Saturday, November 13, 2010

I'M NOT BUYING IT

The general consensus now appears to be that all asset classes have put in an intermediate top and that the dollar has made an intermediate bottom. I jumped to that conclusion myself the other day. After further consideration I'm not buying it any more for several reasons.

First, the cyclical structure of the stock market is not set up for an intermediate top unless we are on the verge of another 2 month horror show like we saw this summer. I don't think for a second that with another 900 billion scheduled to be thrown at the market, of which 110 billion will come in the first month, that we are going to see the market roll over into an extended correction during the traditionally bullish Christmas season.

The intermediate gold and dollar cycles also aren't set up for an intermediate top. Ever since March of `09 the Fed's QE programs have stretched cycles, not caused them to contract. Here are the last 5 intermediate gold cycles.




Every single one of them has run long except one and that one was followed by a very stretched 30 week cycle. If the current cycle follows the pattern of the last two years then it's too early to expect an intermediate top, and the current correction is nothing more than the normal move down into a daily cycle low. Once that bottom is in place (possibly sometime next week) it should be followed by one more daily cycle higher before putting in the larger degree intermediate top.

But more importantly the dollar cycle is way too short to be looking for an intermediate bottom. In order for stocks and gold to form an intermediate top we would need to see the dollar form an intermediate bottom.


You can see in the above chart that the Fed's monetary policy has led to normal to slightly stretched dollar cycles also. The current cycle would have to have bottomed on the 13th week. This would also have to correspond to the yearly cycle low.

Now what are the odds of a yearly cycle low, a major bottom, being put in above 74, in a shortened cycle, with sentiment never hitting true bearish extremes? (The recent public opinion poll had bulls at 29% and I've seen it as low as 22% at prior yearly cycle lows) Pretty slim in my opinion.

There is no question the dollar is now in the grip of the three year cycle decline and in the beginning stages of a currency crisis. That being the case I seriously doubt the dollar will be able to move significantly above major resistance at the 80 pivot. It's already half way there now. If this is an intermediate bottom the rally is about to hit a brick wall that I have serious doubts it will be able to penetrate for more than a day or two, if at all.

Far more likely in my opinion that the dollar rally will fail at 80 and roll over into the natural timing band for an intermediate cycle low sometime in mid to late December. This should drive stocks and gold higher into December before finally rolling over into intermediate degree corrections in January or early February.

Finally, to top it off, we still haven't seen the large selling on strength day or days that occur at virtually all intermediate tops. Until we see signs that big money is sneaking out the back door I'm going to assume the intermediate rally is still intact.

23 comments:

  1. Toby I think you posted USD chart twice by mistake. so gold chart is missing.

    But I with you. Astrocycle has Jan 12, 2011 as date for intermediate top.

    I know you are looking for C top in March timeframe but slim chance that Jan top becomes C wave top.

    they have majot tops at 22 month cycle may 06, mar 08, dec 09 and jan 12. First two are C wave tops of 5 and 6. And I am expecting C wave top of 8 in Janauary 12.

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  2. After some thought my thinking here is that this action is related mainly to the rate hike. There have been rate hikes along the way here and this selling is just reactionary to it. It just seems too knee jerk to me. There have been reports that the selling was low volume too. Oh and some very bullish news came out where somewhere gold is gold to be used as collateral now in CDS transactions. That's huge!

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  3. Hi Toby,

    Maybe you are right, as 2-days volume chart show intact bull.

    We will see how is it going.

    http://smartmoneyvolume.blogspot.com/2010/11/unsafe-market-conditions.html

    good luck!

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  4. Looks like the long term weekly trendline on DX was violated to the downside a bit, 200dma on spx weekly was penetrated and has held up as support also. No telling how long this short correction will last exactly, but odds are, it's just a correction. Thanks.

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  5. Toby:
    based on the reports of the G20 meetings, do you expect any shift in policy by any of the major international players, especially actions that will influence the direction of the dollar?

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  6. No the dollar is now in the grip of the 3 year cycle decline. That will run its course to completion sometime next spring.

    Besides I certainly don't see Bernanke all of a sudden halting POMO operations.

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  7. For the USD to fail to drop in the 3 year cycle low it is not necessary to stop Bernanke's POMOs: all it takes, is another bailout in Europe. Everyone seems to have failed to note that the US QE2 actually _followed_ the European QE2 (the almost 1 trillion $ - 600 billion euros - bailout package in Europe last June). Bailouts are again in the books in Europe and if not, hair trimming of bondholders with the same effect (undermining the euro). Your confidence, Gary, in the "European taking care of their currency" (as you commented somewhere last week) is misplaced: they are just more hypocritical, the "talking hawkish, acting dovish" kind... (Yes, I do live in Europe).

    As to stopping Bernanke: "An Open Letter to Ben Bernanke", E21 Group, www.economics21.org/commentary/e21s-open-letter-ben-bernanke.

    The above does not mean that "you are wrong". It just means that to disregard the alternative scenario is wrong. Insofar as all currencies have become massively & directly political, one cannot simply say whether by late Spring the USD will perform a drop in the 3-year cycle lower low, or make a higher low, or just rally out of the bottom structure being laid out as we speak. The USD must drop, but so does every other paper currency. The key dimension of our time is cooperative (yes, cooperative, not competitive, at least not yet) devaluation, and the dynamics of relative devaluations is not that mechanical (or linear). Cycles, or whatever other tools, are distorted by a logic which is alien to that of the market: the logic of the political. But, then, everyone understands politics, sex and football, don't they...

