Of course these very low yields are for the perceived safety of government dept. There’s little intrinsically safe in any government dept other than the fact that they can print their own money when they run out of revenues, unlike everyone else. But there is a wide spread between government dept and various levels of corporate dept, especially in the lower rated issues. Investors are being paid high yields relative to the risk on the lower rated corporate side. These are unusual times, and they may be around a bit longer than most traders think.

It would seem obvious that with governments running up dept like crazy, with the eventual need to monetize that debt, that inflation would be starting to get priced into these markets, with yields starting to rise and bond prices dropping. Yet just the opposite is happening, so far. Bernanke has said that interest rates will stay at these low levels for at least another year or more. But markets tend to discount the future and so far they aren’t discounting much inflation.

Perhaps deflation is the larger fear. Perhaps the analogy of pushing on a string is still relevant. Until jobs and spending resume it will be difficult to have any pricing power no matter how much the governments around the world try to destroy their currencies. The resumption of more normal times may be a long way off.

Most traders I know, and some very smart traders, are heavily short bonds with very large and mounting losses. They all seem to have thrown their money management out the window. It seem so obvious that this bubble will soon burst, but what seems so obvious is usually wrong. The weekly chart above shows that the trend is still up. The momentum indicator in the middle sub-graph got a bit overbought and has kinked down, but the trend indicator is still up and the adaptive CCI in the lowest sub-graph is still hovering around the +100 line, indicating the trend is still alive. Meanwhile, I’m leaving the short side of this market alone from a trading point of view until these indicators indicate that the trend has changed direction. And I’m parking some money in the high yield end, as those spreads seem to be well compensating investors for the risk, especially in diversified bond funds (as boring as that sounds).

But what about technicals? The above chart is of the weekly etf of gold. I like to use the GLD etf to avoid having to create a continous contract of the futures. The GLD is close enough. You can see blue moving averages have remained bullish through the entire chart, and that whenever prices approached the blue line that a good entry point on the long side presented itself. We are once again sitting on that blue line. However, the last weekly candle is perhaps too large to expect support to hold. The middle indicator is the double stochastic and it defines cycles fairly well. Upturns from oversold, or the lower dashed line, represented good long entries. I use this only to enter in the direction of the trend. However, sometimes will use the overbought readings above the upper dashed line to exit, especially after a break of the upper dashed line. The lower indicator is the adaptive CCI. It has stayed above the zero line for the entire chart. When it is above the plus 100 line, which is the line that the indicator is still holding above, this suggests that the trend is strong. However, when the indicator crosses above the plus 200 line, which is the upper dark cyan line, prices are usually extended and ripe for either a pullback or a pause in the uptrend.

It would be very bullish in my interpretation of the gold market if that blue support line were to hold and then the cycle (middle indicator) were to turn up along with the CCI remaining positive. I really don’t expect this to happen because of the severity of the decline. It seems that the bubble still has more air to let out, but that’s just a feeling. Until the uptrend as been structurally broken on this chart, I’ll still trade from the long side, even though I would rather from gut feel be on the short side. I’ve learned not to trade against the trend, and that is still up according to the weekly chart, despite the huge drop last week.

There are times when technical analysis can help to make trading decisions, and then there are times when market uncertainty along with multiple standard deviation moves makes even the best analysis extremely challenging. We are in a period now that makes trading, at least for swing and position trading, very difficult. It could last a while longer. I plan to sit this out until I see more normal markets return. Whatever comment I could make on the market would probably be invalidated by the market action the next day, as these triple digit swings continue to knock traders off both sides. Perhaps day-traders are having fun with this.

Regarding gold, that asset bubble became much larger than I thought possible. Nothing much has changed my opinion. I good washout was not a surprise. A clue, as I’ve mentioned many times, was the huge divergence between the price of gold and the price of the gold miners. Many believe that relationship no longer is valid, but I think they we justifying the divergence, thinking, as always happens at tops, that “this time is different.” I’m still a bull long term. When the radio ads disappear I’ll jump back in.

