A New Bull Market?

by JDH on October 29, 2011

Is it possible that we have entered a new bull market? Two weeks ago I asked “Is an Inflection Point Coming?” You could make the argument that we reached that point, and a new bull market has started. Let’s review the evidence:

First, the Dow has broken out of it’s three month trading range (10,600 to 11,700) (click to enlarge the chart):

It would now appear that the next resistance levels would be the double top from July, around the 12,724 level. From there it’s only a short trip to the high for the year of around 12,810 on April 29.

Hard to believe, isn’t it, that on October 4, 2011, a mere 19 trading days ago, the Dow was at 10,434. That’s a 17% gain in less than a month.


Obviously everything is fixed in the world, and we have no more worries. The stock market is up, gasoline prices are down, so consumer sentiment is at unexpectedly high levels. And it’s not just the Dow; the S&P 500 Index had it’s best month since 1974, and the Euro is up!

For those of you who don’t remember 1974, it was a really crappy year:

Fortunately 1974 marked the bottom of the bear market, with the S&P 500 hitting 62.34 on October 4, 1974, and it’s never looked back.

So, is this the start of a new bull market? Is October 2011 just like October 1974, where we reach the bottom, and never go lower again?

If you assume a bull market is a 20% gain, we aren’t quite there yet. Of course the S&P 500 was 1,353.22 on July 7, 2011, and then it was 1,078.37 on October 4, 2011, for a drop of 20.3%, which technically is a bear market.

So, this month, we have had both a bear market and a new bull market?


What we have had, obviously, is volatility.

So, to answer the question, is this a bear market, or a new bull market, my answer is:


We have a saying here in Canada: if you don’t like the weather, wait ten minutes and it will change. Back on Canadian Thanksgiving Day, October 10, it was warm, and I went for a swim in our outdoor pool. Yesterday morning, October 28, the temperature was below freezing, and there was frost on the ground. (And yes, the pool is now closed for the season). It would appear that our weather is as volatile as the stock market.

But a new bull market? Call me a skeptic, but I have my doubts. We still have high unemployment and massive deficits, and the Eurozone problems have not been solved; they’ve simply been papered over.

The precious metals markets appear to agree.

Gold traded in the 1,600 to 1,700 range from September 26 to October 24, when it exited the range to the upside. That’s good news for gold investors. For the first time in more than a month gold is now above it’s 50 day moving average, and even during the correction it never dropped below it’s 200 day moving average. That means this correction was a great buying opportunity.

Let’s look at more charts. Here’s gold, over the last six months:

Here’s HUI (the Amex gold bugs index, a basket of gold stocks) over the last six months:

In October, HUI has bounced from 500 to 582, a bounce of 16.4%. Gold has bounced from a low of $1,600 to $1,744, a gain of 9%. Obviously, finally, gold stocks are demonstrating move volatility than the gold price. That’s good, because that’s exactly what should be happening. We invest in gold stocks for the leverage.

An even nicer chart, silver:

After bouncing around in the $30 to $33 range for the last month, silver has broken out of the range, ending the week at $35.37. When you consider that silver traded as low as $26 on September 26, that’s a bounce of 36% from the low, a much bigger swing than gold, or gold stocks.

Hopefully this indicates that the silver manipulation is ending. I assume the bounce was the shorts covering in advance of proposed position limits (which probably won’t come into force for many months, but it’s a start).

One final chart, SVM.TO – Silvercorp Metals Inc.:

Silvercorp Metals

Silvercorp Metals Inc.

On October 8 I said that Silvercorp Metals is a strong buy, because I assumed the short sellers would be proven wrong. At that time Silvercorp was trading in the $8 range. Today’s it’s at $9.80, thanks largely to the report by KPMG, commissioned by Silvercorp, that the short sellers were full of crap. Silvercorp was over $15 earlier this year, and I see no reason why it can’t regain those hits. I’ve taken a significant position, and I’m holding.

So, to conclude:

  • gold, good
  • silver, better
  • gold and silver stocks, probably even better than the metals in the medium term
  • stock market, could be a new bull market, but I think a drop of 20% is just as likely as a further 20%, so take your profits when you have them, and keep some cash ready.

Finally, last week I asked where you would invest $100,000. So far precious metals are leading the poll on the side of this page, but if the stock leverage continues, they make take the lead in the future. I favour a mix of both, but if you are worried about risk, you can’t beat physical metal.

Thanks for reading; see you next week.

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