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  • Weekly Market Outlook, The Importance Of Long-Term Trend Lines, Gold And Silver  0 comments
    Nov 11, 2013 6:59 AM | about stocks: AGQ, GLD

    The market outlook expressed in our last posting remains in effect. Short-term neutral, expecting a bearish turn soon.

    A massive "melt-up" is possible, but this hurdle would have to be cleared first:

    The above chart reveals a 14-year trend of resistance not far above current levels.

    It's remarkable how much the latest bull run looks like the one in the late '90s. Duration of 5 years with an approximately 8000-point rise vs. duration of just less than 5 years with an approximately 8100-point rise. The bull run in the middle of the chart also lasted 5 years, rising approximately 7000 points. All three enjoyed a steeper burst at the end that lasted one year each.

    As we've noted recently, sentiment also resembles previous stock market peaks. That's best expressed by the mania for the Twitter IPO. It dropped over 7% on Friday, making it both the most talked-about IPO in years and probably the worst performing within its first two days of trading. An unsurprising correlation for those of a contrarian mindset.

    In contrast to the massive media coverage of Twitter, have you heard a word elsewhere about these IPO's that we've recently written about? TCS (Container Store Group) flat since its debut on November 1st, WUBA (58 Com) up 16% since its debut on October 31st, and VJET (Voxeljet) up 124% since its debut October 18th.

    Getting back to the chart above, some readers doubt that there's any merit to studying trend lines drawn on a chart. We ask what they were doing in early March of 2009. The world was black-bearish on equities and selling everything as fast as possible in a panic to meet margin calls.

    On March 06 2009, a Friday, the DJIA hit its lowest point in 10 years at 6470 and closed the day at 6626.

    Here's what we posted, before the market opened on Monday March 09 2009, effectively at the exact market bottom, by taking note of the long red trend line of support seen in the chart above, along with sentiment and other measures:

    "No guts, no glory? The markets appear to be putting in a bottom. Not "the" bottom, but at least "a" bottom of some duration we believe."

    It is very important to note, we hadn't been guessing incorrectly at a bottom for months like many others had been. On January 09 2009 we'd written: "The markets could go either way, but appear to us to wish to go downwards."

    February 2009 was the worst month in the markets since 1933.

    On February 23 2009 we wrote: "We believe the banks are in much worse shape than is claimed, and that this will be painfully evident to everyone soon. We believe any rally could be very short-lived and met with equally quick selling.

    We are not comfortable holding any unhedged long positions overnight, and especially not comfortable having any significant long speculative holdings merely hoping for a protracted market rally. We sleep well with effective shorts in place, believing the markets will be much lower within months if not imminently."

    Between that February 23 2009 posting and our March 09 2009 bullish call, the Dow Jones Industrial Average dropped a whopping 10% and Citibank shares dropped 57%, Bank of America dropped 26%, Wells Fargo dropped 26% and US Bancorp dropped 22%.

    Those types of moves seem incredible now, but had almost become normal at the time as many readers will recall. Consider that in the month from February 09 to March 08 of 2009, the DJIA dropped 1800 points! Trying to turn bullish during that time proved disastrous for most, who then tried turning short at the bottom when we were turning bullish.

    As we may have noted back then, and which we were certainly aware of, brokers were fielding record calls from novice speculators to open new margin shorting accounts in the days and weeks leading into the market bottom. Of course many of these clients were the same ones who'd been wrong consistently on the way down, while trying to time the bottom and "buy the dips". Their zeal for turning short was one of the main things that caused us to turn bullish, along with that very long-term trend line of support we cited above.

    That the markets eventually rebounded fully is of no consequence. Anyone can look at the volume on charts and see that most people were bailing out at the bottom. Many did not participate in the rally since then, and in fact some of them are only now going "all in" long at what could prove to be a lasting market top. If so, we'll see if 2009 was "the" bottom or not.

    Turning to metals now, regular readers will recall that we cited extreme bearish sentiment and novice shorting of gold and silver shares in late June of this year as our reasons to turn bullish. For the previous two years we'd been correctly and very profitably stridently bearish, while everyone from "rock star" hedge fund chiefs to novice rubes had been rabidly bullish. In the two months after we turned bullish, we turned massive profits on our holdings.

    We did so on the exact day of the peak (so far?), as gold and silver have gone much lower since our August 27 announcement that we were booking gains of hundreds of percent after a mere 8-10 weeks of holding those positions.

    Note also on that same day we bought CWA (Coast Wholesale Appliances), again with trend lines factoring a large part in our decision. A month later it was 19% higher.

    There's a point in all of this, beyond reminding readers of what's consistently possible - if doubters must continue to send us petty hate mail, we wish they'd offer links to their public record.

    Getting back to trend lines, here's an update on AGQ (ProShares Ultra Silver) which we most recently entered earlier this week:

    As can be seen, that nearly 5-month uptrend in red seems broken. No method is perfect and perhaps we were too aggressive in drawing that line. In any case our stop at $19.20 was hit on Friday.

    Ultimately an effective levered silver position in AGQ is really a play on gold. As can be seen in this chart of GLD below, gold appears to still be holding above its short-term uptrend:

    We suggest that if you're long, keep holding gold or silver as long as GLD is above that line or above the October lows. We'll probably re-enter AGQ if it's over $20 again, though it might be prudent to wait until both of these issues are above the green downtrend lines.

    Why wait? For years gold and silver have essentially tracked equities higher, though for the past couple years they've been lagging far behind. Precious metals, bullion or related shares, are definitely not the hedge against stock market losses that many purport them to be. These are just more bullish speculations, usually on margin and blind irrational faith, same as in equities.

    When equities turn lower, as we believe they will per the commentary above and in other recent postings, we have every belief that gold and silver, as well as related shares, will outpace equities downward.

    You may not believe it, but you'd certainly better fear it.

    We respectfully suggest that if you're not shorting or hedging, at least be prudent in reducing major long positions in equities. New entries should only be pure speculations, or reliable dividend-paying stocks.

    Markets have seldom in history been so easy to predict and take advantage of as in the past few years, despite all of the incessant political drama and economic uncertainty. That good fortune is not statistically likely to continue.

    If you're somehow in a losing position in 2013, in equities or metals, it's best you exit from speculating entirely and remain out at least until historic market drops are again front-page news.

    Look again at the DJIA chart above. It's virtually an uninterrupted multi-year bull run that looks nearly vertical on a long-term chart. It's been a bull run rivalling the greatest bull runs of our lifetimes, indeed in all of history.

    Accounts should be at record highs and prudent amounts withdrawn from risk to put to good use or into real, stable investments.

    Book, at the very least, the profits that have accrued so far in recent months or in 2013.


    What To Buy At Market Tops

    US Stocks Rise After Strong Jobs Report

    Comedic content from that article:

    "Wilson described the initial selloff on the jobs report as a "good news is bad news market," meaning some investors selling on economic strength that could reduce the Fed's stimulus measures. That selloff was followed by a "bad news is good news" reaction to the soft sentiment report, leading to gains for the main stock indexes, he said.

    But Wilson also said it's possible that more market participants are just upbeat after the jobs report, believing that good news is simply good news. "Even for those who fear the taper, there has to be some faction who believe that the healing of the patient in the long run will be a good thing," the analyst told MarketWatch. Wilson said he's "a believer that good news is good news." "

    What Were Tesla Investors Expecting?

    Disclosure: I am long VJET, WUBA.

    Stocks: AGQ, GLD
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