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March 03, 2007

The HUI Will Soon Diverge Against the Major Stock Market Decline
by Robert McHugh

The Dow Industrials lost another 120.24 points Friday, closing at 12,114.10. In a little over a week, the Dow Industrials have lost a precise (to the point) Fibonacci 38.2 percent of all the gains from July 19th, 2006, the date we received our last "buy" signal. This is why we pay close attention to the risks of oncoming Bear markets. It only takes a fraction of the time to wipe out months of gains. We've been expecting a major top in equities around March 2007 for a while now, so this week's plunge was not surprising. The HUI Amex Gold Bugs Index has also had a bad week. However there is a big difference between the patterns in the Blue Chip stock indices and the pattern in the HUI. While Gold stocks and Blue Chips travel the same highway south, the HUI will soon find the exit ramp. The Blue Chips will veer into the passing lane and step on the gas. Below is the pattern in the Dow Industrials:

There has been a multi-year Broadening Top forming in the Dow Industrials, which is nearly identical to the same Broadening Tops that occurred just prior to stock market plunges in 2000, 1987, 1986, 1973, 1966, 1957, and 1929. Same pattern. In each instance, prices took forever to reach point e, then plunged. The 2007 version is now starting its plunge. Last week's carnage is simply the first small degree wave of what should be a protracted and severe decline throughout most of 2007. Stock market declines often forecast recessions. Once a recession is common knowledge (it already has started), the plunge in Blue Chips will accelerate. Common knowledge will occur once banks are attacked by real estate loan, heat-seeking examiners. Common knowledge will occur once public companies start restating earnings. Common knowledge will occur once bankruptcies hit the news. As it deepens, jobs will be lost, politicians will be thrown out, savings will disintegrate. You know the routine. The only way out of this mess will be a massive and drastic Dollar devaluation, accomplished through the printing and distribution of trillions of dollars to households across America. Fiscal policy is already too much of a mess to be counted on to stop this recession. Another war will just make matters worse. No, this time it will take monetary hyperinflation the likes of which America has never seen before. You see, the Fed has had a lot of practice over the past two decades. They will be ready to serve.

This fundamental economic fact will be Bullish for Gold stocks and precious metals. The patterns in Gold stocks and precious metals are very different than that massive Bearish Broadening Top in the Dow Industrials. The pattern in the HUI and Gold is a Symmetrical Triangle, a continuation pattern, a "pause" in an already established long-term rising trend. The way this pattern works is we get five waves oscillating in a narrower range - a sideways move intermediate-term. Once the fifth sub-wave wave completes, the direction of prices before the pattern will be the direction of prices after

The last sub-wave within the Symmetrical Triangle for the HUI and Gold is scheduled to be down. That is exactly what we are getting now. The final leg down. Once complete, a huge rally will follow. In the case of Silver, it has formed a slightly different continuation pattern, an Ascending Bullish Triangle. It is earmarked by a flat upper boundary, and a rising and converging lower boundary. Once prices breakout above that flat upper boundary line, Silver should rally sharply. In all three cases, these Bullish continuation patterns are nearly complete. So, it is very likely that by summer, the HUI, Gold, and Silver will be rallying hard (fundamentally in response to massive liquidity infusions to bail out the economy), while major equity markets sink. Our 49 page Weekend Market Newsletter goes into great depth analyzing this week's plunge, and what is coming next.

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"These things Jesus spoke; and lifting up His eyes to heaven,
He said, "And I am no more in the world; and yet they themselves
are in the world, and I come to Thee.
Holy Father, keep them in Thy name, the name which Thou has given Me,
that they may be one, even as We are.
While I was with them, I was keeping them in Thy name
which Thou hast given Me; and I guarded them,
and not one of them perished but the son of perdition,
that the Scripture might be fulfilled.
But now I come to Thee; and these things I speak in the world,
that they may have My joy made full in themselves."
John 17: 1, 11-13

If you are a trader, we offer market timing signals. If you are a conservative long-term investor, we manage our Conservative Balanced Investment Portfolio, and publish our transactions on a regular basis.

Robert D. McHugh, Jr. Ph.D.
Main Line Investors, Inc.

Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com. The statements, opinions and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.

Copyright © 2004-2008 Main Line Investors, Inc. All Rights Reserved.

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