Index Data and the Battle For Moscow part 4

Closing values for Wednesday, March 31, 2010:


Trend & Value 50:

1071.25 (down .36%)


China Small Cap ADR 25:

911.03 (down 1.67%)


Precious Metals Complex:

4619 (up 1.05%)


Commodity ETFs:

2084 (down .15%)


BRIC Basic Materials:

1057.12 (down .02%)


Penny Banks:

1061.97 (down .32%)


Foreign Blend:

7399 (up 37)


General Liquidity:

1022.97 (down .03%)


Über-Indicator:

36.33 (down 2.86)

----

Index Data and the Battle For Moscow part 3

Closing values for Tuesday, March 30, 2010:


Trend & Value 50:

1075.14 (up .24%)


China Small Cap ADR 25:

926.50 (up .20%)


Precious Metals Complex:

4571 (down .81%)


Commodity ETFs:

2087 (up .28%)


BRIC Basic Materials:

1057.39 (up .45%)


Penny Banks:

1065.19 (up .14%)


Foreign Blend:

7362 (up 95)


General Liquidity:

1023.26 (up .07%)


Über-Indicator:

39.19 (down 1.45)

-----

Index Data and the Battle For Moscow part 2

Closing values for Monday, March 29, 2010:


Trend & Value 50:

1072.54 (up .06%)


China Small Cap ADR 25:

924.63 (up 1.29%)


Precious Metals Complex:

4608 (up .99%)


Commodity ETFs:

2081 (up 2.37%)


BRIC Basic Materials:

1052.66 (up 2.93%)


Penny Banks:

1063.63 (down .29%)


Foreign Blend:

7267 (up 173)


General Liquidity:

1022.55 (up .86%)


Über-Indicator:

40.64 (down .21)

-----

Now I feel kind of silly about this documentary thing I started, but I guess I got to keep up with it. So here is part 2 of the Battle For Moscow:

Massive Head and Shoulders on the Dow?

A couple days ago a reader sent me this very long-term chart of the Dow Industrial Average:



At the moment I am not sure who made up the chart. Anyhow, the implication here is that a break of this neckline generates a price target of practically nothing, or sub-1000 on the Dow, at least.

This raises some questions about how to form price targets from chart patterns. With H&S patterns, everyone seems to like this formula where the downside target is the distance below the neckline that the head was above the neckline. Sounds rather simplistic to me, but I suppose under normal circumstances a simple target like that can serve as a decent guideline.

But on a major formation like this, the implication for a one to one target can become rather absurd. And no mistake, any analysis that has the Dow dropping to lows of the 1970s is absurd. There is no other word for it.

It's perfectly reasonable to look for the Dow to decline, perhaps significantly. But it is not going to drop to 700 or whatever. It just won't.

But it happens that today I was playing around with the reciprocals of some price indexes. On stockcharts you can make a ratio of '$ONE' to anything, so to get the reciprocal of the Dow you just enter $ONE:$INDU. So essentially you are charting the performance of a dollar relative to the stock market, rather than the other way around. Here is the $ONE:$INDU over the past couple years:



Now the cool thing is that this ratio gives you a dramatically different target on the big H&S pattern than the right side up chart of the Dow. Look:



I used the 21 day moving average just to smooth out the pattern some. The actual target -- if you are using the head to neckline measurement -- varies depending on whether you place the neckline at the 2002 low or the 2009, but in either case, the potential is for the Dow to move back to some level it traded in the mid-90s. 5000 maybe?

Of course, that's only if this actually ends up being a potential head-n-shoulders pattern, and we are a long ways from being able to say that now.

Index Data and the Battle For Moscow part 1

Closing values for Friday, March 26, 2010:


Trend & Value 50:

1064.45 (up .06%)


China Small Cap ADR 25:

912.87 (up .20%)


Precious Metals Complex:

4563 (up 1.83%)


Commodity ETFs:

2033 (up .05%)


BRIC Basic Materials:

1022.72 (up 1.46%)


Penny Banks:

1066.76 (down 1.70%)


Foreign Blend:

7094 (up 82)


General Liquidity:

1013.84 (up .36%)


Über-Indicator:

40.85 (up 4.09)

-----

In keeping with the Operation Barbarossa metaphor, the next couple weeks these index data posts will feature clips of a documentary called 'Battle for Moscow.' Here is part one:

Value Line Arithmetic Index -- Touches All-Time High

I am not sure how they figure the intra-day values of the VLE, must be 'theoretical,' but in any case, the index hit an all time high yesterday, before the market fell off at the end of the day.

Index Data

Closing values for Thursday, March 25, 2010:


Trend & Value 50:

1063.76 (unchanged)


China Small Cap ADR 25:

911.07 (up .03%)


Precious Metals Complex:

4481 (down .89%)


Commodity ETFs:

2032 (down .47%)


BRIC Basic Materials:

1007.98 (down 1.54%)


Penny Banks:

1084.99 (down 1.43%)


Foreign Blend:

7012 (down 24)


General Liquidity:

1010.23 (down .39%)


Über-Indicator:

36.76 (down 3.03)

-----

These markets aren't healthy. More fiber.

