Safehaven | Random Musings at a Market Bottom

October 09, 2006

Random Musings at a Market Bottom
by Greg Silberman

Article originally submitted to subscribers on 3rd October 2006...

For months on end Gold Stocks acted as high beta plays on the Market.
Wherever the Dow went Gold Stocks followed.
Suddenly that correlation evaporated.
Unfortunately for us Gold Bugs the trend became a Higher Stock Market and lower Gold Stocks.

Whilst there is no denying the short-term pain, long-term, I take this action as exceedingly positive.

Gold Stocks are by nature counter-cyclical. The greatest gains in Gold Stocks (in the current Bull market) occurred from 2000 - 2002. A period where the Stock Market tumbled and the Nasdaq lost 80% of its value.

For those of us anticipating near-term weakness in the stock market and hedging with Gold Stocks, the DOW: HUI chart below is very instructive:

Chart 1- Dow vs HUI

All indications are that the Dow is topping out against the HUI:

Price appears to be turning at resistance;
Internals (RSI and MACD) are overbought and rolling over;
A small divergence is apparent on the RSI;
Gaps which tend to be filled are evident at lower prices;

The message for Gold Bugs is, "This is as bad as its going to get!"
For non-gold stockholders the message is, "This is about as much as your stocks will be worth in Real Terms for a LONG time!"

I recently returned from a trip to the Ukraine.
It has been 2 years since I travelled there.

During the 2-year interim the economy went ballistic!
No surprise there.
Construction and property have taken off like a rocket.
My taxi driver suggested he showed me a few Choice Properties for Sale - bubble anyone?
Almost every person carries a cell phone and reception is seldom an issue.
Politics remains shaky but democracy appears to have a foothold.
Once the youth taste the benefits of capitalism it's hard to turn off!
Joining the European Union is the issue of the Day - quite a shift from the old Soviet Union.

Here's something I found interesting:

Whilst waiting for my flight at the airport in Kiev I was watching one of those government promo ads.

"Ukraine your destination for World Class manufacturing and innovation..."
Picture: Monster Anatov Aeroplane taking off and Mig's buzzing all over the screen.

The message I got was this:

"Ukraine World Class destination for all your Military needs!"

Have we hit rock bottom in the Gold Stocks?

I'd say an affirmative Yes!

For all the hand wringing, teeth chomping and heart stopping moments, this correction has stuck closely to the playbook by following a predictable textbook pattern.

Chart 2 - HUI Elliott Wave Count

The above chart shows an Elliott Wave count of the HUI since the Gold Bull Market began in 2000.

Of specific interest is the inter-wave corrections marked ii and iv (blue circles). It is widely accepted that Wave Correction marked ‘2' was not an inter-wave correction but a major correction that separated Phase 1 from Phase 2 in the Gold Bull Market.

We are currently in inter-wave correction (ii) of Wave 3. The inter-wave corrections in this Bull Market have all shown alarming similarities (so far):

A seasonal top occurs in Spring;
A sharp drop and a bottom into early Summer;
A moderate rally to a lower high during the Summer;
A secondary correction in late Summer which holds above the early Summer lows (we are here now);
A move higher beginning October / November into the next upleg of the Bull market

The current correction has followed the above pattern very closely and there is no reason to believe it will deviate. That being the case, the September low of 283 may very well be the late Summer low and we will work higher from here into the next Upward thrust in Gold Stocks.

For more info on Elliot Waves -> (I have no financial affiliation with EWI)

Being away from the quote boards, effectively out of touch for 5 days gave me some room to think.

It's always refreshing to get away from the screens for a while.
It's just not healthy watching the action tick by tick.
It causes one to make impulsive and emotional decision that someone detached from live prices would not make.

I think an obsessive desire for money is a dangerous and compulsive habit.
It detracts a person from appreciating life's other blessings.

What about this?

If the fanatical desire for money is an evil trait, perhaps it pays to fight the impulse. Perhaps we gain some kind of reverse psychological advantage when we chase dreamy money making ideas out of our heads?
In essence telling this evil character if you want a piece of me you're going to have to work for it.

Limit your investment thinking strictly to 1 hour a day and tell this evil urge, "Don't Bug me unless you're delivering Honestly earned, Tangible Gold Coins directly into my palm!"

Hey, we've gotta do all we can to shift the odds in our favour!

More commentary and stock picks follow for subscribers...

Greg Silberman CA(SA), CFA
www.goldandoilstocks.com

Profession: Research Analyst and Newsletter Editor
Company: Ritterband Investment Management LLC

Career Brief: Greg qualified as the youngest Chartered Accountant and Chartered Financial Analyst (CFA) in South Africa in 1998 at 25 years old. After completing his traineeship with Grant Thornton he moved to London where he worked for JP Morgan Chase in their Fixed Income Swaps Division. Sick of the grey skies and cold weather Greg relocated to Atlanta, Georgia where he spent the next 4 years freelancing as a management consultant. His targeted clients were fast growing mid size US based companies and he worked across many industries including credit cards, health insurance and energy trading. Greg has recently returned from Sydney Australia where he spent the last 2½ years working in Equity Derivative Structuring for Perpetual investments a major Australian Asset Management Company.

Greg has a passion for the markets and has been writing Greg's market newsletter for 2-years. A newsletter focused on metal and energy stocks and recently non-resource small caps listed in the US and Internationally.

This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.