Apr. 7th
Stocks:
I’m going to start off today with sentiment levels. I’m not sure I made this clear yesterday but as of Monday, and even more so yesterday, sentiment had reached levels that usually precede an intermediate term correction. The problem is that we are only due for a minor daily cycle low not an intermediate cycle low. We reached this level so quickly because of the extreme momentum push of the last two months…obviously. That kind of unrestrained buying pressure eventually works it’s magic and soon everyone becomes conditioned to buy every dip and every Monday open. And that’s exactly what we have watched unfold over the last 9 weeks. During that period the market was up an incredible 65% of the time. That my friends is one very strongly trending market. The only time we might see an even larger percentage would be during a parabolic move into a final top. The last leg up for gold during November of last year rose 76% of the days. That was a true parabolic move.
I don’t think we are quite ready to see that yet from the stock market, although we may during the next daily cycle (more on that in a minute).
Interestingly we are now at a crossroads where we should either see the beginning of an intermediate decline lasting 3-8 weeks… or what I think will most likely unfold will be a very sharp correction into the now due daily cycle low. I’ve gone over this before and again yesterday. What tends to happen during one of these momentum runs is that traders become extremely complacent. We saw that in Monday’s option data. Traders have for the most part lost all fear of any significant correction and as a result the level of put buying has dried up to the lowest it’s been in several years. I think Jason Goephert of sentimentrader.com said it perfectly, “there’s no safety net under the market”.
When the market begins to stumble everyone hits the door at the same time because no one has any insurance. The selling tends to feed on itself and you end up with something similar to what happened in February 07 where the market gives back weeks or months of gains in a handful of days.
I think that’s probably what we can expect due to the timing of the intermediate and daily cycles, and the nature of the rally over the last two months.
So the question now becomes how much longer must we wait? Of course no one knows the answer to that question but I think it’s probably sooner rather than later. Since we did form a swing high on expanding volume on most major indexes today and considering this was the 41st day of the rally there’s a pretty good chance the top occurred yesterday. Most daily cycle lows unfold over a 4-10 day time frame so I expect we will probably bottom by next Friday’s options expiration if today did in fact signal the top. We should see some follow through tomorrow and Friday if this is in fact a short term top. Now if this does unfold like I think it will, we should see sentiment quickly revert back to bearish. That’s exactly what happened in February 07 during the mini-crash and it set the market up for the final run into the top of the bull market. I think we need to see something similar happen now in order to reset sentiment and set the stage for the final(?) surge into the top of this cyclical bull market. Dollar: So far the dollar is doing what it needs to do, and I think we may have the catalyst to spike the dollar higher in the coming days as the yield on Greece’s 6 month bill spiked viciously today. The same thing happened just prior to the last surge in the dollar in January and the attendant correction in the stock market. Either way we now have a clean break out from the bull flag. It looks like the 81 level is going to hold for now. The next major pivot comes in around 83. A violent move up to that level in the next few days would probably put enough pressure on stocks to get a correction going. Gold: What to do? Well first off there is no doubt now that the last daily cycle stretched long and bottomed on the 24th. The move above $1144 cemented that scenario. The question in everyone’s mind (mine included) is where the hell are we? Is this a really strange A-wave that will top soon and head back down to continue the consolidation process or could we still be in the most baffling C-wave of the entire bull market? Well first off before we throw caution to the winds gold still needs to complete the final key. That being a move above $1161 to reverse the pattern of lower highs. Of course that still won’t tell us whether gold is in an A-wave or beginning a second leg of a very late C-wave continuation. Since we really won’t know where we are until gold breaks convincingly above $1225 I’m going to lay out a game plan (and one I think I’m going to use myself). I still don’t want to enter in front of what could be a very nasty stock market correction. There has never been a time during the entire bull that a severe correction in stocks didn’t affect the miners to a greater or lesser degree (usually greater as we just saw during the February swoon). So for now I’m going to remain on the sidelines until I think we have put in the daily cycle low in the stock market. Once I think that has occurred I will refill my junior and silver mining positions. Basically I will be 50% in the five silver miners (SLW, PAAS, CDE, HL, & SSRI with a bit of a skew to SLW) and 50% in 7-10 juniors. Remember just because I’m willing to allocate all my capital to miners doesn’t mean it’s right for everyone. Decide for yourself how much you are willing to invest and don’t forget how volatile these things are. 20-40% corrections are the norm not the exception. I’m going to take this position with the complete understanding that this may be an A-wave that will top soon and I’m going to be stuck riding these positions up and down for probably the rest of the spring and summer. If however this turns out to be a C-wave continuation then we will ride these positions into what should be a parabolic top in early summer. At that point I will exit all mining positions as we wait for the D-wave to run its course. For what it’s worth the HUI did complete the 1-2-3 reversal today. I still don’t like all the gaps on the GDX & GLD charts though J Short term indicators are neutral so we have room for some follow thru to today’s decline. 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. GDS L.L.C., Gary Savage, will not provide you with personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. From time to time, GDS L.L.C., Gary Savage, may hold positions in securities mentioned, but are under no obligation to hold such position