Just a side note for any bloggers out there, I had a terrible run-in with Getty Images. I helped a nursing organization put up a small website. The site was for about 30 nurses in the Northwest to announce meetings and collect via PayPal their $12 membership fee. Nothing was being sold on this site, and the organization is non-profit. On the home page we put up a generic photo of the Seattle skyline copied from Google images, with no reference to a photographer, photo bank, copyright, or anything. The organization received a very nasty letter from Getty Images demanding that the photo be taken down and also demanded a settlement amount of about $1200 for the past usage of the image, and the threat that if payment wasn’t received within 14 days that the matter would escalate and the organization would face a lawsuit. Now I can understand that if someone were profiting from the use of one of their copyrighted photos that a demand for settlement would be in order. But if a small non-profit website accidentally put up a photo, I would think that a cease and desists letter would be in order. But a threat and demand for $1200 is more like extortion. The photo was immediately taken down, of course, but Getty Images would not remove the demand for the money. After many back and forth emails, they asked for proof of their non-profit status, which was supplied. Getty then cut the demand settlement in half. Then I got involved and went through the entire Getty archive of Seattle skyline photos, and could not find an exact match between the image they accused the nurses of using and any of the images in their catalogue. I sent them an email with my findings and said the nurses would settle if they could explain the discrepancy between the image they used and the one they accused them of using. As it turns out the image the nurses used was shot at a different time of day, had a different cloud pattern in the sky, had more of the skyline than the Getty image. It was obviously a completely different image. So they eventually acknowledged their error and said they would drop the case. But it left a really bad impression of Getty Images. As a result I took down all the images on my website, just in case one happens to be something that is in the Getty Images data bank. I did a Google search and found horror stories of people using a simple little image on multiple pages and then were handed a bill for tens of thousands of dollars. One was even a student project with no commercial intent, and Getty Images wouldn’t budge on their demand. They are really bastards. So if anyone is reading this, make certain you have no images that can in any way be linked to Getty Images. They’ll find the images eventually. They apparently have some way they scan the entire internet looking for matches. I suppose that method isn’t so perfect, as in the case of the nursing site where they made an error. But it was a real pain to sort it out with them.

This is a specific type of trade to do during a specific type of market action. Just to be clear, I’m not in any way suggesting this type of trade after a bubble bursts or during more normal or range bound markets. It is only a tool to keep in mind when a market has a speculative bubble such as was the case in silver recently, or another type of unusual movement. This information is for educational purposes only and no trade recommendation is implied or should be inferred.

Now that the uptrend in silver has been broken it would be normal to expect rallies up to resistance. But where is resistance? It is difficult to find logical reference points when the previous uptrend was of a parabolic nature. I will be watching the moving average (darker blue line in SLV chart above) for a clue. There is no magic in the formula for this moving average, but it does attempt to adapt to the current cycle of the market and offers a good reference point when there are few other clues.

One thing I noticed is the symmetry of the two impulse moves defined by the two red lines over the price bars in the above chart of the silver ETF. These lines have been drawn both as regression lines and are of the same length. The little pullback in between these lines is subtle, but I think it is enough to suggest that these two impulse up-moves should be counted separately. If so, the current impulse may be at or approaching an end, not necessarily the end of the bull market, just the end of the current impulse. Before reading too much into this, I’d caution that these symmetrical impulse moves do seem to jump out of the charts when they succeed, but the failure rate is high, and all patterns seem to disappear from notice when they fail. It is easy to become fooled by randomness. But these symmetrical impulses, like other chart patterns do get my attention and often they do become a piece of the puzzle in reading market clues.

