Wednesday, December 15, 2010


I've noted before that at intermediate turning points we will usually see breadth diverge from price.

The McClellan oscillator is now showing a large negative divergence and has moved back below zero despite the market making new highs.

On a slightly more serious note we are also starting to see a divergence in the advance/decline line for the first time since the cyclical bull began.

The last time this happened the market was entering the final topping process of the last bull market.

I think that is probably the case here also, as I think we are already in a very large topping pattern.

As you can see on the chart the next four year cycle low is due sometime in 2012.

Bernanke has massively increased the monetary response in an attempt to halt the secular bear, and we know how the last attempt to control the market turned out (we got the second worst recession since the Great Depression and the second worst bear market in history). I fully expect the next leg down in the secular bear to be even worse that the last one - not only in the stock market, but also in the economy.

Greenspan already proved that you can't meddle in the markets without eventually causing bad things to happen. Unfortunately Bernanke doesn't seem capable of learning that lesson and has now made the same mistake again only on a much larger scale. I'm confident it will only lead to a much larger collapse in the end.

We will almost certainly dip below the `09 lows at the next 4 year cycle low, probably in nominal terms and certainly in inflation adjusted terms.

Once the impending intermediate degree correction runs its course we will get what I believe will be the last rally in this cyclical bull market. That rally may or may not make marginal new highs before rolling over into the next leg down in the ongoing secular bear market.

I expect by this time Bernanke's insane monetary policy will have spiked inflation high enough to collapse the economy again and the global stock markets will begin the trip down into another devastating bear market.

In 2012 they won't be calling it a Great Recession they will be labeling it by its true name; The next Great Depression!


  1. Wow, Toby, posting at 3:15 a.m.....
    somebody is really mulling over the markets.

    I agree with your analysis ... the markets are tired, and the artificial stimulus has run its course.

    the real question now is: will gold be tied to the market or will it separate.

    the secondary question is: will gold miners be tied to the downward plunge or will they separate as well.

  2. I second the secondary question raised by "fact"; my only equity exposure YTD is in PM/miner funds, and at this point I'm considering cutting exposure in half even though I'm in it for the long run. Mistake?

    Massive redemptions caused all assets to decline in 4Q08, even though gold declined less than the S&P. Miner stocks/funds were decimated. Currently, real rates are going up with the treasury sell-off, but gold and silver seem to be hanging in there in spite of this and bullion bank illegal manipulations.

    Nothing works as it used to, or as it should. Very confused.

  3. Could Toby or a colleague answer the above question posed by fact and bluebox. Willthe value of gold mining funds be significantly affected when the markets correct.
    Should I sell my Blackrock Gold and General fund (held for over one year) now and re-enter the market after the correction?
    I subscribe to the smartmoneytracker premium site
    (Gary Savage), but have not found an answer to my question.

  4. This comment has been removed by a blog administrator.

  5. paulf, There are no crystal balls, only educated guesses. I ask only because I'm poor enough not to afford $200/yr subscriptions (sorry Toby), and that I've reached the limits of my financial education.

    However. I'm quite certain gold and particularly silver will be much higher 6-12 months from now, but I want to know just how connected the miners are to PM's AND how disconnected they hopefully will be from a general stock market decline.

    I think we're all in no man's land knowledge-wise, and it would be unwise to apply many past correlations to future actions in this environment.

    That said, I'd still like some small inkling of assurance. :)

  6. While I don't agree with Bernanke's monetray actions, I also cannot yet come to the same long term conclusion as Toby.

    No doubt the McClellan divergence is showing the possibility of a short term selloff. That would be consistent with Toby's "intermediate term turning point". No arguement there.

    The Fed's monetary response was designed to keep the toxic waste on banks' balance sheets from taking down the banking system. It is doing that, albeit at taxpayer expense. The asset bubble we are going thru now is a side effect.

    But the conclusion that we must takeout the 2009 lows is unsubstantiated. There were many short term divergences in the Cum a/d line during the 2003-2007 bull market that didn't pan out.

    To get near 700 on $SPX, you'd need either current forward earnings OR p/e ratios to drop almost in half, or some combination of the two. At the 2009 bottom, banks were bleeding losses, and energy and basic materials companies were stuck with rock-bottom prices for their commodities, both of which torpedoed earnings.

