The Eerie Silence

by JDH on January 30, 2010

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.

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