Bruce Pile

Flag Pattern: Comparison to 2003 Shows Prices Could Grind Higher

Babak, when you say "I've yet to read a comment from someone who is outlandishly bullish and riding prices higher" I'm assuming you missed a parade of my comments pointing out the turn to a major bull move. You can read them in my comment stream - check my comments on 3/31, 4/3, 4/6, 4/7, 4/10, 4/11. I've also got some highly technical stuff (Wheelbarrows Run Amok) on my Instablog.

In late March, my technical reads were telling me "turn" but my informed good sense was telling me "it's a dangerous bear gyration, you idiot". But I soon gave the nod to my technical stuff, which is usually smarter than my informed good sense. When I watched Doug Kass make his bullish call on the Kudlow show at the start of March, I thought "What a moron." But before the month was over, I was on his side of the argument.

Five Characteristics of an Upward Trending Market

The last bull move was little more than 36 months from '03 to '07, when housing began turning everything down. Yet we regard it as a "glorious" bull market. The turn is clearing technical levels that suggest it has legs, not the least of which is the Coppock Curve, which has just now turned up, indicating a new bull move. This curve is a monthly moving average type of calculation that has a very good record of signaling major new moves. For a look at the Coppock Curve, see Babak's article of May 8. For a look at some other technical formations showing this turn, see my Instablog.

Sell in May? Not This Time

Here's a thought. Instead of pondering selling in May or what year of the president's term we're in or the relative humidity, why not let what the market is actually doing be your guide! How do you do that? Well, they've invented things like moving averages for that.

If you had done nothing but let the simple 100 day moving average for the S&P 500 be your guide for being aggressive or defensive, depending on whether the market was above or below this line, this is how you would have navigated the last two bear market debacles:

Allowing about a month or so at each cross point to see if the cross was for real, it would have had you

out October 2000 and absent during the carnage of the bear's
first half

in December 2001 and present during much of the rally into mid
2002

out April 2002 and absent during the capitulation carnage of
the bear's last half

in May 2003 and, like a genius, present during the start of a new
bull move

and for the current bear,

out November 2007 and absent during the first selloffs

in May 2008 for a little of the rally into mid 2008

out June 2008 and absent during the end of the world

in April 2009 and, like a lone genius again, present during the
current rally

There are periods where, if you only follow this rule, you must be out and quickly back in for brief episodes of benign market weakness that don't really hurt very much, but what old wives' tale, cute saying, or highly paid adviser could have guided and protected you any better?

Market Outlook: Trendless Consolidation Will Give Way to Major Move

Nice charts. But you should have drawn the textbook example of the cup and handle on the copper chart! This suggests a strong move up soon for copper through the 50/200 congestion. The leading edge stocks and groups seem to have already cleared this congestion area with the broad market now engaged in it.

I agree with the author that technical analysis just shows what is going on, not what should be going on. In our present case, the technical picture may be a video of America successfully kicking the debt can down the street, and probably not portraying any real solution to the debt mountain. In '03, we kicked the can out 3 or 4 years with loose money until the mortgage bust. In '09, we may be kicking the can out "18-36 months" as one if the above charts states, probably until an inflation/gold bubble runs its course. Somewhere, they are going to have to stop the can kicking and fix the problem. Let's hope the Obama administration figures out something soon.

Jim Rogers has a point when he says we would be better off not to have ever had a Fed. Instead we would have had a series quick, bad recessions with the idiots who mismanage flushed from the system and only the sensible remaining in control. It would have fostered a culture of the sensible in lieu of a culture of the over-complicating, over-levering, over-reaching trouble makers that have brought us to this present mess.

Smart Minds Think Gold

With fiat money solutions to fiat money induced problems coming faster and faster in our modern world, the barbaric relic has never been more fashionable.

Can Oil Go Even Higher?

You can find several oil stocks where the oil price debacle has not even dented a rapidly climbing cash flow curve, making them much more attractive than USO or any pure play on oil price. Endeavor International (END) has ramped their per share revenue up 2400% since 2004 and their cash flow up over 600%! Maybe they want more oil debacles like this. The insiders were grabbing up shares with both hands during last year's panic. The stock, of course, is way down from its high, but now it is absurdly cheap with a current PE of about 4 and a phenomenal growth rate.

Avoid (Natural) Gassy Stocks

I've been saying for over a year now that there will be a growing disconnect away from the traditional oil/gas pricing ratio of around 6. For the several decades of the oil age, this ratio was a pretty reliable pricing guide where, if it got too far out of synch, you could expect oil to come down, gas to go up, or whatever. But since about 2006, when this disconnect first started to be noticed and written about, there have been two big changes from the previous decades - one, conventional oil has come up against the forces of peak oil, and two, the shale nat gas recovery advances have made the impending North American gas shortage a thing of the past.

If you look at a gas/oil ratio chart like $NATGAS:$WTIC at SharpCharts, you see that we have recently broken below the trading range bounded by about .07 at the low end for the first time in years. This really makes the whole nat gas stock investing area a little too unpredictable for my taste. Aubrey McClendon of CHK seems quite confident in the gas business with his large insider buying, and he isn't the only gas company official grabbing up insider shares. He is very aware of the plentiful supply of gas and has even hinted at the notion of building more LNG facilities here in America so we can export to the global LNG trade. The technical behavior of the gas stocks sure doesn't suggest doom and gloom for the industry.

As for the domestic land drillers behaving well in the face of low gas prices, I can see that because the new shale gas, while plentiful, is much more drilling intensive than the old conventional gas - and getting much more drilling intensive very quickly. It has been referred to as an accelerating treadmill by industry experts, where the athlete is the driller who must keep running harder just to keep the supply constant.

Hawkins Is a Diamond in the Rough

In addition to their water treatment chemicals, which is a good growth area of the future, Hawkins is something of a stealth agri chemical play, but without the high profile foibles of a Potash or Agrium. These fund darlings have too much of a tendency to follow and amplify all the sharp moves of the market, not because of their fundamentals, but because of their shear popularity. I don't like the popular, high profile names just for that reason. HWKN tends to move more independently from the market.

Hawkins certainly has the growth of a fund darling. Their revenue growth the last 3 years has been jaw dropping. If you look at a bar chart of their eps of the last 10 years, it has the look of an explosive growth stock with the recession of '07/'08 merely holding flat a hyperbolic curve that is now resuming. You are paying a P/S of 0.75 (I like any P/S that starts with "0") and a ttm P/E of just 10 for this level of growth, not what you'd expect to pay. The price/cash flow is 18, more expensive than I like, and there is no insider buying to speak of. But they all have a wart or two.

With a tiny float of 8 million shares, any big fund movement into this stock could turn it into a rocket. If it should become a popular agri chemical play as well as a popular water play, it may attract such money. The agri involvement is just a small part of everything they do, but CEO John Hawkins said in commenting on a stunning fiscal Q1 '09 on 8/7/08 "...we realized higher margins on certain products this past quarter given growing demand and a tight supply environment, which drove up prices primarily in products serving the agricultural sector."

Commodities: A Wise Long Term Investment

The '73-'80 gold/stock market sequence of movement may be a model of our current situation. Stocks went into a severe bear market in '74 followed by one of the strongest rallies ever in '75 and '76. This stock rally was during a nearly two year slump in the gold bull market of the 70s. But gold turned in August of '76 at $105 and proceeded to $850 over the next three years while the stock rally mellowed into a mainly sideways path bridled by "stagflation".

Our present situation is a severe bear stock decline followed by the strong rally. The gold bull market of this decade has been in a slump since March '08. We've had a stock turn that, for all the leadership groups anyway, happened in November '08. We're beginning to see this lag effect between stocks and gold now with gold igniting into a big climb a year or so after a sharp bear/bull stock market turn.

In a downturn, stocks discount the economy's turn 6-9 months in advance, then the economy slowly begins placing physical demand on commodities, pushing prices up alongside the downturn's easy money inflation forces. Investor speculative demand usually shows up just in front of the change in physical demand for commodities, and we have a lot of that nowadays. So our lag time could reasonably be expected to be shorter than that of the 70s, which was from January of '75 to August '76. If we follow the 70s model, modified for much increased ETF and fund demand, and put a monster gold rally out 6-9 months from the stock turn of November '08, it would predict a strong gold move beginning in the July to October time frame. If you take March '09 as the stock market bottom and use the '70s lag of 1 year and 8 months, it delays the gold move to November '10.

Baltic Dry Index Signals Commodity Inflation

The Agri stocks are a most interesting area of the market right now. They are essentially food stocks, a safe haven in a bad economy, yet they were demolished along with every company that sold any consumer discretionary fluff. Much of this was forced fund selling last year because the fundamentals were so strong they had become darlings and were bought hand over fist (MOS, AGU, POT, CF, etc.).

If you look through the quarterly cash flows and eps for these stocks now, you see that after 16 months of this brutal recession, their numbers are at or near all time highs. Not very consumer discretionary-like. The group's price/cash flow, price/revenue, and P/E valuations are all way below the average numbers for the S&P 500, yet most of these names are growing much faster than the best growth stocks in the S&P. And their growth is based on global food demand, not the more unstable things that growth stocks usually depend on.

Jim Rogers is of the opinion that farming is going to become the next great wealth magnet of the world, replacing the whiz kids who sit around creating new debt instruments to wheel and deal. It will be the farmers, Rogers says, who will be driving the Maseratis. He is busy buying up farming operations all over the world.

Technically, the Ag stocks seem to be starting a strong move away from the floor, maybe starting to regain consciousness from last year's beating. They are just now breaking resistance levels going back into '08. Even companies that are only partially involved in Ag chemicals like KMG Chemicals (KMGB) and Hawkins (HWKN) are making this same technical break. Compass Minerals (CMP) is also a lesser known, partial fertilizer play, expanding from their base road salt business into the lucrative Agri potash area. But their stock tends to trade more with the recession resistance group than with the high flying Potash crowd - for now, anyway.