The above chart looks at a similar situation from a longer term perspective. This is the weekly chart also with two longer-term impulse uptrends described by the red regression lines. In this case there is a larger pullback that occured for most of the month of January. This time the first impulse to the left is of a longer duration than has occured so far on the current impulse to the right, suggesting this impulse has more to run if symmetrical impulses are in the works. On the other hand, the angle is quite steep, which could suggest this impulse could become unsustainable. There’s always an “on the other hand” when analysing charts. Again, the adaptive CCI is strongly bullish, as it would be with this strong of a move, and may not give much of a warning of a turnaround .

Another thing I always look when trying to figure out the precious metals market is divergence between the metal and the companies that mine it. The above chart shows Silver Wheaton in the lower part of the graph, which is a popular silver miner. You can see how this mining stock has failed to participate in the current uptrend in the underlying metal. Pan American Silver has even shown more weakness, and was down 93 cents today with silver being up by as much. Of course, many company specific issues can cause these divergences, but this seems to be occuring in many of the silver miners. However, (on the other hand) these divergences seem to be less reliable than in years past, probably largely due to the effect of the ETF market.

As I’ve said many times on this blog, it is dangerous to try to pick tops and bottoms. It is much safer to trade pullbacks once a trend is established, and clearly the trend is up in the precious metals. But it is also dangerous to overstay a position in an extremely crowded market. I’ve know many people who have been burned by the silver market over the years in previous bull runs. Almost as many as those burned during the great bubble dot com bust of a little over a decade ago. At least the precious metals market is based on something other than hot air, as was the case with most of the dot com stocks. This is most likely a very long term bull market, that will persists as long as politicians do what they do best. Maybe it will end when we get change that we can really believe in. But don’t hold your breath.

The chart above is the weekly silver ETF. After an extended period of consolidation this market broke out to the upside, and has more than doubled in a few months. And that launch was a couple of months prior to the announcement of QE2 (not the boat). You can see how the adaptive CCI (middle sub-graph) quickly went above the bullish plus 100 line and has stayed there. Also, there was an oversold inverse head-and-shoulders in the double stochastic indicator in the lowest sub-graph at the start of the big move. There was one consolidation, forming a bull flag at about the mid-point of this trend. Now the stochastic is in over-bought territory and turning down a bit, along with a still bullish and trending CCI. The daily chart (not shown) shows a very similar interaction with these indicators, however the daily bar show an outside reversal day to the downside, which has a bearish implication if one believes in these patterns. Like all patterns they work about the same as a flip of the coin, but they are interesting to watch as they do sometimes precede spectacular reversals.

So what does all this mean, if anything. For me, as much as I think this market is long overdue for a correction, I don’t want to try to pick a top and go short, at least not yet. I prefer to let someone else pick the top, and to wait for the trend to turn down and then sell the rallies back up to the moving averages. Of course the downside of this thinking is that sometimes the market just collapses and good entry points just don’t materialize. If one were to look at the great silver bull market of the late ’70s to early 1980, one would see a run from $5 an ounce all the way past $50, at least in the futures market, and then a straight drop all the way back down. Of course this was a different time. The market was being cornered, and then regulators changed the rules at the peak, with the peak only lasting a short time, and then limit moves for many days to the downside. Now we don’t have anyone cornering the market, but we do have a fed chief who is engineering inflation and destroying the currency, and money is pouring into just about everything solid, well, maybe with the exception of real estate. But what about supply and demand? Is there a silver shortage as there seems to be in some commodities? There may be a shortage due to the demand to have physical silver back each share of the ETF. But keep in mind that this shortage can quickly turn into a surplus if holders of the ETF reverse their trade. So things are different this time. But they are also the same.

As bullish as I am on the long term fundamentals of both gold and silver, I try to keep an eye on how crowded the trade is, and know from lots of painful experience how quickly greed can turn into fear. I don’t know, and nobody else knows, if this market is putting in a top. This market was under $10 near the end of 2008 and went past $40 last Friday. That was enough for me to take half my silver eagles to the coin shop Friday after the close to lock in some profits. There were many people there buying. I asked the coin shop guy if there were more people buying or more selling, and how high they think silver will go. He said everyone was buying and that silver should go past $50 by next week. After hearing that I felt like getting the rest of the silver out and selling it.