Index Data and Observations

Closing values for Wednesday, March 24, 2010:


Trend & Value 50:

1063.80 (down .83%)


China Small Cap ADR 25:

910.81 (down .46%)


Precious Metals Complex:

4522 (down 3.21%)


Commodity ETFs:

2042 (down 1.33%)


BRIC Basic Materials:

1023.72 (up 1.32%)


Penny Banks:

1100.91 (down .30%)


Foreign Blend:

7036 (down 151)


General Liquidity:

1014.22 (down 1.05%)


Über-Indicator:

39.79 (down 3.17)

-----

Huge gold pump at Forbes today. Yikes.

When stocks, gold, and bonds are all dropping, we call that Deathflation. Deathflation is just the opposite of Reflation. With Reflation, everybody wins. With Deathflation, nobody wins -- not even the house. If that goes on for too long then the casino will shut down. Nobody wants that to happen.

Aside from the Really Bad Day in the T-Bonds market, the markets seem to be following my rough script. Dollar's doing alright, commodities going nowhere, gold going nowhere, well, at least not up. If gold accelerates to the downside, then watch out, the commodities complex will really start to come down hard, along with the non-US equities markets. After that shakeout gets rolling then you'll see the US stock market take its dive. Then Treasurys will start to move sharply higher in price.

That's the basic Deflationary Sequence I have outlined in my head right now. (Notice I said deflationary, and not deathflationary. Whatever happens, I highly doubt we'll see a sustained period of Deathflation.)

Index Data and Observations

Closing values for Tuesday, March 23, 2010:


Trend & Value 50:

1072.71 (up .80%)


China Small Cap ADR 25:

914.98 (up 1.40%)


Precious Metals Complex:

4672 (up .32%)


Commodity ETFs:

2069 (down .06%)


BRIC Basic Materials:

1036.16 (up 1.32%)


Penny Banks:

1104.20 (up .14%)


Foreign Blend:

7187 (up 93)


General Liquidity:

1025.01 (up .05%)


Über-Indicator:

42.96 (up 3.84)

-----

In January, the high close for the T&V 50 index was 1072.81. 1072.71 today.



The Über-Indicator remains a little below last week's high.



The idea with this type of indicator is to look for persistent divergences between it and the actual market. Well, there is your divergence, but it's way premature to call it a persistent one.

The typical price of the S&P 500 hit its special average today:



Remember, the market has traded below this average since September 3, 2008, so this is super major resistance. But as I mentioned before, if the S&P can start trading above this average, then we will really have to reformulate our overall conception of the market.

Index Data

Closing values for Monday, March 22, 2010:


Trend & Value 50:

1064.20 (up .33%)


China Small Cap ADR 25:

902.31 (down .78%)


Precious Metals Complex:

4657 (down .15%)


Commodity ETFs:

2070 (down .01%)


BRIC Basic Materials:

1022.66 (up .47%)


Penny Banks:

1102.60 (up .33%)


Foreign Blend:

7094 (up 35) (corrected)


General Liquidity:

1024.54 (up .22%)


Über-Indicator:

39.12 (up 2.07)

-----

Chinese Food for Thought ($FXI) -- Charles Amadeus

Chuck puts the sell on China:

Chinese Food for Thought ($FXI) -- Charles Amadeus

That's his first blog post in months, so it must be important.

China Small Cap ADR 25 Index

I finally entered all the closes for this one onto a spreadsheet. Here is a chart since I started tracking it 100 trading days ago:



I heard if you dig a hole far enough down you end up in China. But that was when I was a kid. Lately I've heard that the world is flat, so I'm not sure if you can dig a hole to China any more. You might have to take a bus. Oh, but they're building a bunch of fast trains over there and those are said to be more roomy than the bus. The train might be the way to go.

US Dollar Index -- Weekly Chart

We got the 13 week moving average looking to cross above the 55. That'll be a major buy-signal from a long-term perspective.



Now one might argue that relying on such a cross of moving averages doesn't work, because by the time the signal reverses, much, if not all, of your gains will have evaporated. That may be true, I suppose, but only if you are dumb enough to use the same technical indication to exit a position as you did to enter it. Using a single indicator like that works sometimes for certain markets, but for a situation like the dollar index here, there will be plenty of other means to time an exit.

Gold

Watching the charts develop the past couple weeks, I have noticed that the gold price has been forming a pattern that, at first glance at least, looks similar to the pattern formed last summer, right before the great price breakout. See the circled areas on this chart of GLD:



And now that I find myself negative on gold much in the manner that I was back then, I feel the need to address this pattern similarity, because my negativity on gold last year proved to be an embarrassment, and fairly costly besides, so I'd rather not repeat the experience.

The first thing that speaks against a repeat is the alternation principle. I am using the term loosely, but basically you just don't look for the same pattern to repeat twice in a row like this. That's not to say it can't happen, but most of the time when this kind of repetition starts to show up, it ends up that the market is playing a trick. History may 'repeat itself,' but it wouldn't get very far if it kept repeating what it just did last time.

Furthermore, while the two price formations have some affinity on a time-based chart, you will notice that the volume during the two periods is pretty different. We are just not seeing the drying up of volume on GLD now like last summer. Not yet, at least.

Finally, when we view a weekly chart, the pattern similarity loses a lot of clarity.



As far as the short-term for gold goes, I'd like to see some movement, one way or the other, in the PM Fix CROC:



To me it looks like the indicator is set to break lower, but I guess we'll see.

