Chris Ciovacco's  Instablog

Last week in Gold, Recessions, Bonds, and 1987, we stated that:

• A major objective of all the money printing, government intervention, and low interest rates is to create positive inflation, which includes asset price inflation.
• Asset inflation helps heal sick balance sheets and repairs a portion of the lost "wealth effect".
• When gold lies dormant, it means reflation is not working all that well in the minds of market participants. Gold’s recent breakout may indicate that the entire reflation of assets is working (in the minds of market participants - they fear future inflation caused by money printing, intervention, etc.).

Crude oil also can lend support to the relation case as market participants look for ways to protect purchasing power and profit from slowly improving fundamentals. Thurday's Energy Department report showed an unexpected decline in U.S. gasoline stockpiles, giving the bulls some fundamental backing for buying energy related commodities and stocks. Regardless of whether or not crude oil can hold the recent breakout as of the close Friday (10/15/09), the primary trend for oil will remain up.

Click to enlarge chart

We will expect to see more of the same (bullish trends, higher highs, and normal corrections), until we see significant evidence to the contrary.

We did not become bullish earlier this year because we do not understand the problems of the day. The market became bullish. When we observed evidence contradicting the formally bearish trends, we became bullish. We remain bullish, but maintain a fairly high degree of uneasiness and skepticism regarding a sustained long-term bull market. We are concerned about valuations, especially if earnings do not materialize and as we move closer to 1,200 on the S&P 500. We are also concerned about banks and looming problems with commercial real estate. We are monitoring market sentiment looking for excessive acceptance of a new bull market. We are concerned about excess capacity throughout the economy (from hotel rooms in Vegas to condos in Miami). As a result, all markets need to be monitored closely. There is a fine line between staying with a profitable trend and ignoring clearly bearish signals. At the present time, we do not see many bearish signals, but in the long-run it pays to be aware of what could go wrong even while things are going right. For now, the bulls remain in control of almost all markets. We expect more of the same until we see something different (bullish trends, higher highs, and normal corrections).

Investments or strategies described above may be inappropriate for some investors based on their own individual situation and risk tolerance.

Disclosure: The author and CCM clients have numerous positions, including exposure to U.S. tech stocks, foreign currencies (long and short), emerging market stocks, foreign bonds, and commodities.