I hear many justifications for higher prices, and of course the destruction of our currency is a legitimate and sensible reason for a continued bull market, but markets can and do become overheated and test prices beyond what the fundamentals can support. The idea of buying high and selling higher works for a while, but buying low when nobody want it, and then selling when they are all waiting in line to buy seems like a more sustainable strategy. And one more point: I’ve been hearing on the radio nearly double the number of ads for silver than for gold. One common justification I hear is that gold historically sells for 16 times that of silver, therefore silver has to climb to way over $100 an ouce just to get back to that ratio. That is utter nonsense. Each market trades on its own fundamentals. Inter-market relationships, even in so-called highly correlated markets, tend to fall apart as differences in supply and demand shift and change in each market. And of course that 16 times ratio theory doesn’t take into account what would happen if gold fell rather than silver climb to achieve that ratio.

And one final point is that the fed has nowhere to go regarding any further lowering of interest rates, and it’s unlikely there will be more QEs. If there is not to be a QE3 and QE4 and QE5, and if the inevitable interest rate uptick happens, especially if unemployment is still high, these asset bubbles could all pop very quickly and be followed by deflation. Uncle Ben surely understands this, but what can be done to prevent it? I sure don’t have the answers. But I do know it’s easier to get out of bubbles as they are inflating rather than waiting until they pop.

There are many indicators that work very well at certain times in certain market conditions. But there are no indicators that work well all the time. And at a time like this when news is driving the markets, it is best to not rely too heavily on technical analysis to guide trading decisions. The current market is especially difficult. The fundamentals are not supportive, in my opinion, of the kind of bull market we’ve seen over the last couple of years. But the reality is that the market has gone up a great deal and part of trading is to not fight a trend however illogical it may seem. It seems the buying is partly inspired by near zero interest rates resulting in a situation where there are few alternatives to earn a return, most likely with much of the money feeding the trend that would normally be going into safer investments. Then there are the momentum traders who en masse can keep a trend going just for the sake of the trend. Both these conditions almost always end poorly. Now add an increase in oil prices to an already high unemployment rates and mix that in with an administration that is becoming more inept by the day, and that all makes me wonder why anyone would pile onto this bull bandwagon. Yet people are. On almost every dip in the market the buyers come rushing back in. Lately all it seems to take is a few pennies dip in the price of oil to encourage the buyers. When you watch the market tick by tick all day you can sense the urgency of the buying. In markets of the past the buying would seem labored like an uphill climb, and then the sell offs would be characterized by a sense of urgency. This market seems to be just the opposite. It’s eerie. Is this an aberration or something to get used to? I don’t know. Many analysts think it is an artificial condition engineered by the fed, and I’d have to agree. Be careful of the downside. It could emerge in a more serious way. One of these days a down candle might not attract buyers.

The above chart shows one of the big momentum stocks of this bull market. In 2008 (off the scale of this chart) the stock was trading under 20, and on Valentine’s Day of this year the stock almost hit 250. So it’s over a ten bagger. Today the stock just filled that big gap up from January 27th. The trend appears to be reversing, even on a big up day in the overall market. For a long time one could just buy all the pullbacks to the moving average lines and many would have worked out profitably. You can see the last couple of days the stock moved up to the declining moving average lines and has since fallen back. I’m only showing this stock as this pattern seems to be showing up in many of the favorites of the momentum crowd. And many of these stocks were very crowded with bulls. And of course when that’s the situation, something’s gotta give.