    Corporate America has since shored up their balance sheets, the consumer is coming back to life, and fear of inflation has propped up commodities. To get back to SPX 700 requires some exogenous event that will upset this equilibrium, such as nuclear war, rampant inflation, etc.

    But I believe that those counting on rampant inflation to crater stocks will be soundly disappointed, as inflation must be preceded by a serious increase in M2, and elimination of the slack in the labor market. Even if those two conditions occur, the Fed will no doubt raise short term rates at the first sign the economy is heating up.

  7. The two problems I see are that we already have serious inflation. Gasoline is up almost 100% from the 09 lows. Silver over 100%, Copper the same. The CRB up 60%.

    Despite the governments claims to the contrary we already have steady commodity inflation. When that bleeds into the labor markets it will get much worse. If labor markets don't improve then we just have escalating commodity inflation without the ability of the general public to offset it with higher wages. Not a great combination.

    And finally never in the history of humanaity has a secular bear market ended until P/E ratios have dropped back down to single digits. Since I really doubt human nature has changed this time will be no different that any other bear market and we will see the market continue lower until we do see a trailing P/E in the 5-8 range.

  8. Hi Toby - I grant your point that we have had some commodity inflation over the past two years.

    Certainly I could game the results by picking an advantageous starting point. But most commodity indices have not exceeded their 2008 highs and many are close to 2006 levels, including the DBLCIX, CRX, and CXV.

    The question is, how do you measure overall inflation, not just commodity inflation? CPI is one approach, albeit flawed, but so is any other measure. One thing that we all know that inflation is more than the price of just a few commodities.

    Now, here is some of my data.

    Homes are changing hands for 25% less than a few years earlier, and more downward pressure is expected over the next two years as foreclosures continue to hit the market. Automobiles are delivering more functionality at a (slightly) lower cost today than previously. I also get more computer power per $ spent today, and more Home Theater/ stereo quality per $ spent than I did on similar systems a few years ago. I had improvements done to my backyard including adding gardens,sod, a bbq pit and a patio for ~20% less than the prior year's pricing. Top drawer vacations are running at least 10% less than a few years ago.

    The average wage is roughly 15% lower than it was five years ago, putting downward pressure on pricing, and forcing corporations to be more efficient. While I am not minimizing the pain caused to individuals involved in such dislocations, my general point is that you cannot simply point to a few commodities and argue that inflation is suddenly upon us.

    You mention p/e ratios at the end of bear markets... what metric are you using to conclude that the bear market did not end in 2009? The most common metric that I know of is the 200 day MA on the SPY, and by that measure we are currently in a bull market.

    I am not arguing an immediate return to the Bull market highs of 2007, simply making the point that your 700 call on the SPX is based on a number of unsubstantiated assumptions.

    E.g., even given that your p/e projection of 8 is valid, which I could debate, that p/e could possibly be achieved by the markets trading sideways until earnings eventually catch up.

    Corporations which are now streamlined from cost cutting will leverage additional sales into higher earnings much more efficiently than they could before.

    I would suggest to you that most of the price inflation that you do see is due to government constraints inhibiting supply creation. Think about drilling moratoriums, environmental regulations, teachers unions, labor unions, tenured professorships, etc, etc. This is not the result of an inflationary economy, just an economy held captive to the self-serving regulations of our bureaucrats. If we dont remove those barriers, then outsourcing will continue and supply in the US might never be turned loose to meet higher demand. That will be the likeliest source of inflationary pressures in the years to come, if we do not break the grip of the government on our economy.

  9. Yes we could certainly see the market trade sideways until earnings catch up. The secular bear from 66-82 generally followed that path although there were still clearly several bear market legs down.

    I suspect this secular bear will be similar and the final move to a true secular bear market low will come during one of those legs down.

    I think commodity inflation is due to several reasons. One big one is the massive expansion in money supply that has been ongoing since 2001. Another is supply constraints brought on by the extended bear market in commodities from 1980-2000. And the third is like you say meddling by the government.

    But in real terms commodity prices are rising and have been at a relentelss pace since 09. The fact that they aren't at 07 levels yet doesn't mean they aren't going to get there.

    I think any rational person understands that inflation doesn't just occur overnight and we all of a sudden go from $35 oil to $150 oil instantanously.

