Last week, with the Dow at 10,389, I asked the question: The Correction, Finally? The Dow closed this week at 10,067, a drop of another 5% this week. Even worse, most days this week the Dow closed at or near the lows for the day; there was no buying pressure at day’s end to save the day. That development does not seem to have caused panic. In fact, it seems to have caused nothing other than an eerie silence.
Year to date the S&P 500 is down 3.7%, and the Dow is down 3.46%. Most worrisome is that the Dow has now closed six straight days under it’s 50 day moving average (click the chart for a larger view):
Looking back over the last year, the index was below it’s 50 DMA for 8 days in July, and 7 days in November, and that was it. So, if we don’t see a significant rally in the next day or two, the existence of at least a minor correction will be confirmed.
As for gold, it hasn’t fared much better:
Since peaking at over $1,200 at the start of December, it has now fallen to $1,081. That level doesn’t worry me, since the uptrend line remains intact, and it appears to be nothing more than a healthy correction. We are probably at a good support level now, but $1,025 and $975 could also be support levels. The picture on gold stocks looks even worse.
G.TO – Goldcorp Inc. is now trading at $36.24, well below it’s 200 DMA of $41.11; support may not arrive until $32.50, or even $20.
So what to do?
Gold stocks look like great buys at these levels, but a market crash will take them down with the general market, so a prudent hoard of cash seems logical to me. I am currently 61% in cash, which perhaps should be a bit higher given the potential for general market weakness ahead.
And yes, I read the happy talk headlines that U.S. fourth quarter GDP was up 5.7%, so everything is great. That’s what the market thought in the first hour or two, but then reality set it, which is what makes me nervous.
Of course the numbers are not as great as reported. Inventories were drawn down, and if you remove the inventory adjustment GDP was up 2.2%; good, but given the stimulus spending, certainly not great. With the trillions in stimulus spending, how is it possible that GDP was not up 10%, or 20%, or more? Presumably the answer is that we are in the middle of a massive credit collapse, and that will pinch off any possible recovery.
This week I got a letter from my credit card company advising me that the interest rate on cash advances was going up from 19% to 22%, due to “market conditions.” Given that interest rates are near zero, it’s obvious the market conditions they speak of are huge defaults; it has nothing to do with interest rates. (For the record, I’m not stupid. I don’t take cash advances from my credit card, and pay my balance in full every month). And let’s not forget that unemployment is still stubbornly high.
That sound you hear, my friends, is an eerie silence. President Obama’s State of The Union speech didn’t save the markets, because speeches don’t accomplish anything. High government spending, so far, has also accomplished nothing. Times are bleak, but the media is still giving us happy talk.
I will watch market action closely this week. Long term I know that gold, and gold stocks, will be higher, so I might put in some stink bids this week, since the time to buy is when others are selling. But it is also time to be cautious, so I won’t invest any money that I will actually need for the next year or two, because further market weakness could carry my stocks lower before they recover. Those are my thoughts, such as they are.
Other than that, we can sit back and listen to the silence.
{ 0 comments }
![[Most Recent Quotes from www.kitco.com]](http://www.kitconet.com/charts/metals/gold/t24_au_en_usoz_2.gif)
![[Most Recent Quotes from www.kitco.com]](http://www.kitconet.com/charts/metals/silver/t24_ag_en_usoz_2.gif)
The Abyss Averted?
by JDH on February 6, 2010
Wow, that was lucky, eh? (For my American readers, “eh”, pronounced “A”, is how we Canadians end every sentence, eh?). Lucky in the sense that the Dow had fallen through 10,000, and was clearly headed for the abyss, until everything got better, and everything was fine. From around 10,000 at 10:30 am, the Dow fell all the way to 9,840 around 2:00 pm, and then, in the last two hours of trading, staged an almost 200 point recovery to close at 10,012, for a gain of 10 points on the day. Whew. That’s only a loss of 5.63% on the week, and only 4% on the year, so all is well.
Thanks to sidewinder on the Buy High Sell Higher Forum for this chart of Friday’s action (the original image is here, or in his post on the Forum).
Strange, eh? 10,000 on the Dow (or 1,000 on the S&P 500) are important psychological barriers, and as the Dow fell under 10,000, all of a sudden, massive buying ensued, and the market closed slightly up on the day.
I guess most of the luck came from the jobs report; everything is great there. In the United states there are just under 130 million workers. Unfortunately that’s the same number of workers there were in 1999, and the working age population has increased by 29 million during that time period. Employment dropped by 5 million in 2009, and that was after billions in stimulus spending. That doesn’t sound good to me.
More numbers: The S&P 500 peaked around October 5, 2007 at 1,557, then fell so that by March 9, 2009 it was at 676, a drop of 56%. From that 676 level to the peak on January 19, 2010 at 1,150 the market recovered 70%. Or, stated another way, the market has recovered about half of what it lost in the 2007 to 2009 crash.
So the market miraculously recovers with two hours to go on Friday, to close just about 10,000 on the Dow. The market has recovered 50% of it’s losses from the peak. Sounds either like a manipulated market (probably), or a technically driven market (also probably). If it’s technically driven, a 50% bounce probably leads to at least a 50% retracement (so if the bear market rally has lifted the market from 676 to 1,150, a 50% retracement would take us back to around 913 or so on the S&P).
So what’s coming? As I said last week, the eerie silence will continue until we break one way or the other. I assume Monday and Tuesday will be up days, and then later in the week we will trend downwards, since that’s what’s been happening the last few weeks. I bought some puts a week ago, and sold them on Friday at a slight profit, and on Monday I may by some calls, hold them for two days, sell them, and repeat the process. Of course I won’t do it with real money; just pennies, for gambling purposes only. The bulk of my money will remain in cash, and will be deployed on better bargains in the coming weeks.
Gold
As for gold, we’ve had a correction, eh? From $1,225 to $1,065 in just over two months, or over 13%. Is the correction over? Who am I, Nostradamus? I have no idea.
If you want a guess, I would assume that support exists around the $1,050 blue up trend line, or around the 200 Day Moving Average around $1,018. So, my guess is $1,000 is good support, and a few dollars below that wouldn’t bother me in the least.
As for gold stocks, here’s the chart of G.TO – Goldcorp Inc. over the last two years (click on the chart to expand it):
Clearly the gold stocks have corrected more than gold itself, as is usually the case with leverage. The decisive break below the 200 DMA has already happened, but with the bounce on Friday the bottom could be in. Or not. My plan is to continue to wait. I will hold the stocks I own, and I will cover them (selling near term call options against what I own). I’ve sold February calls against all of my optionable gold and silver stocks, so if the market goes on a run in the next week I will be leaving money on the table. So be it, at this point I would rather protect against the downside.
I can’t ignore the negative news, so on the sidelines I will stay.
Enjoy the Super Bowl; I’ll see you next week.
{ 0 comments }