Market Update

November 4, 2012

Poor New York and New Jersey, there are people who had everything they owned taken away from them by Hurricane Sandy. I'm not happy with Wall Street, but to most people, there is something wonderful and unique about New York City, and yes New Jersey too. At times like these, it's appropriate to say a little prayer for those in need.

Speaking about need, if I'm reading my tea-leaves correctly, the Dow Jones "bull market" is going to need some help to get through the next year. As I look at the Dow Jones' step sum chart below, Grand-Pa is getting tired and cranky at even the thought of making a new all-time high, and the "medicine" Doctor Bernanke is "injecting" into him isn't improving his attitude either.

Here's my opinion on the stock market; it's either been in an actual bull market since August 1982 (1982-2000), or the public has believed it's been in a bull market (2000-2012), for no good reason other than all the financial media continues to pretend that the 1990's never really went away. Well I have news for everyone; the 1990s died when the high-tech stock bubble popped in January 2000, and a massive bull market in the precious metals was born a year later.

Be reasonable; since 1885 no stock market bull has ever lasted thirty years, so why believe this one has? When did it stop? Well when you move on to the segment on market volume below, I make a strong case that our current "bull market" in stocks actually moved on to the big-cow pasture in the sky twelve years ago (2000). For over a decade, investors have been trying to lasso some profits by chasing the ghost of a dead-bull market, while they've been ignoring a rip-roaring bull market in the precious metals.

This BEV chart for the NYSE Financial index actually scares me. After the high-tech wreck bottom of October 2002, everything was pretty much back to normal. People had employment sufficient to fund their living expenses, and maybe some money left over for some fun every now and then. But Wall Street was raising a viper in the derivatives market that soon changed all of this, beginning in the summer of 2007. As you see below, the snake in the derivatives market (mortgage derivatives) turned around and bit the big banks, too, with an 80% decline from June 2007, to March 2009.

So actually, most of the economy was doing okay in 2007, until Wall Street lost control, and let its snake collection (interest-rate derivatives and credit default swaps coming into the money) slither amuck in the general economy. Look at the post March 2009 dead-cat bounce. The NYSE Financial Index saw a huge 144% gain from March to October of 2009, but has been range bound between its BEV -45% and -65% lines for the past three years. What exactly is the problem here? Snakes!

As far as Interest Rate Swaps and Credit Default Swaps are concerned, nothing has changed since 2009. I suspect it's worse now. All this talk from officials of the Federal Reserve (and their Ivy-league fellow travelers) about lowering interest rates to "stimulate" the economy is total bunk! They do, what they do, BECAUSE they HAVE TO preventHundreds-of-Trillions-of-Dollars in derivatives from going INTO THE MONEY!

When yields and rates once again rise up to where they were in October 2007 (as one day they must), you'll see more snakes crawling out of the sewers along Wall Street than is healthy for you, me, and the economy. The possibility that these big banks' share prices will be completely wiped out is ever present (a BEV value of -100% in the chart above).

Gold is correcting here. Gold's price and step sum trends are in agreement that gold is heading lower. But opinions, and trends in price and market sentiment, may change quickly in the next few weeks after this Tuesday's election. The bull market in gold doesn't really care who wins the White House next Tuesday. The problems present in the economic and monetary systems are intractable, and cannot be solved by any piece of legislation by the congress or executive order by the President.

The only guy with the solution to our problem of hundreds of trillions of dollars of promises made by Washington and Wall Street that are impossible to keep is Mr Bear; mark-to-market all assets, and liquidation. And you want no part of that! So if gold looked good at $1888 in August 2011, and it did, it looks ever better fifteen months later at $1677!

The best way to understand what you should do in the current bull market in gold and silver is like this. As wolf bane and garlic protects you from Transylvanian werewolves and vampires, gold and silver will protect you from Wall Street's snakes. So what if gold and silver are going down? Just turn off the TV and stay away from your computer and go read a good book. Count your stack of kruggerands in ounces, not dollars, and you will find it is unchanged.

Gold's BEV plot is down only seven BEV points from its September's highs. I for one, never believed that it would rise up from May's lows of -18% BEV points, and go on to make a new BEV Zero with no corrections in-between. Although I must admit that I did say there was a chance of it doing so. I'm as greedy as anyone else, maybe a little more. And I don't like it when an investment of mine is correcting, but I recognize that a little retrograde advance now and then is actually good for the health of every bull market. With the current situation for the banks in Europe and the United States, and the state of global-government finance, I can't think of a safer place to store your wealth than in gold and silver coins today. One of these days, something really, really bad is going to come across the news wires, and TV sets. So I say keep an iron hand on the tiller, and wait the storm out.

As I've said for the past month, the key to what will happen in the gold market can be found in the silver market. If the bad-guys can't get the price of silver back down to its June lows before silver resumes its bull market advance, they will leave the silver market with a very bullish reverse head-and-shoulders technical pattern for all the world to see.

What does that mean? First; look at silver's BEV chart above. In late 2008, they managed a real panic in the silver markets with a painful 58% decline during the square D correction. But last June (square E correction), they only succeed in getting silver's price to decline by only 45%, and now silver is just below its BEV -35% line. Who knowswhat's going to happen, I sure don't. But I know that if the bad-guys can't manage to wrench the price of silver down below its lows of last June ($26.65), it will give lots of encouragement to the silver bulls who follow technical patterns.

Below, we see how silver's step-sum bear box continues to form. I don't take these boxes seriously until they've lasted for two months or so, and this one is only a few weeks old. Look at how the step sum trend (market sentiment) is breaking upwards, as silver's price trend (market reality) is breaking down. This is what happens in a bear box. Historically, these boxes resolve to the favor of the price trend, not the step sum trend. But sometimes these boxes (bull and bear) fail, when the price trend reverse in the direction of the step sum trend.

This is a very immature box, as it's only a few weeks old. In any step sum chart that plots a couple of years of data, we can find examples of what is now going on in the step-sum chart above that proved to be confusing, with little predictive value of a future price trend change. So unless we see this pattern continue for another six weeks or so, I will continue to expect the next big movement in the price of silver will be up, not down. And six weeks is a long time.


Mark J. Lundeen
Mlundeen2@Comcast.net
It is estimated that the total amount of gold mined up to the end of 2011 is approximately 166,000 tonnes.