    Oil certainly didn't jump from $10 to $150 overnight. One could have said in 06 with oil at $50 that there was no inflation (our government was trying to make that claim at the time) but they would have been wrong because price continued to escalate till it did in fact reach $147.

    We are following the same course. The government is constantly debasing the currency and it is causing commodity prices to rise even in a high unemployment envirnoment. If we continue down this path we will again see $150 oil.

    Just because housing prices are falling because of a sever oversupply and overvaluation issue doesn't mean that we are experiencing deflationary pressures. I think anyone who uses energy or has to eat understands that.

  10. What do you think about the possibility of a market melt up a la Zimbabwe, where people became trillionaires in nominal terms? Afterall, other than PMs, where are people going to park their money in a hyperinflation?

    Also, I am interested to know more about your statement that you were not going to buy physical PMs for the rest of the bull. if a hyperinflatuonary outcome is increasingly discounted by the market, wouldn't the endgame leave physical PMs standing above all else in real terms? Afterall, when SLW hits a trillion, we will have to cash out in USDs which may be valued only in terms of BTUs at that point. Or maybe we wait until the shares are revalued in ounces of gold or whatever the new currency is? :)

    Anyway, keep up the *excellent* work. It is truly appreciated.

  11. falling stocks would mean rising dollar (falling eurusd), should we expect dollar above high of 09 ?

  12. Very unlikely. The dollar is still mired in a long term secular bear market and only briefly spikes as deflationary pressures rise during a bear market.

    The only way to truly halt the bear market in the dollar is for a new industry to come online and release true productive capacity.

    In that scenario we would see a rising dollar and rising stock market just like we did during the 80's and 90's as the personal computer and internet drove the last secular bull market.


    just look at this positive correlation, if sp500 will go down below 09 lows then dollar WILL rise to new highs

    there is no other option

  14. I would call what's going on a "Fascist Bull Market". I can't see the Fed sitting on its hands while the market sells off. The market is being manipulated on a daily basis. Have you noticed that sell offs can't gain any momentum? A lot of times they just slow it down and pump liquidity. The market has been juiced and managed constantly since the lows last year. The Fed is now working in collusion with the banking cartel to play games with the markets all day every day to do what they will here in bailout world. Everything is managed and they want to make those who buy the SPY feel taken care of. The market knows this and the only thing to do really is take delivery of gold and silver as a vote of protest. I think we've got to stay focused on the metals as our inflation/deflation indicator. I like the way silver looks here and that has my comfort level where it needs to be to stay bullish. I am concerned about the Bond Bear. We're now in a phase transition and the market is confused right now, causing volatility in the metals. However, here again the Fed is stepping in to buy the long end to manage, juice, pump, smooth over, and mitigate. These interventions in my belief will cause gold and silver to rise disproportionally to other assets like the dollar, bonds, and stocks. The vision that the hyper bulls like me have is the metals exerting their final judgement on the Federal Reserve Note, the Bond Bear, and all currencies to create the clear vision that gold and silver are money and nothing else is. No construct of man or corrupt fiat currency with all of its instruments and derivatives can last the test of time. In theory the conservative tea partiers coming in next year could cause a metals selloff, but I think the game has already ended. Every time the fed steps in to intervene in the bond markets is essentially debt monetization, the "banana republicization" of our country. I don't think the bailouts stop. I don't think accomodation stops. This is it. Buy gold.

  15. I doubt there is any manipulation going on in stocks. We just have very positive seasonality right now. That being said there are already signs that big money is exiting in preparation for an intermediate correction.

    If there is any manipulation going on its just to get retail traders bulled up so the smart money can hand off the bag to them.

    By the end of January I'm very confident we will have suffered through an 8-15% correction no matter what the Fed does.

    That includes gold and silver. They like stocks are now due for an intermediate correction. Here again the smart money needs the retail buyer to take the bag from them.

    I'm about 80% positive the intermediate correction has already started in the precious metals and the stock market may start next week. If not then certainly by the first or second week of January.

  16. I am almost totally agreed with Toby except SP is unlikely to start its correction before 2nd week of Jan 2011 due to positive seasonality. If you check last year, pattern are almost the same.
    Big money start exit in Nov. and then up in Dec. then another correction in Jan. until Feb.


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