The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Friday, March 6th, 2009.
For years our local retailers have run advertising tagged on the theme of 'March Madness', implying they have cut prices drastically due to an uncontrollable psychological condition. Fitting the stock market into this context at present is of course a synch, with prices getting marked down all over the place due to an uncontrollable psychological condition, better know as a panic. And it just so happens that in studying history, March has been a time of conspicuous events in a biblical sense (important events), with the other more recent example being the manic top in tech stocks seen in the year 2000.
And it's along these lines we mark this March with a seasonal inversion of the typical stock market trading pattern, where normally stocks are strong into this time of year, and weak into summer / fall. Why has this come about? As outlined in our last meeting, this is due to speculative betting practices that are reflected in generally declining and low index put / call ratios, with the majority of the calls apparently being held by dumb money small traders, as evidenced in most recent Commitment Of Traders (COT) data. They are the proverbial 'deer in the headlights' at the moment as stocks continue to fall, which will make their bad bets worthless by options expiry later this month.
In terms of the trading pattern then, which again, was postured in our last commentary, in order to mirror the top in stocks witnessed in March of 2000, a selling capitulation should be witnessed next Tuesday, which is the anniversary (the 11th), with a possible test as options expiry approaches on the 20th. And sure enough we have stocks down 12 of the past 14 trading sessions in measuring the mania, with more of the same to be expected at the open next week. What you want to watch for this time around is for a strong weekly close however, which would break the present pattern. That is to say, it's ok if next week starts out weak, where in fact we are expecting such an outcome. But, stocks should not finish the week down if March is to mark a seasonal trend change this year. Such an outcome would not necessarily negate a seasonal turn, however to witness events unfolding as expected would add conviction to our thesis.
Of course this is not just my view, where other noted bears have come out recently to ponder the same, for whatever reason. Robert Prechter is calling attention to the Elliott Wave pattern, which definitely gives a high degree of confidence to this thesis, as you know from our previous discussions on the subject. That being said, and understood, the next step in remaining ahead of the pack is attempting to calculate how long / strong the ensuing rally in equities will be. Here, it should be noted the present wave down ending is of Intermediate Degree on the big count, at a minimum, so the bounce could be something to behold. One thing is for sure in this respect, you do not want to be short anything right now except for bonds, and even this move is getting tired.
Bullion and precious metals shares will undoubtedly decline once it's understood fear is coming out of the market(s), however as described a few weeks back at the onset of the correction, gold should only drop back into the $850 to $900 range in a sloppy test of the megaphone breakout, with the indexes bolstered by generally buoyant equity markets. This means weakness should be bought, but patience into next month might prove to be a virtue. As an indication of what to expect, I am looking for the Amex Gold Bugs Index (HUI) to drop back down into the 250 area minimally, and below possibly, as late comers to the party are scared out of their positions once it's thought the sky is not falling. Thus, don't be surprised if the HUI attempts to vex the large round number at 200; but, I would be surprised if it got much below the 25-point interval at 225 before a reversal was put in gear. (See Figure 1)
Further to this, and bolstering the case for precious metals in the intermediate-term, the profile in the chart above shows a win-win scenario long-term for bullion at the least, where buoyant and rising stocks will get people thinking about inflation again; and then, when stocks begin to fall (again) once a double bottom is put in, one can start to think of what the larger picture will look like when Canadian banks start failing, considered by many to be the safest banks in the world. Such a possibility will of course become more prominent once the indicated breakout occurs, meaning capital will be seeking safety again in moving into the Dow, which will occur once the pronounced 'crash signature' (see previous commentaries for description) pictured below is triggered. This will occur when moving average support on the Accumulation / Distribution Indicator (A/D) is violated and begins to plunge. (See Figure 2)
That's when long-term trend line support will be violated, moving the Toronto Stock Exchange out of its preferred status once people realize the prospect of a Great Depression is in fact real, which will keep demand for commodities in check. Then, meaning as stocks continue to decline, the bell curves will be complete, including the one in human population, as described in chilling detail by Jim Kunstler in his latest, where in framing things properly, like he does, Peak Oil continues to cause successive complex systems to shut down, not the least of which being agriculture, in good time.
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Good investing all.