Thursday, October 20, 2011


At this point I think it's pretty clear the general stock market is now in the initial phase of a new bear market. It's trying to generate a bear market rally over the last three weeks, but so far it's been pretty weak. That doesn't bode well once the cyclical and secular bear trend resumes.

The HUI mining index is now on the verge of breaking down out of the multi-month  megaphone topping pattern. Once it does that will confirm that the bear now has his teeth in the last holdout sector. The sector that led the bull market over the last 2 1/2 years and now the last sector to succumb to the deflationary forces.

As I have noted in the chart I do expect the miners will find at least temporary support at the 200 week moving average. That should correspond with gold putting in an intermediate degree bottom sometime in the next two or maybe three weeks. Presumably it will come with gold below $1535. My best guess is that gold will make an attempt to test the 75 week moving average at that intermediate bottom.

At that point gold should be severely oversold enough to generate a very powerful, snap back, A-wave rally. That should be followed by a multi-month consolidation as gold works off the huge gains of the last 2 1/2 years. This while the stock market continues down into its final four year cycle low.

I expect the miners will produce a substantial rally off the 200 week moving average also but I'm afraid they will continue to get dragged down by the general bear market in stocks even if gold does form a high-level consolidation over the next year.

So while I expect to see a great buying opportunity on miners in the next few weeks I doubt it will be a long-term type trade. That probably won't occur until the stock market puts in its final four year cycle low sometime in the fall of next year.


  1. In your previous article you left me under the impression that it is up to Bernanke's decision... The current article tries to make a prediction as to what this decision will be ( no further QE in the near future, stronger dollar etc ) or am I wrong?

  2. Hey Larry,
    The way i read it, the previous article was just a call on Bernanke's when he prints ...then this follows. No hard and fast rule. Just a bit of common sense really.
    This article seems to look at where markets are in terms of cycle theory and extrapolates a play based on that. For all intents and purposes he could be correct. Lower gold (final d-wave move) with rest of markets (miners) following.
    The article is skewed towards a deflationary scenario that outweighs the continual money printing. Dont entirely agree with that...but I like to have a balanced perspective.
    Not hard to argue the case for or against it either. In fact if you follow the "sentiment" thats where markets are headed.....!!!
    In meantime...Watch out for the "noise" can get expensive.

    Two vital things I have learned with markets;
    1) Impossible to time them
    2) When there is a BULL trend in place (PM), you must have the conviction to stay the course. You will only reap the real rewards when the exponential moves come in the latter part of the BULL run. We are not there yet....but getting closer every day.

  3. I appreciate your response Liquid!
    I guess my confusion rests on the following part of your comment:

    [The article is skewed towards a deflationary scenario that outweighs the continual money printing.]

    I was referring in the short term but you are absolutely right about your conclusion that it is impossible to time the markets.

    However,the medium term movements are well "diagnosed" by Toby. That is why I visit frequently this blog.

    At the moment no positions on gold or silver (waiting for lower levels to re-entry ) but a bit worried about the dollar. No strenght at all..

  4. I think the dollar is in the process of putting in an intermediate degree bottom.

    Of course if Ben is dead set on destroying the currency at all costs then this could be the beginning of the end for the dollar and we are now on the path to hyper inflation by 2014.

    We should know once the dollar rallies out of the now due cycle bottom.

  5. I have a suspicion that he might wait first for more European turbulance in order to gather more "firing power". Perhaps then he kills it ! :)
    who knows..

  6. Economic numbers are improving. Gary, you are right for a brief period, maybe a few months when luck is on your side. Big deal. There is no big picture bear market unfolding anywhere. In fact, the opposite is occurring. A big fat bull is in the wings, as we consolidate the run up into year 2000.

  7. If the Fed turns the dollar back down we very well could see the market head back up.

    However to turn the three year cycle back down after only 5 months would almost certainly lead to an extreme currency crisis at the next three year cycle low in 2014.

  8. Michael,
    Dont agree.
    Not a Bull market for stocks.
    More like a bear market trap.
    US Stocks have gone no where in nothing short of a decade or more.
    In real terms they have gone backwards. Pull up a chart of the S&P for the last decade and you will see what I mean.
    I ask you what will drive a sustainable BULL market in stocks that you are so confident about. Yes we all know the effects of QE...but take a look at what the last attempts did.
    US and EUR are going no where for at least the next 5 yrs.
    What are your improving economic numbers that you refer to.
    Unemployment, GDP, Debt, Exports, Interest rates, CPI, PPI, Housing ?????
    The only BULL market that exists today is the PM one.
    You still have time to get aboard.

    Gary, Bernanke will continue to print ....while allowing bouts of deflation. In that way the extremes are tempered.
    USD unfortunately cannot make any sustainable moves higher. Although in saying that it will more than likely hold its own against the EUR and JPY. EM and other SE Asian currencies will continue to stay strong and possibly strengthen. They are not subject to the issues facing the western world. There are indeed three zones in the world today. The Nth Amer., EUR and EM/Asia. Only one of them will have any material growth in medium term.

  9. Larry,

    Quite simply...the charts that Gary uses indicate a bear market is due/in store. A Bear market is synonymous with a deflationary environment (part of Gary's forecast).
    Money printing is inflationary. $$ debasement causes (amongst other things) loss of purchasing power.

    In the end the Q is do we see deflation in prices /debt OR inflation in prices and money supply. My guess is BOTH.

    You cant have your cake and eat it as well. Although I must say the longer this thing plays out without a bust or contagion, the more chances we have of seeing swings into both areas on a short term basis.
    One has to keep in mind that the 1st priority of the FED (and the ECB for that matter), will be to avoid deflation/debt/capital destruction at all costs (....YES that includes their respective currencies).
    If volatility is not your friend then its time to go turtle and bunker down.

  10. Liquid Motion:

    It's true that stocks have gone nowhere, however, when you factor in dividends, they are still up 25 percent over that time period.

    2ND: Stocks have consolidated for 11 years running now, from a big picture stand point.

    3rd: Corporate earnings are growing, worldwide gdp is growing, corporations are worldwide entities. This will power the S&P higher over the coming decade.

    4TH: And this one is scary, it looks like another QE is coming. How do you like that? Crude is already back at 95 a barrel. Anyway, that will be a short term driver of higher stock prices.

  11. Michael,
    Your metrics for the "economy improving" are distorted.
    You forgot to mention
    Unemployment at around 16%.
    Housing - the worst since the Depression.
    Budget Deficits at 10% of GDP and public Debt at 100% of GDP.
    Private debt at 300% of GDP.
    CPI (real) 4.5%.
    If the Economy is growing why do these numbers indicate otherwise.
    Corporate earnings are a very big factor of FX (esp those that are "global"). Besides the numbers reported are distorted. Where is the productivity....hmmmm..??
    Better to gauge a company's strength by looking at free cash flow generation. Return on capital invested distinguishes excellence from mediocrity.
    Stocks havent consolidated for 11 years...thats called a bear market.
    Appreciate your call on QE....but the market has already factored that in....some three weeks ago (dow at 10400 5.10.11).
    Global GDP includes China's 9%.
    US = .5%
    EUR = 1%
    EM = 3-5%
    The "Elephant" in the room is not QE nor EUR sovereign something more substantial in the order of $$$600 TLN....That's SCARY!!!!!

  12. I Guess you got that one wrong , in no time at all!

  13. Liquid Motion:

    One does wonder what happens to GDP when the Government spends only what they take in? The obvious answer is there goes a trillion.

    And I would argue that the S&P 500 stocks are priced with this scenario in mind. Lets not forget, the last time these companies were earning 100 dollars the composite traded north of 1500.

    The debt is manageable from this level, and what needs to happen is more hiring. I wonder whether tax reform will spur some of this in the future?

    Look, these companies are making large sums of money with 20 percent unemployment worldwide. Every central bank is debasing, year in and year out. These companies will continue to earn.

    Earnings plus a sound financial structure plus worldwide inflation will drive stock prices higher over the next 10 years.

  14. M,
    Your point is nonsense.
    Deficits are not sustainable nor are they efficient or productive.
    DEFICITS and DEBT are BAD. Future generations will pay dearly for the mistakes/actions of this and previous govts and cb chairmen.
    This is the fate of the US. Decades of overspending and negative real income. Debt was the only way to survive and prosper.
    I wish you well with your optimistic view of S&P over the next decade.
    Just keep in mind that earnings are not only a factor of income but in the past few years to a large extent a factor of cost cutting (wages). Mark my will see fresh rounds of large cost cutting (staff retrenchments) in Q1 2012. Easy to increase earnings.... to support an desirable PE.


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