Tucker Report

As a result of an irresponsible monetary policy with out of control spending and deficits, there are many asset bubbles being formed, and the silver market seems to be the latest such bubble grabbing headlines. Bernanke has a fear of deflation, which is understandable, but his method of creating “a little inflation” as a cure is sure to have disastrous consequences down the road. And kicking the can down the road is a problem in this country when politicians and monetary policy makers have to think more about re-election or reappointment, than in correcting the problem. Fixing the problem would be painful and insure losses in an election. But destroying the currency and trying to force inflation to defeat deflation will only postpone the inevitable.

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.

Well, another long pause between posts. There are times when market fundamentals and news will drive markets with technical indicators offering little help in trying to figure out which way the market will move next. The above chart is of the IWM, the ETF version of the Russell 2000. It has been a momentum leader for much of the upmove over the last couple of years. You can see how erratic the candles have been lately. The trend can still be considered to be up, at least according to the moving averages used here, but it has been a wild ride. This market started to break prior to the January 28th decline inspired by the events in Egypt. But then the momentum players and other bulls took the sell-off as a chance to get on board the bandwagon, and this index pushed up to test the 2007 high. Since the Libya situation began, with a more durable oil price implication than that of Egypt, this index has been flipping back and forth with violent swings. Of course the other indexes have been doing about the same thing, but this index, with its higher volatility, shows this more clearly. The indicator in the lower sub-graph is simply a detrended price line with a 10 period Bollinger band. This indicator helps to show cycle direction and sometimes identifies waning momentum, aka divergence.

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.

I just read the heading on this post and realized that I wasn’t being politically correct.  I’m really sorry I used the word “killed.” I hope that doesn’t encourage anyone out there to go get a gun and start shooting people. I’d hate to feel responsible for anyone innocently reading this blog and then suddenly becoming inspired to go out and get a gun and start shooting  just because I so carelessly chose a bad word. I’ll really try harder to do the right thing.

It’s really hard to believe that CNN had to apologize for a guest using the word “cross-hairs.” Didn’t they have a show called “Crossfire?” I wonder how many shootings were caused by people becoming violent when they saw the listing for that show in their TV Guide? Don’t both parties use the term “battleground states?” And John Boehner won’t refer to the health care bill as “job killing” and changed it to something a bit tamer. I think the latest version is “job crushing,” but maybe that’s even too harsh. Maybe not. I didn’t see him cry when he said it. The politically correct thought police really must think we’re a bunch of morons. Because one crazy person decided to go on a shooting rampage we now have to change our language, just like millions of us now have to take off our shoes at airports because of one crazy passenger. I suppose Microsoft will have to take out the bullet points feature from their Word software. Some mild secretary might become crazed and violent when she’s typing a letter and asked to put in bullet points.

Back to the markets. The above chart of F5 Networks is not a stock I trade, but thought it was interesting to show how quickly a bubble can pop. This stock was around $18 a couple of years ago, and recently went as high as $145. When a story is well known and all investors pile on an overcrowded bandwagon, the rush for the exit can become a stampede. Certainly a lot of money can be made riding the trend. It is difficult to know when the trend starts to accelerate only for the sake of itself, rather than future prospects based on fundamentals. There are many stocks that seem to be in this situation. It’s amazing to watch talking heads on the financial news shows that suggest these bubbles still have a long way to go, and try to justify their valuations, even calling them fairly priced as their price charts have gone parabolic. When the stock inevitably breaks down the talking heads, along with chat rooms, bulletin boards, and other market commentators suddenly stop talking about yesterday’s stock and are off chasing the next bubble. I’ve felt gold and silver have been in that bubble territory for some time, and there are finally signs that the trend, at least this phase of it, is tiring. I do feel the fundamentals in gold are sound and that the long term bull market is still intact. It just needs to shake off the momentum traders and build a new base for the next leg of bull market.

But how to determine when to get off the bandwagon prior to the bubble bursting is the difficult question with no clear answer. I think technical analysis can be a great help. In the case of the above chart there is clearly an over-bought condition from the double stochastic indicator in the sub-graph. It turned down from over-bought territory prior to the big gap down. However, looking back at the chart over the past couple of years would reveal similar over-bought reading, even with divergences, that did not call a top, with the indicator turning back up and the market going ever higher. But when a market or stock accelerates in a parabolic fashion it is best to not get greedy and to let someone else get the last bit of the move. The above chart even had a double top that would suggest that the parabolic move might be ending. Another thing to gauge is sentiment, which of course is quite subjective. When sentiment is all of one opinion, the opposite opinion is probably the side to start thinking about, especially if the trend is just feeding on itself.

I read an interesting article in the Wall Street Journal last week. I know it is now this week. I’m a little behind in my reading. Anyway, the article talks about how the U.S. is losing ground on economic freedom. You coulda fooled me. According to this article the U.S. is now ranked number 9, right behind Denmark, if you can believe that. I’m surprised it is not ranked lower. With the desires of many on the progressive left who view France as the model we should follow it would seem we would be much lower on the list. France actually came in at number 64. I suppose if the Hollywood left had their way, with their love of Castro and Chavez, we would be much nearer the bottom. In fact Venezuela came in at number 175, with Cuba a close second at number 177. Only Zimbabwe and North Korea were below that, at number 178 and 179 respectively. I wonder if Michael Moore and Sean Penn would give up their millions, their careers, and all their possessions if the U.S. would adopt the kind of government they seem to want for the rest of us. It’s a dumb question. The answer is obvious.