If gold breaks below 1100, particularly on the PM Fix, then we'll be looking at the next support around the CDMA, currently at 1060:



A break below the CDMA and the major target becomes 980, where we should expect tremendous support. But of course I've been expecting to see 980 for a couple months now and I'm still waiting...

Index Data

Closing values for Friday, March 19, 2010:


Trend & Value 50:

1060.73 (down .39%)


China Small Cap ADR 25:

909.40 (down 2.04%)


Precious Metals Complex:

4664 (down 1.62%)


Commodity ETFs:

2071 (down 1.32%)


BRIC Basic Materials:

1017.90 (down 1.25%)


Penny Banks:

1099.03 (up .20%)


Foreign Blend:

7059 (down 123)


General Liquidity:

1022.25 (down .82%)


Über-Indicator:

37.05 (down 6.07)

-----

While the broad market indexes suffered only moderate losses today, if you open up the hood, you can see the market is starting to sputter. Highest volume on the Wilshire 5000 index since 12/18/09 (and the highest volume down day since 5/7/09):



The Ü-I down over 6 points:



And so far, the S&P has had real trouble moving above the special moving average that I updated you on a couple days ago.

IKN: Speaking of oil revenues, Ecuador has a message for China

IKN: Speaking of oil revenues, Ecuador has a message for China

Major news out of Ecuador. Click the link above. Thanks Otto.

Oh, and in case you missed the T&V exclusive of Viteri dancing last summer, here it is:



Whether inspired by higher oil prices or no, giving the finger to China was a fine thing to do. So congratulations, you guys deserve another dance party.

Index Data

Closing values for Thursday, March 18, 2010:


Trend & Value 50:

1064.91 (up .38%)


China Small Cap ADR 25:

928.36 (down .61%)


Precious Metals Complex:

4741 (down .21%)


Commodity ETFs:

2098 (down .50%)


BRIC Basic Materials:

1030.79 (down 1.47%)


Penny Banks:

1096.66 (down .70%)


Foreign Blend:

7182 (down 88)


General Liquidity:

1030.67 (down .35%)


Über-Indicator:

43.12 (down 2.57)

-----

Index Data

Closing values for Wednesday, March 17, 2010:


Trend & Value 50:

1060.84 (up .44%)


China Small Cap ADR 25:

934.03 (down 2.77%)


Precious Metals Complex:

4751 (down .20%)


Commodity ETFs:

2109 (up .72%)


BRIC Basic Materials:

1046.13 (up .12%)


Penny Banks:

1104.36 (up .92%) (corrected)


Foreign Blend:

7270 (up 82)


General Liquidity:

1034.30 (up .46%)


Über-Indicator:

45.69 (up 2.2)

-----

The Über-Indicator hits another new high for the rally... I remember Richard Russell used to say (and maybe he still does, I just haven't read him in a long time) that his Primary Trend Index (PTI) is smarter than he his. Well, the Ü-I is no PTI (and it's not meant to be) and I'm surely no Richard Russell, but, you know, it may well be that my Über-Indicator is 'smarter than I am.'

But speaking of 'proprietary' tools, the special average I showed you last month is just right above the current price of the S&P 500.



whether by coincidence or some intelligent design beyond our understanding, this moving average has served as resistance at every interim peak in the index since September of last year. So it would not surprise me in the slightest to see at least a temporary top come in right here.

However, if the S&P can climb above that special average (and one other with a somewhat longer period which is currently about 1175) then that could really call into question the whole thesis that the advance that began last year has been 'just' a counter-trend rally within a larger bear market.

If you want to be long stocks now, my suggestion is to pick a few of what we'll call 'Large-Cap Laggards.' There aren't many stocks that haven't been participating in this advance, but those that haven't almost have to get bid up from here if the market keeps rising. And if the market decides to turn lower, you will likely have less risk in these 'Large-Cap Laggards' if only because they hadn't surged in price in the first place.

Like I said, there aren't many of these that fit the bill, but here are a couple: Exxon Mobil (XOM) and Monsanto (MON). Odd that a commodity basher like me is pitching two of the biggest names in the basic materials sector, but hey, they have a certain logic to them right now. Besides, these two might be a good hedge from here if you have adopted an otherwise bearish stance on commodities.

Oh, and if this market does keep flying, then the banks are obviously going to maintain their new-found leadership status. But Trend & Value does not advocate chasing anything (except tequila), so I got to put banks down as a (strong) 'Hold'. Though relative to most other groups they are most likely still in out-perform mode.

Hey, throw in a few charts, some price targets and a few hundred more words, and this post could have been a chargeable newsletter... A lucky day for blog readers I guess. Oh well, there ain't no such thing as a free lunch, but a free dinner is a dime a dozen.

Index Data

Closing values for Tuesday, March 16, 2010:


Trend & Value 50:

1056.17 (up .59%)


China Small Cap ADR 25:

960.65 (down .33%)


Precious Metals Complex:

4760 (up 2.48%)


Commodity ETFs:

2094 (up 1.34%)


BRIC Basic Materials:

1044.91 (up 1.38%)


Penny Banks:

1094.29 (up 1.39%)


Foreign Blend:

7188 (up 123)


General Liquidity:

1029.53 (up .97%)


Über-Indicator:

43.49 (up 3.7)

-----

Good bounce nearly across the board today. Bonds up, stocks up, gold up. A genuine reflation day. It happens though that we get good reflation days like this (fairly rare occurrences) sometimes right before a big shift in the market takes place. Not that I know what such a shift would entail right now, but whatever positions you have I wouldn't get too complacent about them.

