Apr. 5th
Stocks:
A while back I speculated that this cyclical bull would have at least three legs up. There’s no question about that assumption anymore as the third leg is well underway. I also theorized that this bull might unfold differently than most bulls based on the incredible flood of liquidity the Fed has unleashed upon the world. At the time we were still awaiting the correction that was to separate the second leg of the bull from the third. Now that that profit taking correction is behind us I want to go over that theory again. Usually we see the most explosive moves at the beginning and end of bull markets. As you can see from the chart this bull is already way more aggressive than the last cyclical bull. My thought was that the incredible liquidity the Fed has pumped may bypass the middle stage of the bull. We are already seeing a near parabolic move out of the second stage correction very similar to what unfolded out of the `06 yearly cycle low. We are still due for a daily cycle low anytime now. I’m wondering if the correction will correspond to the Feb. `07 correction to be followed by a continuation of the runaway move into a final top later this year. For now though we are back waiting for a swing high as the next possible top for this daily cycle that is now 39 days old. (The cycle usually doesn’t last much more than 40-45 days). Even the runaway move in `06 & `07 still had daily cycle troughs although they were admittedly mild for the most part. So far this run has been the single longest period the market has spent without closing below the 10 day moving average in the last 15 years. I also don’t like that volume continues to shrink on almost every index and ETF. This also goes for miners and GLD. Ultimately I think the market is going to at a minimum test the breakout before the next move higher begins in earnest. So I don’t feel the need to chase this move higher. I think I would prefer to just wait patiently for the test and then re-enter at that point. (Keep in mind I’m just guessing at the timing of the test on this chart.) It could begin later as earnings get underway or it could begin soon and run its course prior to earnings and in the process reset sentiment and set the market up for a big push higher through earnings season. I’m still leaning toward the sooner rather than later scenario simply because the daily cycle is pushing very deep into the timing band for when we should expect a bottom much less a trough and the fact that the market corrected during the 1st quarter earnings makes me skeptical we will see a repeat of that scenario. I’ll also point out the NDX commercial position has now reached a -3.46 billion. I don’t put much stock in the index positions anymore as they quit working for the most part a couple of years ago, but the Nasdaq 100 positions have still worked fairly consistently at spotting tops and bottoms. Back in Jan. when the NDX net short position reached -3.67 billion that signaled almost the exact top of the second leg. Anything over -3 billion is probably a warning sign. Regression to the mean: At today’s high the market had become more stretched above the 200 day moving average then any time during the last cyclical bull post the second leg correction. The market is now at levels where the law of regression to the mean is going to try to force a correction on the market. Bonds: Our two bond funds continue to give off warning signs. LQD broke down badly from the bear flag today and the high yield fund is also looking weak. Dollar: Remember until proven otherwise we have to now assume the dollar is in a cyclical bull market. So I’m expecting the bull flag to breakout to the upside soon. That should probably allow stocks to correct. And as long as the dollar remains in the cyclical bull I think we are probably going to see gold contained in the trading range. Gold: The slight move above $1133.20 today potentially forces a re-phasing of the last daily cycle low to the 24th. However as I’ve said over and over I’m still worried about the stock market. If stocks correct soon and drag gold back below $1085.50 then I will go back to the 12th as marking the last cycle bottom. I’ll also say I would be a lot more inclined to buy heavily in that scenario, as it would fit into the “normal” cyclical structure. A 24th bottom means the last cycle stretched beyond the normal duration for a daily cycle. It also means gold is already 7 days into the cycle and could potentially enter a left translated cycle if it doesn’t break $1145 before the stock market corrects. It would be much better cyclically if gold were to make one more quick spike down along with the stock market. I would be a lot more confident taking positions in preparation for a continuation of the A-wave advance in that scenario and I expect we would also see the gap filled on the GDX, SLV & GLD chart. Short term indicators are now overbought. Gary Investing in the financial markets can involve considerable risk. Past performance is not necessarily an indication of future performance. The information included in The Smart Money Tracker and The SMT subscribers daily updates is prepared for educational purposes and is not a solicitation, or an offer to buy or sell any security or use any particular system. Information is based on historical research using data believed to be reliable, but there is no guarantee as to its accuracy. G.D.S L.L.C., nor Gary Savage, do not represent themselves as acting in the position of an investment adviser or investment manager for funds that are not under their direct control and fiduciary responsibility. 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