Patience – Gold will shine, but a small pullback is probable

by JDH on September 18, 2010

Here is my quandary: The economy is obviously in bad shape. Unemployment is high. Government spending is very high, leading to high deficits, and presumably either higher taxation or a currency devaluation in the future. That’s not good for the markets, so the obviously approach would be to short the markets.

However, despite this horrific backdrop, the markets have not crashed. In fact, the S&P 500 remains stuck in a trading range between 1,040 and 1,130.

The close on Friday, September 17, 2010 at 1,125.59 obviously puts us within five points of the top of the range. (For the record, the market was close on the following days:

  • June 18 – 1,117
  • August 2, 1,126
  • August 4, 1,127
  • August 9, 1,128
  • September 17, 1,126

A technician would tell you that the peaks on August 2nd, 4th, and 9th were an obvious triple top, so it’s no surprise the market dropped all the way down to 1,047 on August 26, 2010. (Easy to say in hindsight, of course). That’s why the 1,130 level is very important in the short term. A break above that level and we may get to test the previous high at 1,172 on May 12, 2010.

Why has the market not crashed? The simple answer, I assume, is because the U.S. government, via the Fed, and the Plunge Protection Team (or the Working Group on Financial Stability), created by Ronald Reagan via Executive Order 12631, is intervening in the markets to keep them afloat.

I have no proof of that statement. I’m just guessing. But, if elections were set to happen in November, I would want to make sure that:

  1. The markets stayed positive prior to September 30, the end of the quarter, when mutual funds report, and when investors in mutual funds get their fund statements; and
  2. The markets remained positive through the November elections, so that investors (which includes lots of retired people) remain happy and vote for the incumbent.

I therefore assume that it’s quite possible that the markets will remain in this trading range, and perhaps even move higher, for the next six weeks, leading up to the November elections.

In the long term the stock market is a proxy for the economy in general. In the short term that’s not necessarily the case. Even in a depression the market can go up for a day, or a week, or even for a few months.

As we all know, the individual investor left the market after the crash in 2008. Most trading today is program trading, done by computers. It is reasonable to assume that the computers are programmed to buy if the S&P 500 breaches the 1,130 level, and if they all start buying, the market will rise. A rising market will attract some of the billions in cash on the sidelines, which will cause a greater increase, which will lead to more buying, and so on.

So, for the moment, although I believe that the market is rising “on fumes”, I’m not betting against it, at least until the election season is over in six weeks. I’ll stay on the sidelines for now.


As for gold, wow, up again.

Gold closed the week at yet another all time high, so for gold bugs, that’s great news. As you can see from the chart, gold has had six easily identifiable “up” waves, as indicated by the blue uptrend lines. Obviously there were a similar number of corrections. What’s interesting is that the blue uptrend periods tend to last for about a month, while the red correction periods are much shorter, lasting for a week or two on average.

As I said last week:

November and December are historically good gold months; September and October, not so much. That leads me to conclude that there is no need to be an aggressive gold buyer over the next few weeks. However, the next six weeks will be a good time to put in aggressive stink bids on the gold stocks you want to own for the more favorable period, starting after Halloween.

Those of you with short time horizons will be saying “hey, JDH, you should have told us to buy last week, because look, gold went up!” That’s true, but I’m not a day trader (or even a week trader, although there are times when I could be consider a weak trader…..). I don’t care what happens over a period of one week. I want to make a killing, and if it takes a year to make a killing, so be it.

I am diligently researching my list of stink bids, on both junior and senior precious metals (and uranium) stocks. But I am not in a hurry to buy. The risk of a correction remains high, and gold appears to be trading at the top of a range, so a brief correction is in order, if not this week, then next.

This week I took further profits on some of my winners, and I will be placing my stink bids in anticipation of a correction.

NOTE: I am not expecting a big correction. I am expecting a small correction in gold stocks, in the order of a week or two, and not much longer. So I will place some aggressive, well below market stink bids, but most will be only slightly below market to allow me to increase my positions without risking “missing the train.”

Thoughts? Feel free to post your comments on the Buy High Sell Higher Forum (and while you are there, read Punter‘s comments; nice to see him back on the Board). Thanks, and have a great week.

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