What Are The Finanical Markets Telling Us?

By: Chris Ciovacco | Thu, Jul 13, 2006
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Editor's note: Part three of Chris Ciovacco's seven part series will resume shortly. The comments below are timely since they apply to both the very short-term and the very long-term. The fundamentals behind the seven part series remain firmly intact.

There is no question that the markets made an intermediate bottom on June 13th. All three major indexes also had follow through days within six days after the bottom, which gave positive confirmations that some type of rally was most likely going to take place. Hence, our decision to slowly feather some very small amounts of money back into several asset classes after taking some profits in early May.

However, all three major indexes also have seen four distribution days since the positive confirmations. This raises a red flag as to whether June 13th was "the bottom". Additional red flags are the fact that the NASDAQ, which tends to lead all markets higher, was unable to break its 50-day moving average. Similarly, both the DOW and the S&P 500 did make a bullish move above their 50-day moving averages, but they have been unable to remain above their 50-days, which is not a good sign.

If you look at stocks, specific sectors, commodities, and bonds, the market seems to be forecasting the next few months as follows:

Please keep in mind the following: (1) The markets may be misreading the future, but I doubt it, and (2) the comments above are one man's interpretation of what is happening.

From where I sit, I remain long-term (next 5 years) bullish on gold, silver, and oil. I also believe the ride, especially for gold and silver, will remain very volatile since rising prices of these commodities eat away at the credibility of all central banks. You can expect the FED to "talk down" gold and silver numerous times during any resumption of a long-term bull market.

Oil is a different animal and will most likely move based more on supply and demand. The perception of slowing global growth may also prove bearish for oil in the short-run. However, even under slowing global growth, the demand for oil will continue to increase albeit at slower rate (read bullish). When supply is tight, even small increases in demand will have a positive effect on price. I think oil will eventually get to $100. It will slow economic growth and reduce discretionary spending. At $100 per barrel, it won't be a total disaster, but as it moves higher and higher in the next five to ten years, which I think it will, it will cause larger and larger problems.

While there is really no evidence to back up this theory, I feel the media has overstated the geopolitical premium in oil. There is no question that a geopolitical premium exists in the oil market, but it may not be as large as many market participants think. I think the vast majority of oil's rise is based on simple supply and demand.

Unless or until we see a significant global recession or depression, I am firmly in the inflationist camp. I do believe that deflation will come after a period of more inflation, possibly ending with hyperinflation. There is too much debt in the economy at all levels for the governments around the world to stand by and watch us slip into deflation. They will do everything in their power to prevent deflation, which in turn will be inflationary. At some point, they will fail and the deflationists will finally be right after being basically wrong for a very long time. I respect the deflationists, but the markets have not treated them well as investors.

In short, inflation first - then deflation. If deflation hits, we will have time to adjust - we are nowhere near the beginning of a deflationary cycle - it is at least several years away unless something catastrophic happens, which is always a possibility in today's world of derivatives, global unrest, terrorism, etc.

The comments in this article are based on market activity as of Wednesday, July 12, 2006 at noon EDT and are subject to change based on future market activity.



Chris Ciovacco

Author: Chris Ciovacco

Chris Ciovacco
Ciovacco Capital Management

Chris Ciovacco

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com.

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