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Crouching Bears, Stumbling Bulls

Sep. 03, 2012 4:12 AM ETDOG, FXA, FXF, FXY, GLD, IEF, SPY, USO, VXX13 Comments
John Overstreet profile picture
John Overstreet
1.99K Followers

Summary

  • The threat of a spike in oil appears to be diminishing, so it may be time to take profits in oil.
  • The Dow at or above the 13000 level seems to be a good place to sit out the market or short it.
  • The Dow will probably bottom in February 2013.
  • Treasury yields will resume their rise in relatively short order, and we should expect rising rates throughout the remainder of 2012.
  • There will be little upside to gold and lots of potential downside.

At the beginning of August, I wrote that we should be on the look-out for a few things over the course of the remainder of the year, and that August would likely give us a very good idea of whether or not that outlook would indeed pan out.

In short, I expected a rise in crude oil prices (more precisely, a spike in year-on-year WTI prices peaking in the late summer), a sharp rise in treasury rates (peaking at the end of the year), and continued downward pressure on stocks (also until the end of the year), as well as gold weakness. I also argued for a rise in volatility and weakness in commodity currencies like the Aussie dollar (FXA) vis-a-vis safe-havens such as the Swiss franc (FXF) and the yen (FXY).

Although one can never feel absolute confidence when predicting anything as complex as the market, and I can hardly declare anything like vindication, in general, my calls remain intact.

1. Crude oil (USO)

I wrote in my first couple of Seeking Alpha articles back in June that the gold/oil ratio suggested a possible 'Leeb oil shock' (an 80% rise in year-on-year WTI) late this summer, most likely August, but that the yield curve did not.

The summer is certainly not over, and it's not hard to imagine scenarios that would push oil much higher, but the threat of a spike appears to be diminishing. A small position in crude may still be warranted, but the 20-25% rise since June also seems to be a good place to take some profits.

crude oil

More promising hunting may be found elsewhere.

2. Stocks (DOG, SPY)

I have suggested before that the gold/copper ratio tends to foreshadow real interest rates sixteen months down the road and that sudden spikes in that ratio have

This article was written by

John Overstreet profile picture
1.99K Followers
I study markets from a long-term historical view, especially the interaction between yields and inflation across all major asset classes. My most original work is probably in the following areas: long-term sector rotations; Gibson's Paradox; Long Waves; market cycles; innovation supercycles; global violence supercycles; intraweek market anomalies; cost disease and inflation; and cost disease and demographic change.

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