Friday, August 19, 2011

The Dow rallied from its 1929 low of 198 to 294 in April, 1930. Thousands of Americans joined in that fabulous rally in the hopes of recouping some of their 1929-crash losses. But car sales topped out in 1928 as did manufacturing, and all during the giant 1929-30 rally the US economy crept lower, but few realized or recognized it.

When the Dow topped out April, 1930, the Great Depression started, as business began to crumble. From its high of 294 in April, 1930, the Dow fell to 157 by December, 1930.

I've had an eerie feeling all along that the whole market rise from the 2002 low to the 2010 peak was a repeat of 1929-1930. Even as the market roared higher following the 2002 low, the US economy acted like an invalid.

Remember, the crash of 2008 was "cut short" by the Fed. That bear market was never allowed to fully express itself. I thought that the 2008 crash should have been allowed to express itself. That would have resulted in the collapse of many of the "too big to fail" banks, and it would have cleansed the economy of half a century of ills, including Fed-created inflation and over-leveraging. But the Bernanke Fed said "No, we have learned our lessons from the Great Depression, and now we know how to avoid another Depression." So the Fed decided to pour trillions of newly-made dollars into the US economy. And the 2008 bear market was halted -- for a while.

But the bear has his ways. Bruin is going to have his way and finish the bear market one way or another. Suddenly, last night all hell broke loose as stock markets the world over plunged. The calamity was joined by the US markets on Thursday.

So what do I think is happening? I've said this before. The crashing stock market is terrifying US consumers, who immediately cut back on their buying and their orders. As consumers cut back, this impacts on the stock market, and we have a case of two wild hyenas eating each other. It's a case of the stock market "eating" consumers, and consumers frightening the stock market.

But can't the Bernanke Fed intervene and save the day again? Well, yes, they can create more money, on the theory -- that "give them the money and they will buy." But it hasn't worked this time. US consumers have already been hit too hard by confusion and the action of an erratic and puzzled stock market.

Gold -- I've been receiving many calls to the effect, "Should I sell my gold now?" My answer is that I don't have the ultimate answer to that question.

My thinking is that gold has been in a decade-long market. Most extended bull markets end with a third-phase period of torrid speculation and a mass entrance by the retail public. So far, we have seen neither.

My inclination is to ride the gold bull market until it provides a classic ending. That means sitting through many a coming correction and perhaps extended periods where gold does little or nothing. In other words, I may be doing something stupid but I'm sitting.

We don't have a lot of hints as to what the stock market will do next. But we'll work with what we have. Below is a daily chart of the S&P 500. Over the last week or so it has formed an exotic little formation. I would say that if the S&P gathers the strength to break out top-side of this formation, we're seeing some bullish action. But after all the negative action, if the S&P still chooses the bearish path and breaks to new lows, then we're in for another spate of down-markets.

In other words, after all the negative action, the market should be rally -- we need at least a "dead-cat" bounce to above 1208. If the market can't rally from here, then we know that something is really wrong!

GOLD -- Lord bless moving averages "that work." One MA that has worked beautifully for two years is the 150-day MA of gold. Note below that gold has "tested" or touched the 150-day MA of gold on five separate occasions over the last two years, and each time gold has held -- and then rallied to new highs.

Gold's latest run has taken it rather far ABOVE its 150-day MA, and now gold has me a bit nervous. Has gold run up too far? Does gold need a rest? Will gold sit on its butt, until the 150-day MA rises to touch it (nah, that would take too long)? Or is gold rising on a new and steeper angle?

Conclusion -- We've seen some extreme downside action. But Jim Stack of InvesTech Research reports that on the August 8th panic the ratio of declining stocks to advancing stocks was 77 to 1, a ratio never seen before in the past 80 years. The closest incidents were the May 1940 ratio when France fell to Germany; that ratio was 60 to 1. The second incident was on Black Monday during October 1987 when the ratio was 49 to 1. In both cases, those hugely high ratios marked a near-bottom, and within one month of those ratios the market was 10% higher.

A few days ago we saw down volume equal to 98% of up + down volume, an incredible extreme.

(1) My feeling now is that this bear market will probably not be a monster, but I believe that there is a fair chance that most of it is behind us.

(2) This will be a long and arduous recovery, and stocks bought here (even blue chips) will not prove to be winners over the next five years. I would not buy stocks for income.
The Dow today closed down 172 points, which is disappointing but not surprising. It's normal that traders want to go through this weekend with as few stocks as possible.

My PTI closed down 6 to 6269, leaving it bearish by 10 points. As for NYSE internals, 732 issues closed higher, 2320 closed lower. There were 7 new highs and 279 new lows. Down volume was 82% of up + down volume. I call it a mildly bearish day.

Dollar Index was down 0.23 to 73.97. December gold closed up 30.20 to 1852.20 another all time high. September silver closed up 1.74 to 42.43. Almost all precious metal items closed higher including GDX, GDXJ and GDM.

Sausalito Valhalla



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