Then the markets got a further boost from QE2, which is more appropriately being called Titanic 2 by many commentators. I guess the market thinks by destroying what’s left of the US Dollar that stocks should be valued, or at least priced, at higher levels. Those in power will do everything they can to inject a little adrenaline into the system rather than to cure the underlying problem. Cure would be more painful short-term, and nobody wants to take the blame. There seems to be no end to the cycle of monetizing debt. But there will be an end at some point, and that end will be much more painful when it arrives. It will be interesting to see if this new crop of Republicans can make a real attempt to get spending under control. If so their might be hope. Although they’ll likely suffer in public opinion for doing so. All I know is they can’t keep printing money. Bernanke seems too obsessed with the threat of deflation. It seems like we are already in the midst of deflation. The common wisdom (there’s an oxymoron) is that all this stimulation will cause inflation, and that gold and other commodities will keep on climbing. It seems logical. The dollar isn’t the only currency falling. It seems logical that gold can only keep going up. That trade has about as close to a 100% bullish opinion by traders as I’ve ever seen. Also bullish are of course copper and other industrial metals fueled by China demand in addition to the falling dollar. I have to think that everything just said, and everything being said in the financial press, is already priced into these markets. With the trade so one-sided I have to think that there must be something wrong with the common wisdom. It is possible that all the stimulation in the world might not be enough to fend off deflation. If the job market fails to improve and if housing prices keep sliding it would be difficult to make a case for inflation any time soon, even with the concerted effort to destroy the currency. Maybe I’m just indulging in my contrarian nature. Maybe inflation is just around the corner and all the traders buying into that concept are correct. Maybe it will be different this time in that all the traders crowding out the same side of the trade will all be correct and all make money. I’ve never seen that happen. But there’s always a first time.

Regarding the stock indexes, way up at the top of this post is the chart of the S&P 500 ETF. It shows the clear uptrend via the blue adaptive moving average lines. In the middle sub-graph is the adaptive CCI, this time with a slight smoothing to smooth out the bumps a bit. It shows that the CCI went above the plus 100 line just as this uptrend got started, and mostly stayed there, with the exception of a couple of brief dips, until just a couple of sessions ago. The double stochastic in the bottom sub-graph shows some nice entry points when it dipped below the lower reference line while the CCI showed a trending condition. The stochastic is once again below the lower reference line, however this time the CCI is nearing its zero line, and price is about to test the uptrending moving averages, as well as a swing point high from about three weeks ago. It will be interesting to see if this uptrend starts to roll over. If it does there will most likely be more rally attempts, and perhaps more two-sided and overlapping price action. I hear many analysts talking about a year end rally, but those usually follow weak September of October markets. This time the market has been straight up during those two months. There might not be enough left for a further rally into the end of the year. It will likely try, so I’ll be keeping an eye on a bounce off the moving averages to see if it stalls out on a potential re-test of the highs. If that re-test, should it occur, doesn’t attract volume then it is likely to re-test back down with perhaps a more meaningful decline to follow.

I will try to update as this unfolds. No promises though. It seems the S&P comments are also applicable to the gold market.

But back to reality in sleepy little Seattle. Real estate prices seem to keep dropping. I see people still turning over the keys to the bank, with the bank offering at what seemed like unheard of prices a short time ago, with still few buyers to snap up the bargains. If they do transact at those low prices then comparables in the area will be lowered, thus driving down prices even further. I have no idea if a bottom is at hand. It seems like a good time to buy with low prices and low interest rates, but all I see are for sale signs. A few years ago you’d see a for sale sign and a week or so later there would be a sold sign attached to it. Now all you see is a new price sign (polite way of saying price was too high and now trying a lower price for the third or fourth time) and this seems to go on for a year or more for many properties.

