 2012. That would suggest a long slow grind down similar to the 2000-02 bear.
ReplyDeleteLet's face it central banks already learned their lesson about letting deflation get a toe hold. They will fight the bear with as much papaer as they can print all the way down. That is probably more conducive to frustrating slog down for two years.
Gold is in a secular bull market. I'm not trying to time wiggles in that market. I'm just invested and going along for the ride.
No more crashes?
ReplyDeleteHA! LOL.LOL.
Keep dreaming buddy, Keep dreaming.
In order to have a true crash we would need to see the credit markets implode again. They already collapsed once. It would be asking a lot for governements to allow that to happen a second time.
ReplyDeleteI know the bears would love to have another scenario like 08 but the odds are not in favor of two of those especially in such short proximity to each other.
Let's face it there has only been 3 true crashes in the last 100 years. It would be asking a lot for a fourth following hard on the heals of the third.
And like I said the next 4 year cycle low isn't due till 2012. Now if the market continued higher into early 2012 then maybe we could see a waterfall decline into the fall. But I don't think the bull is going to last that long. I expect by the end of the year we will have a final top. That leaves two years for the market to move lower.
Two years isn't a crash it's a normal time span for a bear market leg and those are usually grinding affairs with many counter trend rallies.
You're putting your faith in the Gman to prevent another crash?
ReplyDeleteI'm starting to think you are extremely naive.
Looked at Europe today? The banks?
SocGen? Hungary?
Another crash looms. Think debt and derivatives.
Sounds like someone is positioned for a crash and desperately wants it to happen LOL
ReplyDelete"Sounds like someone is positioned for a crash and desperately wants it to happen LOL"
ReplyDeleteHA! It already is happening Chico.
You best read the venerable Sir Richard Russell to update your grid.
There is no Dow Theory sell signal yet. We have to put in a secondary low and then break below it first.
ReplyDeleteWe are in the process of putting in that secondary low right now.
Never mind about bollocky "sell signals"
ReplyDeleteListen to what RR said about getting out of the stock and into only GOld and USD's with some small gold stock positions.
So, what do you call today's action? Just a blip?
It's over, put a fork in it.
In case you didn't know I haven't bought the general stock market in a long time. All I have is precious metal positions. They are the only secular bull market left.
ReplyDeleteFWIW these large gaps on a payroll number get reversed 85% of the time. Pushing the short side right now besides not having much risk reward is just not worth the effort.
Much easier and safer to just ride the bull than try to sell short stocks.
Heck if one holds overnight and monday morning the Fed announces another round of QE the shorts are going to get destroyed. It's just not worth fighting the Fed as long as there is a bull market somewhere to ride.
I don't know how many times we had largely negative jobs numbers in '09 and we saw a rally. Think the market was already spooked by Hungary before the number came out. We could very well see some Fed intervention over the weekend to prop up the world. Gold and natural gas were the only things up today. Gold or stuff - those are your long-term choices...
ReplyDeleteI agree with your analysis. A blow off top before the next bear begins seems reasonable. You're expecting markets to bottom in 2012,where do you think the S&P will bottom at?
ReplyDeleteI have no idea where a final target would be but I do think we will break below the March 09 lows at some point.
ReplyDeleteSecular bear markets don't bottom until trailing P/E's are in single digits and dividends are close to par with P/E ratios.
Latest from Sir Rich Russell.
ReplyDeleteOn April 26 the Dow closed at 11205.03. On May 26, only a month later, the Dow closed at 9974.45, down 1231 points. All this in a single month. At this rate, in a period of 12 months the Dow would disappear, and you know that's not going to happen. But this rate of decline cannot continue. Therefore, I see a period of sideways movement while the bear takes his time and stretches out the bear market. Therefore, we may see months of dismal and frustrating action, but the broad direction will be down. We've seen the highs.
Therefore, have a seat, relax, stay in cash and gold and enjoy the summer. And don't forget the sunscreen.
But, we're gonna a get a new high mover up right?
Ah yah. Whatever Tobester.
I read Russell too and I respect his opinions but you do realize that Russell can't see the future any better than anyone else right?
ReplyDeleteI do think Ben is going to start another round of QE soon and I think that will drive the market up one more time.
I'm not about to trade it though. The market is being jerked around by too many forces to be able to get any edge.
I'm just following the other half of Russells advice and just sitting with my miners.
Toby
ReplyDeleteHere is my take on the Dollar, which can impact Gold.
Gold seemed to trade opposite the dollar for a while -- the dollar fell and gold rose.
Lately the relationship seems to mirror one another.
Both gold & the dollar rising and falling together.
If you look at the dollar chart - in July 08 the dollar began the first leg of a three-leg rally.
Legs 1 & 2 were characterized by parabolic rises with a mid-cycle correction.
The correction following the second leg had the dollar testing the 200 MA in Dec 08 before embarking on the third leg which topped in March 09.
Currently, it seems the first leg of this dollar rally was from Dec 09 to April, which looks parabolic and also had a mid-cycle correction.
The second leg, which we are currently in, started out with a parabolic thrust out of the April low.
We just experienced the mid-cycle correction and looks like the dollar broke through that on Friday and looks to complete the second part of the second leg, which in my opinion will be another parabolic thrust. Hopefully, gold will follow suit.
Of course, this is all subject to Ben starting up the presses - again.
http://img693.imageshack.us/img693/6008/33012553.png
Is it wise too hold precious metals miners (or any stocks) going into a new bear market?
ReplyDeleteWon't everything get sold off in the dash for liquidity? There will be a heck of a lot of volatility.
Well I don't know for sure we are entering a new bear market yet for one. But if gold is heading up the miners will follow. And gold is heading up :)
ReplyDeleteSo you are sitting with your miners. How do you reconcile the ongoing high correlation betweem GM and Miners directions? After what we saw with the downdraft of 08 I am not seeing any reason the miners would not follow the market.
ReplyDeleteThe crash was brought on because banks had about 700 billion in debt they needed to roll over in the fall of 08. The credit market at the time was imploding so it was impossible to refinance that debt. That is what caused the crash. Up to that point we were just in a normal long slow grind bear market.
ReplyDeleteThat isn't happening right now. So the odds of another crash are small. We may enter a new bear market but that will be a long grinding affair like the 00-02 bear and like most of the last bear for that matter. If you go back and look gold and miners were rallying hard during the 00 to 03 bear.
Miners may experience temporary weakness during a selling climax in the stock market but they aren't going to suffer serious damage as long as gold is rising.
Never in history has that been the case. So I don't see any reason why it would all of a sudden change now.
It is exactly this kind of irrational fear that will keep 90% of all retail investors from riding the bull. I suppose that is good though as we will have a big pool of chasers that continually get knocked off the bull.