Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Halifax Stopping Customers Withdrawing Funds Online - UK Brexit Banking Crisis Starting? - 21st July 19
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Gold, HUI and Stocks On the Brink of an Asset Explosion II

Stock-Markets / Financial Markets 2010 Apr 24, 2010 - 12:51 AM GMT

By: Toby_Connor

Stock-Markets Diamond Rated - Best Financial Markets Analysis ArticleLet me start off by saying the market should be correcting.  Sentiment has reached ridiculous bullish extremes, the kind of extremes that led to the January /February correction.  

That correction separated the second leg of the bull from the third.  But let’s face it, sentiment has been in this condition for several weeks now and the best we could muster was a minor correction of 30 points on the news the SEC was filing charges against Goldman Sachs for fraud.


We’ve had three opportunities to “sell the news” with the April jobs report and recently with INTC and AAPL earnings.  None of them have panned out.  The market could use the Greek excuse as a downside catalyst, the same as it did in January.  And now Greek short term bonds are tanking as the EU waffles about writing that check in front of the German elections in May.

All in all it boils down to the market has had every chance to correct and it has failed to do so.

Last month I speculated that we were On the Brink of an Asset Explosion. Well, we may not be on the brink anymore. We may very well be moving into the heart of the explosion right now.

We’ve just seen one of the most powerful rallies out of a corrective low in many years. Until Friday the market had held above the 10 day moving average 42 days in a row. That’s the longest stretch in over 10 years. Since the February 5th low the market has risen 71% of the time. That’s the kind of stuff parabolic blow off tops are made of.

I don’t really think we are in a parabolic blow off top just yet. What I do think is that we may have entered a runaway move similar to the August 06 to February 07 time frame.

During a runaway move, corrections tend to be uniform in both magnitude and duration.  During the 06/07 rally all corrections fell in a range of about 20-35 points.

So far the rally out of the February bottom has followed this script. The February corrective move dropped 25 points in 4 days and the recent pullback on the Goldman news dropped 30 points in three days.

If the S&P and Dow can follow the Russell, Nasdaq, NDX, midcaps and banks to new highs, the odds are going to increase dramatically that the market is now in one of these runaway rallies.

It’s anyone’s guess as to how long one of these moves will last. The rally in 06/07 lasted 7 months.  I can tell you that once a market gets drawn into one of these things you can pretty much throw out every trading tool as the mechanics of the rally just roll over any and all trading strategies.  Sentiment becomes useless, cycles get stretched to ridiculous lengths, technical analysis and oscillators are worthless.

There are a couple of signs to look for as one of these moves comes to an end and I will keep subscribers updated as the move progresses. 

The next question we need to ask ourselves is which sector is likely to see the largest gains if this kind of move takes hold?  I expect a rally like this will affect every sector as virtually all assets have been moving in tandem since the March 2009 bottom.

Before I answer that question I think we need to recognize one indisputable fact.  And that is that the stock market is undeniably in a long term secular bear market, and has been since March of 2000.  And, it’s a bear market the Fed and every central bank in the world has chosen to fight tooth and nail with the one weapon at their disposal.  I’m talking about the printing press.

As you can see from the next chart it’s a battle that is only producing temporary periods of false prosperity driven by bubbles.  As anyone with a little common sense can understand, you cannot drive an economy by creating bubbles.  Bubbles always pop and are followed by periods of economic devastation.



Perhaps our leaders should look at this chart and figure out that it isn’t the size of the dose that’s the problem. WE ARE USING THE WRONG MEDICINE!

Hello, Keynes was wrong!  You can’t fix this kind of problem with a printing press.  All this does is make the problem bigger and ultimately more painful.

I dread the end result of the current liquidity experiment when the government debt and currency bubbles burst.  Unfortunately, there is no short term cure for a currency crisis.  I’m afraid the world is going to learn this lesson the hard way, once again.

So the question is where should we be invested if the price explosion unfolds, or maybe I should say continues?

