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Is the economy slowing down, or is it speeding up? Is the stock market topping or is it breaking out? Have Gold and Oil stocks bottomed?

Ahhh, questions, questions and nobody really knows the answers!

When the current picture gets cloudy, when the emotions run hot, I always find it a good exercise to step back and to refocus on the Big Picture.

Take the weekly HUI chart for example:
click to enlarge
hui weekly

• From May 2005 to May 2006 the HUI rose by 140% and into over-bought territory (not shown in chart).

• Since May 2006 the HUI has been in correction mode, working itself into an oversold position (not shown).

• The correction low of 270 was established in June ’06 and retested successfully in September.

Whilst the HUI was undergoing its exhilarating rally, 10-year bonds were falling like a rock (bottom of chart). This inverse correlation is highlighted in the green rectangle. The prevailing mood at the time was one of increased inflationary expectations. A good trade was to sell bonds and buy Gold.

How perspectives have changed
Since July of this year, 10-Year US Treasuries have been rallying hard. A lot of market commentators (including myself) said this was a sign of a Global Slowdown.

But a longer dated chart shows a completely different story:
us treasuries

• 10-Year Treasuries made an important top in February 2004 and headed lower ever since.

• Since July 2005, 10-Year Treasuries have been in a relentless down trend.

• At the beginning of July 2006 Treasuries were oversold and logically deserved to rally.

• The subsequent rally top in September ’06 looks to me like a test of long-term resistance at 108 (blue line).

• As 10-year treasuries rallied, battered Homebuilding stocks like Centex (CTX) (bottom of chart) stabilized and staged minor rallies (green rectangle).

Here’s the Point:
From a longer term perspective the latest rally in 10-Yr Treasuries does not look like another major bull up-leg to me.

No!

From a technical perspective, probabilities favor Bonds (and Centex) to continue their trend downwards. It’s probably too early to know for certain if September will be the correction top. I would expect at least one more crack at 108 (with MACD and RSI divergences developing) before Bonds begin their next leg down.

Timing? Ahh, timing.

In August, I wrote an article titled Higher Oil Means Less Money To Spend in which I highlighted the fact that the stock market was tracking the Bond market with a one month time lag. The strong correlation remains in force and, if it continues, points to a late October, early November top in the Dow Industrials.

Bearing in mind the 1 month time lag correlation:

• November will be a correction month in the stock market and bonds will complete their double top at 108.

• The Dow will rally in December giving us our year end Santa Claus Rally.

And then?

Well if Bonds head South into their next down leg, which I expect they will, Stock Market Bears and Gold Bulls may finally have cause to celebrate on the same day.

Editor's note: ETFs covering themes in this article include (IEF) [bonds], (SPY) [S&P 500], (IAU) and (GLD) [gold]

Source: Perspectives on Gold, the Current Bull Market and Beyond