So where does LMT go from here?

The problem with identifying underperforming dogs that look underpriced is that once they start to run you got to decide whether to stick with 'em as they get to running. You shift from being a prudent contrarian to a momo skirt chaser. It's rough.



So we've made it back to the highs of last summer and the 50% retrace. I'm not really sure what to do with this. I'll let you (the subscriber) know when I figure something out.

Charts of the Commodity ETF Index

Past 100 days:



300 days:



Since 7/8/08:

DBC -- Our Top Pick for The General Liquidity Challenge

Early this morning I introduced a new blog feature called The General Liquidity Challenge. To briefly recap, the Challenge is pick one of the ETFs in the General Liquidity Index as a long or short trade when the GLI's SSO Histogram gives a buy or sell signal for the entire index.

As mentioned in the introductory post, the histogram gave us a sell signal on Friday, so I chose DBC, the commodity index ETF, as our short trade for the Challenge.

I said we were going to use this morning's opening price as our entry point for DBC. Well, the fund opened the day at $23.38, 14¢ below Friday's close of 23.52. DBC closed the day at 23.24, so our short position was up .6% from our entry price in the model portfolio. (And I emphasize that the Challenge is a model portfolio, I didn't actually place the trade in a real account.)

Had I declared the entry point at Friday's close then the gain for the day would have been 1.2% instead of just .6%, but I am using the using the next open price as entry point for the challenge to make it as realistic as possible.

I picked DBC as the short this time because to me it looks like commodities have the highest probability of dropping over the next week or three. Not that I am very bullish on most of the other markets either, but looking at the charts of all the markets, I see commodities as in a more middle of the road position than most of the other markets, and the commodity indexes have been trying to roll over for a couple weeks now. (I mentioned this briefly about a week ago. click here.)

There will necessarily be other ETFs in the GLI that out-perform DBC to the downside, if only because one or more of the more narrowly focused commodity ETFs in the index will have to out-do a broad basket like DBC. Or a broader panic could develop in the near-term and some of the higher-beta stock ETFs could start to dive much faster than the commodities.

All kinds of possiblities, but since I'm kinda ho-hum about the markets right now and don't have any crazy visions confronting me, I am playing down out-lying possiblities and basing this trade primary on a probability.

My view of commodities has changed little since the indexes first shot up about 10 months ago. My view at the time was that the price advances would prove to be just a counter-trend rally within a much larger bear market in (most) commodities that began in 2008. I still think that, it is just that prices stayed elevated much longer than I initially anticipated.

But I think I am actually more bearish on commodities now than I was 10 months ago. The very fact that prices have remained elevated for so long is going to make the next downturn a real doozy. Sustained overpricing has led to a whole new round of overproduction. Add this new supply overhang to the structural distortions of the commodities bubble that are not even remotely resolved and the renewed bear-market that confronts the sector should make you shudder.

But, the question, as usual, is one of timing. Is the crash directly in front of us or another six months or even a year away? Beat's me, actually. That's why I like the idea of trading on the GLI histogram signals.

The next Trend & Value Letter will feature price analysis of some of the major commodities. I am going to start working on it tonight, but it might not be done for a couple days.

Index Data

Closing values for Monday, March 15, 2010:


Trend & Value 50:

1049.94 (up .14%)


China Small Cap ADR 25:

963.79 (down .72%)


Precious Metals Complex:

4645 (down .17%)


Commodity ETFs:

2066 (down 1.10%)


BRIC Basic Materials:

1030.67 (down .88%)


Penny Banks:

1079.29 (down .12%)


Foreign Blend:

7065 (down 86)


General Liquidity:

1019.62 (down .42%)


Über-Indicator:

39.79 (down 1.58)

-----

The Foreign Blend looks like it needs to hold 7000 or so to stay bullish in the short-term.




The trendline above corresponds to the trendline on this simple 5 day momentum indicator of the FB:

S&P 400 Mid-Cap versus S&P 100 ($MID:$OEX)

Great chart pattern on the ratio of mid-caps to really-big-caps.



The bottom of that megaphone (if that's really the pattern here) is quite a ways down, isn't it?

I don't deal much with the mid-cap style, but in the newsletter I believe I did mention a potential resurgence the US small-cap style back in early December. But that was then. Right now I see some strong indications that the pump in the small and mid styles has approached its limit. Even if the market stays elevated here, I think the large- to mega-cap end of the market will start to out-perform again.

If you are a trader, I'm not sure if this observation is really worth bothering with. But if you are a long only investor (and have to or want to stay long) it is likely wise to increase your large-cap allocation while booking profits in some of your less big holdings.

Update: Below is a chart of the S&P 600 Small-Cap relative to the OEX. Just so you can compare it to the MID:OEX ratio above.

Introducing -- The General Liquidity Challenge

In the last blog post I showed how to make a "Super Simple Oscillator" histogram for the General Liquidity Index. (The GLI is an equally weighted basket of 37 ETFs covering stocks, bonds, commodities, preferred stocks, real estate, currencies, and precious metals.)