Firstoff,  let’s take a look at the stock market.

If, and this is a big if, the S&P does manage to make it back to the old highs one would be looking at a 30% gain from today’s level.  

Now that’s certainly not a bad return but we also have to take into account that this is still a secular bear market and as such, it’s probably wishful thinking that the powers that be can force the market back to the old highs on the back of a government debt and currency bubble.  Realistically I think we have to expect the upside is probably limited in this area to maybe another 20%, give or take.

Next let’s look at the ‘go to’ sector from the last cyclical bull market – energy.

At first glance there appears to be more potential in this sector than the general stock market.  But is there really?

For one thing, the leading sector of the last bull rarely ever leads the next one. We can see from the chart this is, in fact, the case.

Energy is woefully underperforming and there is a reason for this. The world has now moved into a long period of ‘on again off again’ recession. The energy sector has lost a very important fundamental driver which is the demand side of the equation.  Demand for energy is going to be permanently impaired during this prolonged period of high unemployment.

Energy also has another strike against it. Unfortunately, spiking oil prices always have and will lead to economic contraction.  High oil prices are oil’s worst enemy because they lead to economic collapse and that means even less demand.

I’m afraid the energy sector will probably be on a wild roller coaster ride for years to come as monetary policy drives prices to levels that stymie economies, followed by price collapse as demand evaporates during periods of recession.

So even though it appears the energy sector has a lot of room to run, the reality is that the fragile global economy will collapse long before oil reaches $147 again.  I suspect the upside in the energy sector is probably limited to 20-30% at best.

If the stock market isn’t a great place to put our capital and the energy markets are going to be impaired for years to come, which investment sector should we look at, you ask?  

That one is easy to answer. We go to the one secular bull market that’s left. The one area where the fundamentals are actually improving. The one and only sector that stands to benefit from these insane monetary policies.

Gold!  Precious metals.

This is the one sector where the fundamentals aren’t impaired.  In fact, they are only getting better and better as the powers that be continue down their misguided Keynesian path to ruin.

Now let me point out that every secular bull market in history eventually ends in a bubble. Gold will be no different. After it has gone up far enough and long enough we will reach a point where the public comes to believe that gold is a sure thing, just like they thought tech stocks were a sure thing and just like they bought into the housing myth that real estate only goes up in price.

The difference is that the precious metal markets are fairly small markets. When the public finally catches gold fever it will drive a bubble the likes of which none of us have ever seen before.  I expect $5,000 gold is probably a conservative estimate for a final top.

Now keeping in mind that this secular bull is far from over, let’s take a look at mining stocks.

Unlike the S&P and energy sector the mining sector has already tested the old highs.  As a matter of fact the mining sector has led this bull from the very beginning. 

When the rest of the market was putting in a final bottom in March of last year, the miners were already over 100% above their November lows.  How’s that for relative strength?

From today’s level back to the old highs would yield miners a 20% gain. That’s probably equal to the best we can expect from either the stock market or the energy market.

However, miners are not limited by impaired fundamentals like virtually every other sector. The mining sector has an incredible wind at its back.  Does anyone really believe mining stocks ($HUI) would be trading anywhere close to $519 with gold at $1,500?  How about with gold at $2,000?

Before the secular bull is over I expect we will indeed see $5,000 gold.  I would be completely dumbfounded if mining stocks don’t have 500-1000% of potential in them during the remainder of this secular bull market.

So one can fight with a secular bear market and impaired fundamentals for small gains or one can just get on board the only remaining secular bull market and hold on for one heck of a ride. This is how millionaires and billionaires are made. Not by trying to trade in and out of impaired markets.

So if we are on the verge of an asset price explosion I want to be invested in the one area best poised to benefit from the fundamental driver of that explosion…gold!

Toby Connor
Gold Scents  

A financial blog with emphasis on the gold bull market.

© 2010 Copyright Toby Connor - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments


24 Apr 10, 12:15
gold

Another of the gold bugs :)


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules