There is one path in investing that is sure to lead to ruin. It’s a dangerous path because it lacks one critical ingredient for success – thought. The path we are speaking about is called “following the consensus”.

It is both intellectually and emotionally easy to follow a majority of bullish analysts. Unfortunately the ‘consensus’ is seldom right and hardly ever leads to BIG profits.

Well seasoned traders know that for any trade to work, to work big, that trade needs to be in synch with primary trend of the market.

Now clearly the Fed is a not for profit enterprise, but their well healed trading houses should have know better. For months we have witnessed an expanding money supply and for months we have seen a strong bid come into the markets at the most opportune times. But regardless of all the stimulus and props, the markets have spoken loud and clear as the Dow closed below its August lows. Reasserting the traders principal that it is never wise to fight the tape. For all the Feds machinations and rate cuts it seems we may still be on the verge of a bear market.

The Fed reduced short-term interest rates by 50 basis points last Tuesday. That was 25 basis points more than the market expected and the response was rapid and predictable:

• The Dow and other major averages rallied over 2%
• The Dollar fell as Gold and Oil rose.
• Long Bonds fell as the spectre of increased inflation loomed large.

Natural gas future prices are on track for a seasonal low in September. As a result, natural gas investments look set to be the next energy cab off the rank.

Our recent articles on the energy markets have generated lots of feedback.

Wow! Last week's action left us breathless simply due to the sheer magnitude of money being forced down the markets throat. What we have here is a situation where risky fixed income investments ala CDO’s and sub prime mortgages have been written down to Zip Nudda!

Now obviously holders of these securities are not exactly writing them off their books, but what is happening is in an effort to fund redemptions the banks / hedge funds / pension funds or whoever holds these securities is finding they are UNMARKETABLE at exactly the time it really counts!

In summary: We noted that the stock market had been ignoring a falling bond market for much of 2007 in much the same way as the stock market ignored a falling bond market back in 1987. We further explained that it was not until the Bond market broke below its May lows in September 1987 that all hell broke loose in the stock market and ended up in Black Monday, a one day drop of 22% in the S&P500.

We would like to update our hypothesis about a 2007 stock market crash as the similarities continue to eerily pile up.

In a recent article on oil stocks we discussed why these stocks do not necessarily move in lock-step with the price of oil. In short, Oil Stocks are significant components of large stock indexes and as a result tend to move with the big averages regardless of the underlying oil price.

However, as soon as the price of Oil begins to head higher, economists become very nervous and fears of an inflationary shock ala 1973 resurface. Recent history has shown that a near 8 fold increase in the price of oil has not resulted in an outbreak of inflation, a recession or stock market collapse. In fact the stock market has surged higher during this same period which begs the question, are rising Oil prices good for the economy?

Fundamentals:

Kimber Resources is a development and exploration company in the Chihuahua State of Mexico. Properties are located in the heart of the Sierra Madre Gold Belt, an historic gold district.

For over two months, long bonds have been marching relentlessly lower, breaking key support at 106.50 last Friday. The next downside target is the Jul 06 lows at 104 (which equates to 5.25%).


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Here’s where is gets curious:

Richard had been extremely bearish on the stock market for over five years now. Then, wham, last week he decided to reverse his stance. I believe he now expects a serious correction and then a resumption of the bull market.

Thus begs the question, are we in a secular (20yr+) bear market or is it still a bull market?
More importantly, are we still right to be long-term bullish on commodities?

Hey, sounds like the position the Fed is in.

Let’s recap:

1. The current stock market correction was foreseen and necessary;
2. A consensus 10% correction is expected before we enter the next up leg in the
market;
3. Trouble in the mortgage market is well contained and will not cause any unforseen credit problems;
4. The recent sell off in gold along with the stock market confirms gold has passed its sell-by date and is ineffective as a counter-cyclical asset;
5. Oh yes, oil is bouncing from oversold conditions before it will plunge beneath $50 per barrel.

Contrarian investors should thank those who create the ‘market consensus’ because it regularly presents amazing investment opportunities.

However, when I examine the gold, silver, precious metals stocks and various ratio charts the picture is mixed.

Debt creation has been on an absolute tear. Mortgage debt, Private Equity debt, Central Bank debt, Derivative debt, you name it, every area of the economy is overrun with debt. Asset markets have been floating higher buoyed by debt. And yet, nobody has ever stopped to ask the question, what would happen when the party stops?

Looks like we’re finding out.

The yield curve has been inverted since July 2006 and so far NO sign of anything resembling a recession.

Yes, we are seeing an economic slowdown.

Gold recently moved above important resistance at $650. It’s now working its way through congestion in the $650 - $675 zone (blue lines).

Based on the low readings of MACD and RSI (green lines) it looks as if it has every chance of taking out $675 and soon.

Oil is hitting new lows and Copper has begun to break down. And last but not least, there is almost no risk premium in the market as the VIX has broken to new lows.

What are we to make of all this? Is it a sign of a healthy or unhealthy market?

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.

The Dow closed above its July highs last Wednesday, signaling the potential for further gains. Gold Stocks will likely follow higher.

Dow Theorist Richard Russell says it is unlikely that the battered down Transports would confirm an upside break of the Dow lending doubt to the sustainability of any short term rallies.

Then again, does it really matter?

Because there are many other stimuli currently influencing the markets including news of BP's shutdown of the Prudhoe Bay oilfield in Alaska and the tensions in the Middle East.