Since I started tracking the GLI in November of last year there has been four times (the latest being just last Friday) when the histogram has crossed above or below the zero mark. Here is the histogram again, with the price chart of the GLI below so you can compare:





(Click here to view a google docs spreadsheet of all this data. I update the spreadsheet after every trading day, so feel free to bookmark the URL.)

The first cross of the histogram to the plus side occurred on 12/21/09 as the index closed at 1011.26. The histogram then stayed in positive territory until 1/15/10 when the GLI closed at 1035.01. So a hypothetical purchase of the index from the buy signal to the sell signal would have captured 23.75 index points.

From 1/15/10 the histogram stayed negative until 2/9/10. The GLI closed that day at 979.42. A hypothetical short sell of the index at the sell signal would have captured 55.59 index points of downside.

Then, from the buy signal on 1/15/10 to the latest sell signal on 3/12/10 (Friday) the GLI climbed to 1023.88, so a hypothetical purchase of the index would have got you a gain of 44.46 points.

Add up all these hypothetical trades and you have a total of 123.8 points that could have been made buying the index at each buy signal and then reversing the trade and shorting the index at each sell signal. And that's only in 54 trading days. That's a compounded return of over 13% in less than three months, or an annualized compounded return of over 60%. Not too shabby.

But these returns are obviously hypothetical and would be impossible to precisely replicate in the real world. furthermore, they assume no leverage and do not account for transaction costs or dividends paid or received.

But nevertheless, I like what I see with this trade signal so far. We will obviously see a fair number of whipsaws in the future, and three good trades in a row like we have seen the last few months will probably be a rarity. Still, I think the histogram signal will, over time, prove to be a net winner. If you are a fund manager, or an individual investor with sufficient capital, and are looking for a mechanical system to trade a diversified basket of ETFs this might be just the thing for you. I can even help you set it up. Contact me for more information.

But most of you aren't going to buy or sell an equal dollar amount of 37 different ETFs every few weeks, are you? That is why I am introducing a new feature to the blog called The General Liquidity Challenge.

What is The General Liquidity Challenge?

Instead of buying or selling the entire basket of 37 ETFs every time the SSO histogram gives us a signal, I am going to 'recommend' (figuratively speaking -- see disclaimer at bottom of blog) a long or short position in just One (1) of the 37 ETFs that comprise the General Liquidity Index.

So if the histogram gives a buy signal for the entire General Liquidity Index, I will publish a blog post that that gives a buy 'recommendation' on a single component of the GLI that I think is most likely to advance.

Alternatively if the histogram turns negative, thus giving us our short signal, then I will give you my top short pick out of the 37 possible choices.

The pick, whether long or short, will be held in the Challenge's model portfolio until the histogram signals a trend reversal. At that time we will close the model portfolio's last position and pick another ETF (but this time as a short position if the prior position was a long).

The goal of the Challenge is to out-perform the hypothetical returns of buying and selling the GLI as whole using the histogram signal explained above.

Is this making sense to you so far? The concept is pretty simple, I assure you, but I apologize if I have not explained it very well. If anything isn't clear, please let me know and I'll try to explain it better.

Well, since the histogram just went negative, we have to start the Challenge with a short recommendation. As you know, there are 37 ETFs in the GLI (click here for the list). So many markets to choose from. For the first round of the challenge I am going to play it relatively safe and pick DBC, a commodity index ETF. The entry price for the short sell will be recorded at DBC's open price this morning. I'll try to explain why I went with DBC in the next blog post. Stay tuned.

The General Liquidity Index Super Simple Oscillator

First you take the GLI...



...add a 7 day simple moving average,



...and then a 21 day simple moving average:



Next, you take the 7 day simple moving average and subtract the 21 day simple moving average, which currently looks like this:



That, Ladies and Gentleman, is how you make an oscillator, in this case a super simple one.

But wait, there's more! Because what would an oscillator be without a 'trigger' line? So let's add a 7 day simple moving average to the graph above.



You can then make a 'histogram' by subtracting the Super Simple Oscillator (SSO) by its 7 DMA:



You might be wondering why I am wasting valuable blog space on what appears to be nothing but a remedial lesson in technical analysis. Well, actually, I've come up with a new on-going feature for Trend & Value based on this very GLI SSO Histogram. I'll explain it all in the next blog post.

My response to a reader's response to my recent gold bashing on the blog

In response to my latest negative comments on gold, a long-time reader and friend sends me a concerned email. Among many, many other things he writes:

"> Yes. Gold's internal momentum has been waning for years. But
compared to what?"

My email response to this and a couple other issues raised in his note is quoted below.

Compared to its own price history, that's why I referred to it as _internal_ momentum. The attached PDF has a chart of gold's 'Consolidated Rate of Change' (CROC) since 2002.* The CROC is essentially the average percentage change in price over multiple periods (21, 28, 37, 49, 65, 86, 114, 151, 200, 265, 351, and 465 days).

Notice how the recent high in the CROC indicator was below the 2008 high, while the 2008 high was in turn below the 2006 high. It is on this basis that I can assert that "gold's internal momentum has been waning for years."

Now it is entirely possible that the price of the metal shoots higher soon to such a degree that the CROC negates this pattern of lower highs. But as it stands the price climbed to 1200+ a few months ago amid extreme euphoria and speculative buying on the futures market (I refer you to the COT data highlighted on the blog post) and yet was met with this blatant divergence on the CROC indicator.

The other image attached shows the performance of gold (using GLD as proxy) relative to four other markets (commodities, stocks, corporate bonds, and Treasury bonds).^ You can see that during gold's most recent advance, three of these four ratios failed to hit new highs. Only against Treasurys (proxy TLT) were new highs achieved, and even here that could be interpreted has a high 'B' within a much larger ABC consolidation.

As I wrote a few years back, a bull market in gold is in reality a bear market in about everything else. So it is hard for me to label gold's most recent spike as a renewal of a bull market when the majority of these ratios failed to hit new highs.

And it is most definitely the height of absurdity to talk of a bubble in gold at the very time we are confronted with this broad-based under-performance.

As to what you should do about your investment position, my answer is the same as it ever was, sit tight, don't change a thing. Add to your bullion position when you can afford it. Eventually, the investment stance you adopted several years ago will be fully vindicated. Just because I think, for example, that the Dow:Gold ratio can rise another 20% or so from here is no reason for you to have any concern.

Oh, and stop reading all those Precious Metals websites. They can only poison your mind. Seriously, you know the game, what possible advantage is there for you to continue reading that tripe? Go to the library and get some books. Ever read any Saul Bellow? Great stuff.

Kyle

----

* The gold CROC chart:



^ The GLD ratios:

Index Data

Closing values for Friday, March 12, 2010:


Trend & Value 50:

1048.46 (up .10%)


China Small Cap ADR 25:

970.74 (up .23%)


Precious Metals Complex:

4653 (down .76%)


Commodity ETFs:

2089 (down .53%)


BRIC Basic Materials:

1039.81 (up .03%)


Penny Banks:

1080.56 (up .12%)


Foreign Blend:

7151 (down 22)


General Liquidity:

1023.88 (up .14%)


Über-Indicator:

41.37 (down 2.67)

-----

Currencies finally got a bid today, lending some support to the General Liquidity Index. But the Über-Indicator finally had a notable decline, falling 2.67 points to 41.37. Here is a chart of the Ü-I since I started tracking it 21 trading days ago:




So all you subscribers out there, keep in mind that this is playing into to our preferred near-term script for the stock market.

Update -- Comex Gold Commercial Net Short Position as a Percentage of Total Open Interest

Last month I started tracking the level of the commercial net short position in Comex gold as a percentage of total open interest in Comex futures. I noted that while off the extreme highs seen last year, the ratio was still at a rather elevated level, historically considered.

Here we are three COT reports later and the COT structure has yet to improve. Here is the updated chart of the ratio:



I've actually extended the series back to the 9/05/06 report to give a little more context. I have also included the 13 week moving average on the chart, the direction of which we might consider the primary trend in the Comex market structure.

With the ratio at 50.9 this week, it seems there is just as much speculative interest in gold now as at the interim price top two years ago.

I have been involved with gold since 2002, and in a professional capacity since 2003, and in my estimation there has in that time never been less reason to be positive on gold than now. Gold's internal momentum has been waning for years now, and for the past year it has exhibited extremely poor relative strength to competing assets, especially the stock market. As I wrote in the most recent Trend & Value Letter,

Gold can't even out-perform the Dow. Some Bubble!

Oh, there'll be a Gold Bubble, that's for certain. It just hasn't started yet.

Value Line Arithmetic Index -- Back to 2007 Levels

Pretty incredible.

Index Data

Closing values for Thursday, March 11, 2010:


Trend & Value 50:

1047.40 (up .23%)


China Small Cap ADR 25:

968.48 (down .77%)


Precious Metals Complex:

4689 (up .69%)


Commodity ETFs:

2100 (down .11%)


BRIC Basic Materials:

1039.45 (up .30%)


Penny Banks:

1078.76 (up 1.68%)


Foreign Blend:

7173 (up 29)


General Liquidity:

1022.42 (up .12%)


Über-Indicator:

44.04 (up 2.88)

-----

GLD -- Motility Index

In the newsletter I published this morning I introduced a new indicator, which I call the 'Motility Index' and showed a chart of the S&P 500's Motility Index. But Motility isn't just for stock indexes, it can be used for any market at all. As proof here is a chart of the Motility Index for GLD, the gold ETF, going back to 2005:



And here is a close-up of the indicator over the past 100 days:



The purpose of the indicator is to help in timing options trades. I am not sure how original the formula is, but I haven't yet come across anything very similar. If anyone wants to take a look at it, I can send you the formula to review. Just email me.

Index Data

Closing values for Wednesday, March 10, 2010:


Trend & Value 50:

1045.03 (down .03%)


China Small Cap ADR 25:

975.98 (up .33%)


Precious Metals Complex:

4657 (down 1.47%)


Commodity ETFs:

2103 (up .11%)


BRIC Basic Materials:

1036.34 (up 1.16%)


Penny Banks:

1060.75 (up .63%)


Foreign Blend:

7144 (up 62)


General Liquidity:

1021.24 (up .09%)


Über-Indicator:

41.16 (up 1.55)

-----

Curiously, the Trend & Value 50 Index just isn't participating in the most recent part of this stock market rally, as our benchmark hasn't closed higher in four days. I am not really sure what to make of that.

But that Über-Indicator just keeps going up! For the most part, the Ü-I measures breadth among the components of the S&P 500 Index, and I can tell you that the technical breadth (broadly construed -- I'm not talking about a simple A/D line) in the US stock market has been very strong. But perhaps it's getting a little out of hand now. An example: There are now 107 SPX stocks with an RSI(14) above 70, and only 2 with RSI below 30.

Back on 01/11/10 I posted the RSI tally, writing:

oh, and by the way, there are currently 79 S&P stocks with RSI(14) above 70. how many stocks have RSIs below 30? 0 (Zero). if you will pardon my french, that's fucking sick. Waterloo for the bears indeed. or, just maybe, it's Operation Barbarossa. say, mid-October, 1941.

With 107 overboughts now, compared to 79 at the last peak, the market is arguably in a more extreme position now than then. Sure, there are a couple oversolds on the board now, while there weren't any then, but whatever, two isn't much more than zero.

Oh, and I'm starting to like that Operation Barbarossa metaphor.


(image lifted from Wikipedia)

DJ Equity REIT Index ($REIT)

Real Estate is approaching major resistance here.



A lot of indexes have been hitting new highs on the year, but I think there is some chance that these could all prove to be 'X waves'. Not a concept I usually employ, but there may be some descriptive value here.

GSG -- Commodity iShares

This is a fairly liquid ETF that tracks the GSCI. While a lot of the stock indexes have taken on reverse head and shoulders type formations recently, the pattern on GSG resembles something more akin to a rising wedge. And now the pattern is starting to break to the downside. Perhaps a little early for this bear to get too excited, but the look of this, along with most of the other commodity indexes, points to anemic breadth in the pro-liquidity complex as a whole.

Index Data

Closing values for Tuesday, March 9, 2010:


Trend & Value 50:

1045.31 (unchanged)


China Small Cap ADR 25:

972.81 (down .09%)


Precious Metals Complex:

4726 (down .32%)


Commodity ETFs:

2101 (down .75%)


BRIC Basic Materials:

1024.49 (up .68%)


Penny Banks:

1054.26 (up 1.66%)


Foreign Blend:

7082 (up 41)


General Liquidity:

1020.35 (down .05%)


Über-Indicator:

39.61 (up .61)

-----
The General Liquidity Index since early November:



Plenty of resistance around this 1020 area.

Index Data

Closing values for Monday, March 8, 2010:


Trend & Value 50:

1045.26 (down .16%)


China Small Cap ADR 25:

973.71 (down .32%)


Precious Metals Complex:

4741 (down 1.05%)


Commodity ETFs:

2117 (down .22%)


BRIC Basic Materials:

1017.58 (down .05%)


Penny Banks:

1036.86 (up .40%)


Foreign Blend:

7041 (down 1)


General Liquidity:

1020.86 (up .02%)


Über-Indicator:

39.00 (up .11)

-----

Here is a chart of the Trend & Value 50 since October:



Bored with moving averages, I've been playing around with 'moving medians' the last couple days. Kind of interesting...

Index Data

Closing values for Friday, March 5, 2010:


Trend & Value 50:

1046.91 (up 1.07%)


China Small Cap ADR 25:

976.84 (up 2.05%)


Precious Metals Complex:

4792 (up 1.00%)


Commodity ETFs:

2121 (up 1.07%)


BRIC Basic Materials:

1018.10 (up 2.84%)


Penny Banks:

1032.78 (up 2.62%)


Foreign Blend:

7042 (up 224)


General Liquidity:

1020.68 (up .84%)


Über-Indicator:

38.89 (up 7.17)

-----

Index Data

Closing values for Thursday, March 4, 2010:


Trend & Value 50:

1035.82 (up .32%)


China Small Cap ADR 25:

957.18 (down .16%)


Precious Metals Complex:

4744 (down 1.28%)


Commodity ETFs:

2099(down .92%)


BRIC Basic Materials:

989.94 (down .51%)


Penny Banks:

1006.50 (up 1.13%)


Foreign Blend:

6818 (down 48)


General Liquidity:

1012.22 (down .36%)


Über-Indicator:

31.72 (up .88)

-----

The Wannsee - err.. Park Avenue - Conference

This is totally awesome:



So some 'sociopath' fund 'predators' met on February 8th, and that is responsible for the euro's 'demise'?

Okay, let's check the timeline:



Man, if the dollar-bears are screaming about a conspiracy when the euro has dropped all of 15¢ so far, then you know this is going to get good.

And by the way, I'd love to see them ban Credit Default Swaps, because then all the pressure can be directed at the currency itself, as it should be. The whole point of a fiat currency system is for the forex value to serve as a release valve in this type of situation.

And besides all of it, what is happening in Europe right now was soooooo completely predictable.

And predicted! It took me 90 minutes to find it, but I have located a blog post I wrote on September 6th, 2008. I will quote here the pertinent passages:

as for the Dollar, I'm awfully skeptical that the ultimate top for this rally will be only 80 or even 82. the low 80s are where we find the Fib retracement targets from the 2005 top in the Dollar, but the targets from the Very Top put would put the index into the 90s. but having said that, a major counter-trend rally from near current levels seems pretty likely.

my sense though is that the currency markets will increasingly be viewed less from the vantage point of the Dollar against all challengers and more from the view of problems developing within each currency regime. as crises of varying magnitudes begin to take hold within each regime, speculative forces will attack the target du jour vis-a-vis its various counterparts. and then the violent unwindings of these speculative runs. the actions with the Yen and the Dollar the last couple years may serve as prototypes of these myriad einsturzchens to come.

the Euro is a prime candidate now for one of these 'independent episodes'. and considering that the Euro has by far the largest weighting in the US Dollar Index, that could, in fact, push the USDX significantly higher in short order. you Know, when a Euro Crisis develops. (a question of When, not If.)

(click here to read the original post in its entirety.)

Man, re-reading all those posts from the second half of '08 in search of those paragraphs was like a opening a time capsule filled with perfection. I'll regain that kind of brilliance someday, I'm sure, but the last year or so I just haven't been completely 'in my element.' That's OK, I'll keep at it, I might not be that good, but I'm still the best at what I do.

Cue the Bukowski clip:



I originally posted that to the blog as part of this post, if yer curious.

Index Data

Closing values for Wednesday, March 3, 2010:


Trend & Value 50:

1032.54 (up .18%)


China Small Cap ADR 25:

958.71 (up .28%)


Precious Metals Complex:

4806 (up 1.19%)


Commodity ETFs:

2118 (up 1.04%)


BRIC Basic Materials:

994.88 (up .67%)


Penny Banks:

995.16 (up .31%)


Foreign Blend:

6866 (up 47)


General Liquidity:

1015.92 (up .47%)


Über-Indicator:

30.84 (down .36)

-----

ABC it's easy, it's like counting up to three...

EWH -- Oversquare Bar

That's potentially pretty bearish.

Sovereign Wealth Funds at it again

From MarketWatch:

Sovereign wealth funds buying up more foreign assets: study

Reminds me of a quote I heard for the first time not too long ago:

“Everyone times the market. Some people buy when they have money, and sell when they need money, while others use methods that are more sophisticated.” -- Marian McClellan

And here I thought I got some fan mail...

No joke. I am browsing the markets this morning, when I notice I got a new message in my email inbox. I toggle over to that tab in my browser to see what it is. The first thing I view is the title:

Are You a Natural

but in my conceit I read it as 'You are a natural,' and thought someone was sending me some fan mail. I didn't notice the actual word order till several minutes later...

So with the initial thought it was fan mail, I get a warm glow for a sec, until I notice that the message was sent from Matt Furey, the fitness guru. I'd like to say Matt and I are pretty tight, but actually I've never come close to meeting the guy, the mail was just the latest from his opt-in email marketing campaign, which I signed on to a couple years ago. A successful campaign I dare say, as I end up buying a batch of his books a while back, and I hardly ever buy anything.

So I laugh at my ego (sidebar: thought of a new industry for the new age last night -- Ego-Tourism) and open up the email. The message was just what I needed, though perhaps not wanted, to hear. So I hope Matt Furey doesn't mind if I make some extended quotes of the email here:

You're a Natural

Hi Kyle,

Last weekend my son struck out the side in a Little
League baseball game.

On Sunday a friend came over to work out with me.
He asked how the game went and I gave him the
scoop about how my youngin' whiffed three batters
in a row.

He then turns to my son and says, "You're a
natural."

I immediately recoiled and said, "He's a natural
at knowing he better practice if he's going to be
good."

...

Regardless of who praises you and for what -
you practice.

Regardless of who criticizes you and for
what - you practice.

...

Show me how you practice - and later still, how you
play - and even more so, how you react to victory -
as well as defeat - then we'll see how 'natural' you
are.

When you are at your best, when you're most natural
at what you do - that's the day when you know you've
put in your time and paid your dues via the power of
repetition.

You can read the entire message on his blog (click here).

Matt Furey is a master of internet marketing (and to be clear, this is unsolicited and uncompensated praise). Three main reasons come to mind:

1) He has a quality product. For example, his flagship 'Combat Conditioning' course is well worth the money. His other stuff is probably good too, though Combat Conditioning is the only purchase I've made from his store.

2) Repetition. The guy is always at it. If memory serves, I get at least a few, and sometimes several, of these emails every week.

3) Matt always has something worthwhile to say in these marketing emails. Yes, he is trying to sell me something, but even after I bought what I needed from him, I never (in two years) marked his mail as spam, or attempted on unsubscribe. In fact, I think his is the only sales email that still reaches my inbox, while dozens of others are rotting in the spam drawer. This is simply because I enjoy reading his notes, sometimes I learn something, sometimes he makes me think, &c. Sure he is a fitness guru, a far cry from my primary focus (the only physical activity I've ever mastered through repetition is the art of rolling a cigarette) but he writes great stuff about life, and how to be successful and what not.

And thus concludes a rambling profile of Matt Furey, 'Zen Master'. Time for me to get back to work...

GLD:SLV Ratio

About a 50% retrace of the last move, might be time to start looking for another turn... This always seems to swing more than I have in mind, but what else should we expect from the world's eternal manifestation of humanity's bipolarity?



Oh, and wouldn't a classic epic rock song be apropos about now?

When our weary world was young
The struggle of the ancients first began.
The gods of Love and Reason
Sought alone to rule the fate of Man.

They battled through the ages,
But still neither force would yield.
The people were divided,
Every soul a battlefield.

I don't care if it makes the classicist cringe, the song fucking rocks.

Foreshortened Chart of S&P 500

Foreshortened Chart of Gold (PM Fix)