Getting From A To B
The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, February 24th, 2009.
Are you scared yet? You should be because not many others are in spite of the growing carnage in the financial markets these days. This is set to change in a hurry however, where borrowing from the Kübler-Ross model on 'death and dying', which is the same process investors are going through right now, if I am right about this, in getting from A to B, with A being denial and B anger, the stock market could do the unimaginable. You can see it already, the spoiled brats, with Obama in the lead, are starting to realize reality does actually bite, and that no matter how much one attempts to change it, nothing will make it go away.
This is being accomplished by continued and persistent weakness in the stock market despite growing interference by the bureaucracy, where as I will show you below, people are now beginning to give up the ghost on their fantasies with respect to the economy, their wealth, and the future. And make no mistake about it; this will make the mob angry as they see their wealth vaporized. They will be out for blood, with the complacency presently gripping the collective psyche increasingly shattered as more and more people begin to realize their futures do not look so bright anymore. And this is why gold is not giving up its gains, because when angered, people will finally act, taking their money out of the stock market in attempting to secure what is left. Gold, of course, is a natural alternative in this respect.
With all this said, it's important to realize the markets are very overextended in terms of longer-term trends, and could be subject to corrections in the weeks ahead? In this respect we still have six to eight weeks of potential post-crash pattern strength that could sponsor such a turn of events. However in being sensitive to the divergence from previous episodes, the basic message is don't expect much even if this turns out to be the case. That is to say, don't expect stocks and bonds to better their January highs. And conversely - don't expect the double top in gold to last forever either. Eventually, whether by market forces or official decree, it will need to be valued higher in order to back former fiat currency fancy.
So you see, any pause in present trends, with particular attention to how gold is steeling the show due to grand scale deleveraging, would only be that - a pause within a secular trend of the highest order. And it's very important you understand this, because the bad news doesn't end there. No, the world is not just deleveraging a rotten and corrupt financial system. This is only a symptom of the disease. What is happening on a larger scale is the entire socio-political economy of our very existence is coming into question, brought on by Peak Oil, excessive population growth, etc., where up until now the prognosis appears to be increasingly bleak considering special interests still have far to much influence on the pace at which alternative energy systems are being developed. In this respect it appears the combination of faulty pricing mechanisms in concert with everything else (think misplaced intervention, deflation perception, etc.) keeping energy prices too low right now could manifest into an increasingly profound crisis in coming years, one where economic hardship, and even famine, reach populations presently viewed as insular. (i.e. that means you.)
This is scary stuff, no? And so is the nationalization of banks, collapsing economies, and the bureaucracy's increasing inability to stop the slide. Such is life on the farm however, where the next 'big card' to drop will be when gold goes through four-figure resistance at $1,000 on it's way to five. That's right, once the cat's out of the bag, meaning gold moves firmly into four-figure territory, you can begin entertaining such thoughts, especially since the socialists will not give up without a fight. Of course all the fiscal stimulus and bailouts are doing is delaying the inevitable, with systemic collapse unavoidable now. So don't dismiss gold's potential moving forward because as proved in last week's analysis, the public is still in complete denial with respect to what the future holds, meaning they haven't even started buying yet.
They are beginning to sell stocks now however, as evidenced in a noticeable turn lower in the Accumulation / Distribution Indicator (A/D) seen on the monthly plot below. You will remember our discussion on the 'crash signatures' in the charts of the broad indexes from last week, and that when the public finally began to sell stocks, a 'crisis in confidence' with respect to the establishment would ensue. If not please review it, because we are quickly going from A to B now, where the investing public's desire to accumulate stocks is finally starting to wane, meaning stocks still have a long way to fall from here. In this regard both the Dow and S&P 500 (SPX) took out the 2002 closing basis lows yesterday, implying potential for a great deal more downside is 'good to go'. (See Figure 1)
In terms of the crash signature in the above, I just had to show it to you again this week to drive home the point that only 'crazy people' are long stocks right now, and that they are about to get their heads handed to them. Of course with stocks already cut in half, the consensus is a bounce is in order off a double bottom. This fallacy is about to be crushed with the Dow plunging through 7,000 however, which again, is part of the process of the investing public going from A to B. They need to get angry enough to sell you see, because apparently fear doesn't fit into the modern day equation. Most are not smart enough to be afraid. This understanding accounts for the willingness of brazen speculators to accumulate high growth tech stocks right up until the end, with the Nasdaq / Dow Ratio going to a new high yesterday despite the fact stocks were falling. (See Figure 2)
As incorrigible as die hard hedge / mutual fund managers still appear to be with other people's money however, based on the above profile, at the margin and increasingly the public will be forced to redeem moving forward, which will in turn force liquidation of these positions. What's more, the fact the Nasdaq / Dow Ratio was rising right up until yesterday as stocks continued to fall is testament to the observation denial is still rampant. However, if a reversal lower takes hold soon, which is probable if annotations in Figure 2 are correct, again, the move to B will be underway in the collective consciousness.
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Good investing all.