Stock indexes start off the first day of the New Year with a a continuation of the up-leg that started on the first of December. Much is made of the price action on the first day of a new year. I was at the gym today watching CNBC, thankfully with the sound off, and noticed they were showing percentage moves on the first day of the year going back many years, and then drawing some kind of conclusion, or hopeful correlation to where the market would end on the last day of the year. This, of course, is quite silly in the same sense as forecasting the market based on super bowl wins or hemlines. But the market movement has been quite impressive if you don’t look at volume, breadth, various divergences, the economy, housing, progressive politicians, and on and on.  Markets are known to climb a wall of worry, and there seems to be more worry than normal, at least for those who read the news, but none of this apparently is of concern to momentum traders who must be on a bandwagon. Sometimes trends exist based on their own momentum without the need for a positive backdrop. Some will argue that the backdrop is positive because all that matters is rising earnings, regardless of the reason or durability of those rising earnings, and many earnings are rising. My gut says that much of this rally is traders not wanting to be left behind, especially when there are few choices where to park money in this low interest rate environment.

One thing that seems obvious is that this market needs some sort of pullback, or at least a rest. Many are starting to call for this and say they are ready to buy after a decent pullback. As long as the trend remains up that would be the logical thing to do. But one would probably be better off not reading the news. As bullish as everything looks I still must look for signs that the crowd might be wrong and the correct trade might be in the other direction. That’s probably the curse of being a contrarian. Much has been made of the declining volume during the December rally. But December always has a drop off in volume for obvious reasons. I place more weight on divergences between correlated markets. Small caps have been quite strong and seem to have a mind of their own, but I think a more important correlation exists between the S&P and Nasdaq. Many market turning points in the past have been accompanied by divergences between these indeses. You can see the nice positive divergence between the S&P and Nasdaq that occurred leading up to the December rally. I have little red lines drawn on the above chart to show that. This divergence indicated a continuation rather than reversal. Momentum had been stronger on the Nasdaq from the lows last August, but did start to slow down a bit relative to the S&P during the December rally. It did appear almost to be rolling over prior to the gap up today. Now they both seem to be in gear to the upside, but I’ll be watching closely to see if any divergences show up between these markets in the days ahead. A broader divergence could develop despite the action today, especially if the Nasdaq should fall below the moving averages, which are closer together than those on the S&P. So far there are few clues that this market will ever go down, but that could change quickly.

The gold market has also been quite strong lately and has still been grabbing lots of attention and is being well advertised. It has carved out a very well defined three-drives-to-a-high pattern, and is now trying to negate that by driving to a fourth high. Although this time there is some weakness between the price of gold and the price of some of the gold miners. I know there are many who claim that gold mining stocks no longer correlate to the price of gold because of rising mining costs, environmental wackos, new etfs, etc. I still look at divergences between gold and companies that mine the stuff. The chart of Agnico-Eagle (AEM) shows a striking example of such a divergence. This particular stock has diverged more than most. The broader indexes of miners and many other gold stocks are more subtle in this divergence. But it is interesting at a time when almost everyone, including establishment analysts who never followed gold, are now universally forecasting gold to be much higher in the months ahead, at the same time many of the shares of companies that mine gold are not following the price higher, and some like AEM seem to be entering downtrends. I’m still bullish long term and am still holding most of my core position in ABX and a few others, but the relentless bullishness is worrisome, and I think more of a worry than what would be considered a normal wall of worry.

I do hope to be posting on the blog on a more regular basis. I’ve said this before. It’s difficult to find time. Part of the problem is that most of my analysis is geared toward Market Profile and option spreads, and I’m not sure if enough people are interested. Maybe that doesn’t matter. I should just write as if keeping a trading diary, which is what the idea was when I started this. I may move this blog more in that direction in the coming year.

It’s been a while since my last post. It seems to be getting more and more difficult to find time to update. My intention is to post as events occur, and we certainly have had events since the last post. The mid-term elections went about as expected. Actually quite a bit better than expected in the state races. It was a little disappointing on the left coast, at least from my perspective. Not sure how the voters in my state could re-elect Patty Murray, the person who praised bin laden in the days after the 911 attacks for his nice work in building daycare centers, apparently for the children as their parents were off learning how to build bombs and blow up buildings. But that must just be my right wing wacko side coming out. If she said nice things about osama I’m sure he must be a nice guy. And then somehow Reid pulled ahead after being behind in all the polls. How’d that happen? I’m sure there was no union influence. And Barbara Boxer and Moonbeam Brown??!?! It’s really too absurd to make much of a comment. The voters get what they deserve. It’s too bad though. California is otherwise a nice place. But the market was pleased with the results. It had been expecting and pricing in those results for some time.

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.