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  8. that is my sense, contulmmiv. the currencies are gradually descending in an alternating way, like stepping down a ladder.
    But unlike walking down a ladder, the steps are not uniform in time or distance.

    One can try to be clever and time it back and forth on the way down to attempt a bigger total score, or just sit tight in gold regardless of the currency that your capital is denominated in.

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  9. What say all of you about interest rates rising? My bond short is in the money now after the past few days here, but obviously the rising rates have been pressuring the metals. This is a very interesting stage we are entering. If bonds just croak here, everything is getting snowplowed including gold and silver. A lot of metals gurus out there say that the top in long bonds will be a key part of the ongoing metals bull market. Boy that's where I start to have some doubts. I'm in regardless for better or for worse but I think we're in for a wild ride. Any comments on this would be great. There's such a huge pressure cooker building all over the place. Hopefully it all results in a huge gold explosion to the upside. Sometimes the "chaos factor" is what causes the market to go big into gold when meltdowns get severe enough, causing shorts to get their teeth handed to them like chiclets. I'm hoping that happens because I foresee a huge meltdown coming.

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  10. Rising intereste rates have nothing at all to do with gold. Gold is simply moving down into a daily cycle low.

    It's nothing more mysterious than that.

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  11. There is always something that prevents people from selling at the top or buying at the bottom. In your case it is the length of this cycle.

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  12. I'm not sure what you are talking about. I'm just holding my positions with a stop strategy below $1315 on gold as that would signal gold has likely entered an intermediate degreee correction.

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  13. I think that the metals have put in a long term (greater than 1 year ) top.
    Sorry I did not see anything about your stop in your post.

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  14. You would have to have a subscription to the premium newsletter to know that :)

    However the odds are very small that we have a long term top in gold. The dollar is in the beginning stages of a currency crisis that won't end until we get the 3 year cycle low next spring. Gold won't put in a major top until the dollar hits that major bottom.

    We certainly have a minor correction unfolding but that's normal behavior in bull markets and happens like clockwork in the gold market about every 20 days or so.

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  15. Gary,
    QE 2 has failed. At least for now. Look at the 30 year Bond yield. It is higher than when the first QE2 news came out.
    That is deflationary.
    First JPY and EUR, then of course the USD.

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  16. No QE is not failing we are jsut experiencing a normal correction. I had this argument two months ago with dollar bulls. They didn't believe me about the three year cycle either. Now they are broke and I've increased portfolio by over 50%.

    Trust me you don't want to bet against the dollar's 3 year cycle. It has come right on cue for over 40 years.

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  17. They may be broke because they used too much leverage.
    The USD decline is hardly enough to wipe out anyone.
    Till September I had been a PM bull for 6 years and we made over 1500% using options, so I am not your regular Prechter lover.

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  18. Figure of speech. They bet on the deflation trade.

    In a purely fiat monetary system deflation isn't a possibility as long as the country is willing to sacrifice its currency.

    Ben is apparently very willing to destory the dollar. As long as that continues there is no chance deflation takes hold for anything other than very short term bouts as markets drop into normal daily & intermediate corrections.

    With no restraint on money creation the Fed could print 100 trillion dollars by simply punching in 0's on a computer. Yes it would destory the dollar but there is no way deflation has a chance agaisnt that kind of avalanche of money creation.

    Heck if they wanted to the governement could mail a check for 1 million dollars to every man, woman & child.

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  19. Haha Gary. I am beginning to see that with such astounding logic you would be able to sell a premium newsletter.
    Yes they could and they could last just 1 minute in power doing that. The USD would blow up and there would be chaos everywhere.
    would Bernanke needs to do is to announce a cap on the 30 year rate and say he is willing to buy every bond till he gets there. He could not get consent to buy long term bonds with QE2. With 3 hawks in voting position and Ron Paul on Bernanke's ass we will see if your theory bleeds.
    One more thing, people correlate QE1 with the stock market melt up, it was actually the 1.5 Trillion Fiscal stimulus. Correlation is not causation.
    We are not getting that now.

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  20. Will the government mail out checks for 1 million? Of course not. But has the fed been on a steady plan to destory the dollar? Of course they have.

    You can bet on deflation if you want. Everyone that has has eventually lost money.

    I'm going to bet on the 3 year cycle in the dollar unfolding again just like it has like clockwork for the last 40 years.

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  21. Actually I am betting on the Fed wanting to stay in power.
    Devaluation of the USD right now is self limiting. Another 10% devaluation would increase crude over $100/Barrel. With majority of the US housing market in suburbs, that would lose more value, the banks would have to write off more debt. That is inflationary?
    In any case as Ayn Rand said "Reality is the ultimate arbiter"
    Till December 2011.

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  23. Hi Garry - I agree that this is a daily cycle low and I believe that the bottom has started forming.
    Based on your experience, do swing lows (lows lower than the point where the descending path initially stopped) occur regularly/necessarily at the bottom of the daily cycle (but not so during occasional pullback during the cycle)? Are you using any rule of thumb regarding their number/spacing? From my limited experience, I observed that there are three, before the rally begins in earnest, with the second swing low being the lowest. Would such a generalization be valid? Thank you.

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