If you're not sure if the stock market is going to be hot or cold, the Ag/gold area may climb either way. The Ag stocks may trade more like defensive food stocks, like they should; and if the threat of inflation eventually cools down the rally, it will benefit gold and the Ag commodities.

Divergence and Gold

In the inflation/gold chart above, the yellow lines don't really tell the story. Gold and silver have just broken up from a bull flag pattern of which the yellow line is just a part. Both inflation and gold are breaking downtrend lines in unison. Gold and silver may be climbing pretty good in a month or two.

Gasoline Prices: A Retail Headwind

I don't know if its related to a return of rising gasoline prices, but there seems to be something cooking with the "alternative gasoline" stocks lately. Alternative gasoline is sugar cane ethanol (not the worthless corn stuff) and nat gas.

As of mid 2006, what was the #1 investment of the previous 15 years, yet given away for free at every restaurant? Sugar! Back then, Jim Rogers was quoted as saying, "Sugar could quadruple from here and it would still be below its all-time high. The rally hasn't even started yet". And last year at an investment conference, he said "buy all the sugar you can". Sugar got hit by the market decline like everything else, but is now staging a vigorous return to Rogers' rally (check out SGG, the sugar ETF, and IPSU CZZ).

The price of nat gas isn't all that vigorous, but the nat gas stock index XNG is out performing all the major indexes, even the Nasdaq YTD. And the nat-gas-as-auto-fuel stocks are going plum crazy (check FSYS CLNE).

All of this is explained in part by the general market rally, but the alternative gasoline theme appears to be jumping with more gusto than the market and may continue after the market flattens out. Coal and CTL auto fuels are not left out of the picture either (check HW SYNM).

Hopefully, the Obama administration is working to get these fuels going and preparing to ditch the moronic corn squeezin's. There is a bill being prepared for Congress called The Nat Gas Act of 2009 with a bunch of rabble rousers organizing a "Virtual March on Washington" on the net where you can sign your name to a letter of support for the bill and even add your own message. You fill in your info with zip code, and the letter is emailed to your local representation in Congress and to Obama's office. I sent one and gave the president an earfull. You can too if you want nat gas as an alternative fuel; just google "Virtual March on Washington".

Dollar's Purchasing Power Annihilated - The Chart They Don't Want You to See

This chart along with the money supply chart with its off-the-charts increase in funny money show why gold and silver likely will become the currency of choice soon. I can't help but think that the regime of national paper currencies will come to some sort of end if the powers that be don't get all the liquidity from our current mess mopped up just right to keep an inflation crisis from engulfing us.

When you think about it, the system of each nation with its own fiat currency subject to government hi-jinks trading critical exports with the rest of us is an anachronism from a bygone era when such a thing as an "internet" was science fiction. I can see a scenario where the whole complicated system of fiat debt creation and exchange rates comes to a hopeless point where all the massive insufferable debt instruments in circulation have to undergo some kind of Jubilee cancellation/reorganiz... and national fiat paper is replaced with a new global money, maybe a gold backed new money. This isn't as whacky as it may sound. Just google "Jubilee global debt" and you can see that a lot of people are talking about such a thing!

Weak Market Leaders Indicate High Risk Environment

These two charts can be viewed as dissolving leadership and thus end of move, or they can be viewed simply as two leader groups having done their job with the broader market catching up and joining the move, flat-lining the relative charts. This latter scenario is, in point of fact, is exactly what happened with the bull move out of the '01-'03 decline.

You can call up these same two charts at StockCharts and view them in the mid '01 to mid '04 time span. The tech/S&P chart shows tech leading the turn up over the last half of '02, then flat-lining over '03/'04 briefly dipping in April/May, just like the chart above, as the broad market surged and joined the bull move. Thus, the tech leadership dissolved, but not the market's climb.

The financial/S&P chart shows a similar pattern, but the financials led a turn up over the first half of '02, not the last half, then flat-lined like tech did.

Massive Options Trade Signals Gold Miners (GDX) Is Set to Glitter

Don't look now, but silver just broke its bull flag pattern to the upside today. Gold and silver technicals seem to be signaling a big move soon either up or down - a lot of pent up energy ready to blow down or up.

The stock market rally detractors are assuming any bull move in silver automatically means a stoppage of the bull move in stocks. People are either fearful and buy PM or bold and buy stocks, right?. But let me point out that it is entirely possible for gold, silver, and the stock market to all move lovingly together in a raging bull market! Impossible you say? Well you need to look no further than our last big bear decline in '01-'03 to find an example of this. Look at what silver did from mid '01 to mid '04 and you see that it was in a mild climb channel during the bear market. But then, as we emerged into the stock bull market in early '03, silver moved into a much steeper climb into '04! Gold's action was similar.

That makes sense when you consider that, in the present case, you have the same 800 lb gorilla causing both the economic "recovery" and the dire threat of out of control inflation soon - namely the massive flood of fiat dollars.