Sunday, March 13, 2011

It's Time to Get Out!

This is for all you folks out there with retirement accounts in the general stock market. I've been warning for many months that the cyclical bull we've been in for almost two years is still just a counter trend rally in an ongoing secular bear market. I made that same warning about the last cyclical bull market from `02 to `07. Many people ignored me in November `07 when I said the second leg down in the secular bear had begun. I suspect many people wish they hadn't.

There are now warning signs that this counter trend rally may have topped, and even if it hasn't the potential upside is so small that it's not worth the risk of getting caught in the next bear leg to catch a few more percentage points.

As of Thursday and Friday the stock market has now broken below the prior daily cycle low. When a daily cycle low gets violated it invariably signals the start of an intermediate degree correction.

The warning bells are going off not so much because an intermediate degree correction has begun, those happen like clock work about every 20-25 weeks,  but because of how quickly this daily cycle has topped. In only three days. That means we are now locked in an extremely left translated daily cycle. 

It is those extreme left translated cycles that do the most damage. The daily cycle following the flash crash last year was a left translated cycle that topped in only 4 days. We all know what that led to.

The bigger picture is the intermediate cycle. Notice the market is now on week 16 of the current intermediate cycle. I noted earlier that an intermediate cycle low is due about every 20 to 25 weeks. On an intermediate term basis the market is now due to move down into that major cycle low. The next larger cyclical structure is the yearly cycle. That is also due to bottom with this daily and intermediate cycle. The combination of all three cycle durations bottoming at the same time will almost always produce a very severe correction.

Because of how the dollar cycle is unfolding (available to premium subscribers) I expect the stock market cycles to bottom pretty close to the 1 year anniversary of the flash crash.

As a point of reference the last intermediate cycle low occurred in November. The danger is that both the industrials and transports might drop below the November bottom during this correction. If that happens a Dow Theory sell signal will be generated. If a Dow Theory sell signal is generated the odds will be very high that this counter trend rally is over and the next leg down in the secular bear market has begun. 

And unfortunately Bernanke is not going to be able to just crank up the printing presses and rescue the markets like he did last summer. The problem isn't that there is a shortage of liquidity. The problem is that there is too much liquidity. It is causing commodity prices to surge out of control.

Oil is back over $100 despite continued high unemployment and impaired demand. Food prices are going through the roof and have already trigger social revolt throughout the mid east and most emerging markets. Once the next leg down in the dollar crisis gets underway it won't be long before we here in the US will be looking at $4.00 or $5.00 for a gallon of gasoline.

As the dollar crisis intensifies Bernanke will be forced to end QE or risk breaking not only the currency but also the bond market. Without an endless supply of fresh money the markets and economy will quickly start to collapse. We saw this last summer when QE1 ended. The same thing will happen this time only Bernanke's hands will be tied by the dollar crisis and surging commodity inflation. He will be powerless to prevent the return of the secular bear forces. Well unless he's prepared to risk hyper inflation that is.

Personally I don't think Ben is willing to completely destroy the dollar and crash the bond market just yet. I suspect when he finally realizes that Keynesian economic principles have led us down a path of no return he will resign and someone else will put the finishing touches on his master piece.

The only question is whether those finishing touches will be to allow the deflationary depression that is required to cleanse 5 decades of debt from the system or whether we will choose the hyper-inflationary path to service the debt spiral we've gotten ourselves into. 

In any case it is time to exit all general stock market funds and position oneself in cash to ride out the next leg down in the secular bear market. If one has a gold or precious metal fund available in their IRA we should have about two months left of spectacular gains as the parabolic finale unfolds in the gold and silver markets. But once that has run it's course even those positions will need to be exited as there is no real way to diversify against another severe bear leg down.

The simple fact is that in a severe bear market everything gets taken down to some extent. Gold will hold up much better than practically all other assets but even gold will take a 20-30% hit during a  D-wave correction. And all parabolic C-wave finales are invariably followed by an severe regression to the mean profit taking event.

Unless one has the option of a gold fund, it's now time to get out of general stock funds and move IRA's to a money market fund until the next four year cycle low is reached (probably in late 2012).


