Reflation: Like Déjà Vu All Over Again?

It is possible we are experiencing a Yogi Berra (former Yankee catcher) moment reminiscent of his observation, "This is like déjà vu all over again." We all know the government is trying to reinflate asset prices with money printing, leverage, and bailouts. While stocks may not be out of the woods yet, yesterday’s move through 806 on the S&P 500 sends a signal the markets are paying attention to all the "liquidity facilities". Since all of the gains from the 2002-2007 bull market were fully retraced, you can make a simplistic argument the entire bull market (2002-2007) was largely based on easy credit and asset inflation. The fundamentals did not support a bottom in stocks in October of 2002, but the Fed was able to inflate asset prices with easy credit and leverage. Since the Fed is using a page from their 2002 playbook, we can reference 2002 to help us better understand the possible effectiveness of the current money printing extravaganza.

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We have seen some very positive signs which signal a probable change in the long-term trend for gold (and gold mining stocks). The key word above is probable, especially in the uncertain state of the world. Gold’s move off the lows could also signal the process of reflation of asset prices has started again in 2008-2009. Gold and gold mining stocks bottomed first in the 2000-2002 bear market.

As shown above, oil bottomed after gold and gold mining stocks in the 2000-2002 cycle. Oil has shown some encouraging signs of a probable trend change in 2009.

In the 2000-2002 cycle, the stock market bottomed last, and well after gold and oil. While yesterday’s move in stocks supports the recent moves in gold and oil, it does not mean stocks are out of the woods yet.

Some Perspective: As of Tuesday's close, the S&P 500 remains down 10.7% YTD, even AFTER the recent gains. While some progress has been made, the primary trend in stocks remains down for now. We would feel better about stocks if a few more signs of a probable change in trend materialize over the coming weeks and months. Taken together, the moves in gold, gold mining stocks, oil, and stocks, may signal the great reinflation of 2009 has begun. Numerous fundamental risks still exist – so money management and principal protection remain extremely important for all investors and traders. If we continue to pay attention, rather than forecast, we will not go too far off the proper path.

On a tactical note, the S&P 500 closed Tuesday at 806, the area we identified as probable resistance. The move above 806 was quite impressive, so we have to keep an open mind about how far this rally could run.

Disclosure: Author and his clients have positions in GLD, GDX, and SH.

Comments

[Conan the B...:]

On Gold, the continuous contract: Last March, it topped out at $1,000 and made an irregular beeline to $850. So far this year, a replay seems to be occurring with gold making another move to the downside.

I posit that if it holds $850 to $875 within the next two-three weeks, a case can be made for a H&S bottom and subsequent measured move to the $1,300 level by July.

I will be looking to buy UGL below $30, maybe around $27 for a potential 100% gain on a 50% Gold move.

Personal Opinion

Mar 25 08:43 AM

[berated:]

Thanks, Chris. Good stuff.

Mar 25 08:29 PM

[RiskReturnO...:]

It seems like in current environment, things are moving a lot quicker (maybe due to increased globalalization / correlation among world economies & markets). Distance between points 1 to 2, and 2 to 3 are much shorter in the current cycle than in 2001-2002. This may point to shorter time between points 3 and 4 (US market bottom).

Do you seem any similarities between current cycle and last one when it comes to agriculture commodities (say, DBA) and emerging market equities (say, FXI or EWZ). Maybe bottoms in ag and EM could lead bottom in US market??

Mar 26 09:19 PM