Now or Never for the Bears?
It is looking like a case of "now or never" for the bears with "now" defined as anywhere from the first trading day of 2007 through the next several weeks. As you know, in an example of trying to find a needle in a financial market hay stack, on December 16, I wrote a piece calling for a near-term visit by the Dow to 13,007 in conjunction with the gold price holding support at 605, giving a 21.5 Dow-Gold ratio, a blow-off top in stocks and a solid basis for the next leg up in the gold complex in its secular bull market (in nominal terms as well as measured in Dow paper). That analysis is likely to miss its mark as gold is looking strong here and now and does not appear interested in fulfilling the chart objective located at 21.5 ounces per Dow unit. We remain long the GLD gold bullion fund as well as several miners, including major producers Goldcorp (GG), Kinross (KGC) and Goldfields (GFI) and several smaller miners such as AZK, mentioned previously in this analysis. In my view, fundamentals and technicals are lined up nicely for this sector for all the reasons mentioned here on the blog so often over the last many weeks.
Where things really look interesting however is in the broad market indices. Most of you are aware of the poor performance of the Dow Transports since mid-November which has provided a Dow Theory non-confirmation. Also, the NDX (see chart), which tends to lead the broad market, appears to be rolling over after relative weakness compared to the Dow and SPX. Note though that at around 1750 NDX has some strong support. Until that support is broken solidly, the bears are definitely not in business.
Which brings me to a broader measure of the market, the S&P 500 (see chart). We appear to be setting up for one of two near term outcomes. 1) The NDX could find support at 1750 and turn higher toward the double top resistance at around 1825, which would likely trigger some blow-off fireworks in the broad market and bring our Dow 13,007 target into play. Or 2) the NDX could fail support amid much fanfare and signal a much needed and awaited correction. In that event I have noted some likely retrace targets. I believe it would actually be healthier for the bulls in 2007 if a hard correction were to visit the markets near term (see SPX retrace levels noted). A blow off, while euphoric in the short term would likely create a major top of some sort and possibly an epic shorting opportunity because in a market driven by liquidity in the form of carry trades (Yen is front and center currently) and central bank credit (debt) creation, it's a game of "all or nothing" as a friend used to say. No, it is best for the bulls to get a much needed correction over with before carrying on the pretense that this is a long term healthy market.
Our ongoing analysis of the bond market and particularly the yield curve shows rates being pulled higher and liquidity being drained from some segments of what we, or at least I, know as FrankenMarket. Goldilocks was given a bounce in her step due to the housing slow-down and commodity corrections as Wall Street and the financial media, which simply love a good story, spun a nice best of all worlds scenario. The Fed remained firm, yet the globally connected bond market (trading partners buying US treasury debt with proceeds of American consumer purchases on credit) and the ever accommodating BOJ became ever more permissive and constructive for the inflation economy. Some liquidity dynamics appear to changing as I type, with the yield curve having established a fledgling uptrend and the gold/silver ratio having broken resistance at 48 and established a short-term uptrend, which was noted as a key in the December 16th piece. As for the BOJ, if you ever find out what they are thinking, please drop me an email and clue me in.
To summarize the above, I look for either a near term blow off in stocks and most other assets along with a notable decline in the US Dollar toward the closely watched 80 level. This would prompt higher interest rates which would eventually put a stop to the Goldilocks foolishness. Or alternatively, the numerous bearish divergences in many markets fulfill themselves in the form of strong and downright scary corrections. This could eventually lead to new highs across many asset classes down the road as monetary policy makers, fully aware of the cards this house is built with, panic yet again with the idea of not letting any domino's start to fall. I believe the bears have an opportunity coming in the near term. The question is, will it be the opportunity of a lifetime or merely a nice trade?