  1. Toby,

    Thanks very much for your insight.

    Do you also expect bonds to head into a severe bear market along with stocks later this year?


  2. Toby,
    Ok...USD down = get out of general stocks. Too general.
    Recently you posted when USD falls into 3 yr cycle low, then CRB should rise along with Gold/PM's.
    Why couldnt you therefore expect miners (small cap- mid cap) to do well in this scenario.
    Additionally, in your previous post you indicated "the Bernank" would continue with his printing, although in this post you doubt that will occur.
    With PIMCO exiting ...isnt Gross indicating that he anticipates another round of printing...sending bonds crashing and USD along with it.
    We are 4-6 weeks away from a possible USD low, still needs to take out the Nov. 10 low, for which it is running out of time. Besides every time it tests that level (low 76's) it rebounds.
    The market is displaying all the signs of being too volatile to predict with any degree of certainty. The time to exit general stocks was mid-Feb '11.
    I dont doubt Bernanke will crank up the presses again. He will have no choice. He will keep assets (stocks) inflated for as long as he can. He wont resign from the FED, he will be pushed.
    2012...on all accounts seems like a very bad year.

  3. Ray,
    Bonds have entered a long term bear market. I wouldn't touch bonds for the next 20 or so years.

    If you read the post again you will see that I said precious metals and miners will rise during this initial leg down by the stock market.

    Any kind of precious metal fund is desirable right now. The post was mostly for people who don't have a PM option in their retirement account. Those people should just move to a money market fund and wait patiently for the next 4 year cycle low before re-entering.

  4. I appreciate everything you say Toby, still i don't see how could PM and PM stocks rise while dollar and regular stocks fall.
    It just doesn't make any sense.
    End of 2007. PM, PM stocks,Regular stocks, all fell down while dollar rallied hard.
    Just don't tell me it's different this time

  5. I am sorry, i wanted to say you can't expect just some of the risky assets to fall while others rally.
    When dollars goes down ,everything else rallies and when dolar rallies everything else goes down.
    You can see that right now.
    All stocks including PM's are falling hard while dollar rises

  6. The dollar is actually looking weak now, in spite of the panic. Stocks will continue lower and gold will move higher over the next couple of months as Toby predicted IMO.

  7. As you can see, in panic precious metals get sold even harder than regular stocks.
    Risky assets are risky assets.
    Even with dollar falling they fell hard. I don't even want to think what would have happened to PM's if dollar went up instead of down

  8. Eri....
    Which begs the question...
    If the dollar is falling and PM's are taking a hit...what does that tell you where money is being parked?
    Bonds ??? Dont think so..crack up about to happen.
    Currencies = EUR ....mad, YEN ...possible , RMB ....again same, USD ...nfi.
    PM's to me are just taking a breather...some liquidation.
    Commodities = quite likely but again they habe come off over the same period.
    The "risk" as Toby puts it is in the General Stocks. There are exceptions as I /he pointed out.
    Lower dollar = continuation of uptrend in CRB/PM/miners , albeit S.T.
    Quite feasible that because the USD has not rallied over the last few trading sessions (Japan tsunami)...its setting up for one helluva test and possible correction to the downside.
    Toby also points out that PM's/stocks ultimately will cave into the pressure of the stock market in general when it does eventually fail in its yearly cycle low.
    Words of wisdom....take heed.

  9. Market Down, Silver Down = Miners Losses Exceed Markets Losses Substantially!

    Market Up, Silver Up = Miners Not Even Keeping Up With Silver

    Very frustrating so far. Twice the leveraged risk to the downside and barely any leveraged upside.

    I'm just waiting on Gary's dollar collapse call. Only about 25 more basis points.... we'll see.

  10. The USD just broke below its November 2010 low.

  11. So is the next semi-resistance point the 74.17 low on 11/26/2009?

  12. Did you hear about the founder of Liberty Dollar getting convicted for voluntary competing gold silver currency?

  13. Toby,
    What if my 401k only has stock or bond options and no money market or PM options? Then what?

  14. All 401k plans have a money market. You can't be forced into risky assets with your savings.


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