So how does one make a case for inflation. If there are few jobs and housing prices probably not enabling tapping equity, where will pricing power come from? Will conditions improve if Republicans take over part or all of congress? The stock market seems to think so. There seems to be a bullish bias according to some studies when a democrat president has a congress from the other side of the aisle. Gridlock is good when it comes to government it seems. The general stock market seems to like the poll numbers and probably will until earnings start being released soon. But gold is entering what seems to be a vulnerable price area in my opinion. I will point out that I’m always way too early in seeing bubbles. It is very difficult to judge when greed will become overtaken by reality. It is much easier to identify a panic bottom. Tops can give many false divergences as traders are more complacent as they are making money from a rising trend. I think the bullish argument on gold makes sense from the standpoint of currency and fiscal irresponsibility. Perhaps there is hope that a change in congress will create change we can believe in regarding spending. Not sure how long that hope will last even if congress changes hands. If the past is any indication it will probably just turn out to be more broken campaign promises. But whatever happens with the election, the markets, and especially the gold market, still has to deal with the real risk of continued deflation, continued high unemployment, continued near zero interest rates with fear of rising rates at some point accompanied by a rising dollar, and an over crowded bullish trade in gold particularly, and in some other sectors of the market.

When I first started trading gold there was no gold market in the United States. One had to either trade silver, numismatic gold coins, or gold mining stocks. Back in those days there was an understanding of a normal ratio between gold and silver, and a leverage assumed between the price of gold (in London as US prices were fixed) and that of the price of the stocks of companies that mined the stuff. Many of the better trading gold stocks had about a 3 to 1 leverage to the price of gold. Most of the gold bull market letters (there were few serious stock analysts following the stocks of the barbaric relic) would advocate buying the best quality companies. The better companies had the lowest cost per ounce to mine the gold. But during the great gold and silver bull market of the late 1970′s, the best mining stocks had relatively mostest upmoves. The big winners were the crappy stocks that had very high costs per ounce. They were much more sensitive to changes in the gold price. So it is difficult to determine how much a particular stock should move based on a price change in gold, as they all moved at a different rate. But it was assumed that the mining stocks would in general lead the price of gold, both up and down. That relationship, like many inter-market relationships, seems to have fallen apart in the current environment. If relationships and ratios were stable it would be easy to make rules and systems and trade accordingly, but even then the edge would soon be lost.

Some will make the case that now there are many more vehicles to chose from if one wants to participate in the gold market, so mining stocks have less importance now than in previous cycles. One can buy an ETF without the risks of rising labor costs, environmental restrictions, unstable governments, BS from the CEO (the biggest risk imho), etc. But being from the old school of thought, I still like seeing confirmation from the mining stocks. This rally sure seems to be lacking that. The above chart shows the ETF for gold in the upper graph, and the gold stock mining index in the lower part of the chart. The last few weeks have pushed the mining index higher along with gold, but the index is still lower than the peak drawn back in March of 2008. If one were to look at an index of gold mining stock that did not hedge their production, one would getting a little better correlation between the mining stocks and the metal. Some companies sell forward some or all of their output to lock in the price, which would be fine except if the price keeps rising like it has lately, those companies hurt their earnings. But even factoring in the hedging, few mining stocks are showing leverage to the price of gold. Some of the newer mining stocks are doing better than the older blue chips as they are seen to be in their growth phase. It seems unrealistic to think in terms of growth when analysing a gold stock. It is difficult to think of long term growth for a gold mining company, at least in the sense of a Microsoft or Google when they were in their growth phases, when a company just has a hole in the ground and is depleting their limited assets every day. Well, maybe it is not as simple as that, but I think you see my point.

The relationship between the price of gold and the price of the companies that mine gold is only one piece of the puzzle in trying to figure out where prices might be heading. I read in Barron’s this weekend that one analyst now thinks gold won’t be in a bubble until it gets to over $5000 per ounce. I thought I heard people saying $2000 just a short time back. It seems when bubbles get going the numbers keep getting bigger and bigger. When markets go exponential it appear there will never be a reversion to the mean. But the mean market always does, and if it is a bubble popping it can overshoot to the other side by an even greater degree. But that’s just my opinion.