Categories: General Market Commentary
Topics: General Market Commentary

Pivotal Events: Signs of the Times

March 7, 2011

"Any investors willing to bet that the commodities boom is running out of steam may need both courage and patience. Major mining companies have wagered more than US$110B on the opposite view."
-Financial Post, February 19, 2011

"Consumer Confidence in U.S. Increases to Three-Month High"
-Bloomberg, February 22, 2011

"U.S. treasury secretary: poor financial regulation in Britain fueled financial crisis."
-Telegraph, February 22, 2011

Market Peak - Economic Peak = 12 Months

(or)

MP - EP = 4 quarters

To be serious, the business cycle could roll over on this developing crisis with very little lag between the start of the bear market and the start of the recession. Let's check back on the last first business cycle out of a post-bubble crash.

According to the NBER, that recession started in May 1937 and the big stock rebound peaked on March 13. Only a one-month lead on that one. Of interest, is that Ron Griess (www.thechartstore.com) points out that the great rebound out of the 1929 Crash ran 104 weeks to the key high on March 13, 1937. The gain on the S&P was 134%.

On our great rebound, the 104-week count works out to a potential high on February 25. For the S&P the gain has been 102% to 1343 on February 18.

Coming out of the 2009 Crash we used 1937 as a model and did not stay with it. We should have as the correlation has been fascinating.

Ron points out another example of a 104-week great rebound out of a financial panic. The rebound out of the 1907 Crash ran until November 20, 1911. Transposed to now, the equivalent high counts out to March 11, 2011—which is more than just interesting. Both post-crash rebounds were followed by a 15% selloff. This works out to around 1135, which was the break-out following the early summer slump.

The financial establishment may wonder how these pages can have a forecast for straight-up speculation and a strong economy and at the same time look for a sharp decline in both.

Well, it is the way financial history works during Anthropogenic Financial Climate Change, or AFGC. This observation refers to all market participants, not just to policymakers who have been naively blamed for not keeping the 1929 mania going. More recently, the Obama administration has naively blamed the Bush administration for not being able to keep the 2007 financial mania going.

The point is that there is no power on earth that can prevent a financial mania and there is no power that can keep one going beyond its shelf-life.

We think the same applies to great rebounds and this one is within six weeks from failing. Confirmation is provided by our Forecaster, which when the big action includes commodities the recession has started close to the heads-up alert. On the signal in November 1973 the recession started that November. On the November 1979 signal the recession started in January 1980.

Wonderful two weeks ago, the outlook is now bleak.

Commodities

It seems to be time for an old saying: "There is only one cure for high prices and that is higher prices." The conclusion of soaring prices is accomplished as high prices prompt significant increases in production and significant declines in the rate of personal consumption.

We know that the Fed has pledged to boost prices "forever"—or more realistic—while it remains in business. But it has been attempting to inflate currency and credit since it opened the doors in 1914 and booms and busts have prevailed.

Commodities are close to starting another cyclical bear market.

Interest Rates

Last week, we noted that the long bond could rally as most commodities weakened, but that rallies would be limited by the possibility of another general wave of bond revulsion.

The risk to corporate bonds is increasing by the minute. Prices and spreads are now vulnerable as this business and commodity cycle rolls over.

S&P earnings go up and down with commodities and the down indicates poor pricing power for business and that means deteriorating ability to service corporate debt.

Currencies

Since early November, the DX has been building an important base. The recent decline to the 77 level on February 2 seems to be testing the 75.6 level of early November.

The Dollar Index could churn around for a few weeks when another upturn seems likely. Rising through 79 would confirm the uptrend.

Precious Metals Sector

Gold and silver could still rally with crude oil. Precious metals could rally even if crude oil prices leveled off.

Precious metal stocks are a good way to play the trend, but often shares lead the culmination of a bull move for metals. Investors should consider that if crude goes hysterical oil stocks may not perform in the final stage. If crude goes hysterical so will silver and gold go along with the ride, but precious metal stocks may not perform in the final stage.

Our "dancing on a cliff" theme suddenly applied to agricultural and base metal prices. It is not rocket surgery to wonder when it may hit crude oil and precious metal stocks.

Representing the oil patch the weekly RSI on the XOI has reached 82—the highest reading since the 80 attained in 2007.

Gold stock (HUI) momentum is nowhere near as high, nor is momentum as high for Silver Wheaton Corp. (NYSE:SLW; TSX:SLW), which we use as a proxy for the silver camp.

Now for the play in gold and silver: The silver/gold ratio which is sympathetic to the bull move for both has reached a daily RSI momentum of 79.8 which in ordinary conditions would prompt a correction. On stronger moves this measure can get to the high 80s and tradable corrections have followed. That was basis for our Correction Zone that began in November.

Precious metal stocks have rallied in the initial stage of our Construction Zone and investors could take a little money off the table.

This article was originally published on February 24. Copyright © 2011 Institutional Advisors

Author Bob Hoye, chief financial strategist, writes the weekly overview, Pivotal Events, and can be found on SafeHaven.com. In 1998 he founded the Institutional Advisors website, a forum for reliable financial research. Bob's review of financial history provided the forecasting models designed to anticipate significant trend changes. This included the alarming volatility typical of the transition from rampant speculation in tangible and financial assets to severe contraction. His articles have been published by Barron’s, Financial Post, Financial Times and National Post. Bob is frequently interviewed on radio, podcasts and TV.

 

 

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