Tucker Report

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.

I just returned from another trip to New York City. I like to spend as much time as I can there. I must say if it weren’t for all the negative media on the economy one would have a difficult time finding any sign of recession in New York. Everything seemed to be running at full capacity. Expensive restaurants, away from the tourist traps of course, were mostly full. Broadway plays full. I like browsing the high-end watch boutiques on Madison Avenue. There were many customers looking. Not sure how many were buying, but according to the woman in the Breguet shop business was brisk and many of the models with impressive complications were difficult to keep in stock. I know it is a silly status symbol to wear something on the wrist that costs as much as a more visibile and usable status symbol like a Mercedes, but they are fun to look at, much like a painting or rare coin, and it seems a good indicator of the health of the investment community.

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.

Not much has changed since my last post. The gold market is still over-extended in my opinion, although there are fundamentals that will probably support this market for a very long time. The stock market is still swinging wildly from day to day based on whatever traders think the news is meaning at the moment. And bonds continue to stay at high levels when many analysts think this market has no business being where it is.
The above weekly chart of the gold etf shows the persistent uptrend, with a standard error band on the prices and the double stochastic in the sub-graph. Clearly the trend is still up. A previous negative momentum divergence failed to create much of a down-draft. The stalling did seem to let some of the air out of the over-enthusiastic sentiment. The market is trying for another impulse higher. The momentum on this one may start to wane. At least it feels that way. Maybe it is just wishful thinking. I’m very bullish on the long term but get nervous when the the boat is fully loaded on one side. It usually tips over. This market needs to rest and cure some of the wild projections. At least the annoying radio ads are slowing down just a bit. When they disappear it will probably be the next good entry point. I took a little off the table last week, which will probably insure it will head higher as I’m always too early exiting.
I still think that inflation can’t get moving until the employment situation improves. Any fed moves here seems to be like pushing on a string. Prices of most things will keep on a downward path (deflation) until more people are back to work so they have money to buy things. Until then there is no pricing power. Economic uncertainty is probably already priced in to the gold market. I think it really needs inflation to continue the bull trend, and that inflation is a ways away in my opinion. Same thing regarding the bond market. It seemed common knowledge that interest rates had to go higher. What everyone knows and thinks is usually wrong. Interest rates have continued to plummet and may very well stay down for a long time, even though this doesn’t seem logical or possible. The bond market sure looks like a bubble on a chart, but interest rates will have a difficult time rising if prices in general are falling and people are not working and buying things.
The stock market is still swinging with large multiple standard deviation moves from day to day, without making much progress in any direction. This should resolve soon. My inclination is bearish, but if there is a change in congress the market could get a big boost. Perhaps some of that boost is already priced in as most polls and pundits seem to think there will be large democrat losses. I can only hope. Perhaps the market would already be in a severe downtrend if the polls were indicating the other way.
I hope to be posting on a more regular basis. I’ve taken some time off this summer. It’s good to take time off to clear the mind. The market will always be there. Well, hopefully it will. I know there are many in the government who don’t understand the purpose of the markets and would like to tax traders unfairly, which would just move trading to other parts of the world. Hopefully those people will be gone soon.

The stock indexes are still oscillating in large, frequent swings. The chart above shows the absolute value of the close to close standard deviation daily moves based on the implied volatility of the options.The cyan reference line is placed at a 1.5 standard deviation. You can see that such a move appears every few days over the last couple of months, and with increasing frequency. There is understandably much uncertainty in the market. The fear of the much advertised double dip is a real possibility. It is of concern to me that sentiment has quickly gotten so negative that a rally would not be unexpected. Bear market rallies seem to pop up when there seems to be no reason for the market to ever have another up day. I was quite surprised today to hear a cable political show talking about the very much advertised bearish head and shoulder pattern. It seems the world is watching this pattern, even among those who thought the pundits were talking about shampoo. Again, and sorry to sound like a broken record, there is no edge in what everyone can see on a chart. As bearish as I am based on the economy and lack of leadership, I would be surprised if this pattern follows through in textbook fashion.

And regarding politics, I see little need to continue to bash the president and his inept administration. It should be obvious to anyone interested in the news to see he’s doing a great job in becoming the worst president in many years, possible in history. And the news keeps coming. Today I hear he now wants NASA to have its main objective to reach out to Muslims and make them feel better about themselves and their scientific contributions. That sounds like a joke, but that’s what was in the news today. I guess that’s fine, but isn’t NASA supposed to have something to do with exploring outer space? I can’t wait to see what the news will be tomorrow. I don’t see how the financial markets can survive if this idiocy continues from the government. I thought that the previous rally was being fueled by the falling poll numbers. The numbers continue to fall, but now the market is falling. I still think that was fueling the previous rally, at least to some degree. New information came into the market with the European problems. If the Euro stabilizes and if democrats have declining poll numbers going into the fall elections, I think the market could rally again. At least temporarily. I suspect we are in a primary bear market, and the full expression of the bear could extend much further than most can imagine. Rallies can be quite deceptive for those who want to be bullish. It is instructive to study past primary bear markets. But don’t expect the patterns to overlap. Each market cycle will express itself in its own way. It drives me nuts when I see people finding a pattern of swings from 80 years ago and expect that the same patterns will occur today in the same sequence. They never do. But the psychology and the sharpness of the counter trend rallies are interesting to study, and that can be applied to current markets in a general way.

I’ve been trading very little over the last couple of months. I do hope to get on a more regular schedule of updating this blog. But I’ve said that before. Sometimes distractions can get in the way of well intended plans. It is difficult to blog when I don’t have positions in the markets. I’m clearing away the distractions and hope to be fully back in the markets within the next few weeks, so hopefully this blog will become more active. I also have quite a few more technical articles I have partially written. If I can just find the time to finish those and get them posted.

Above is a continuation of the S&P 500 etf daily chart that appeared on my last blog post, updated with the prices as of today. I discussed the possibility of a move back up to the moving averages after the big break. I didn’t expect the snap back rally would stop almost to the tick at those moving averages, but on the S&P it did. The big down candle on May 6th looked like at least temporary exhaustion, so some sort of rally could be expected. What is interesting is how the adaptive CCI in the middle sub-graph stayed over the trending plus 100 line (dashed cyan line) for the duration of the persistent rally, then caused a failure swing around the zero line just prior to the big sell-off. Then when the rally back up to the adaptive moving average lines occurred, it failed to push the CCI back into positive territory. It then turned back down from a negative reading just as prices stalled at the moving average. I consider the darker blue moving average to be the main support and resistance line, and the combination of the two determining the trend direction. I also added the double stochastic in the lower sub-graph which also gave a very timely signal of an over-bought condition within the new downtrend. There seems little doubt that the trend has finally come into sync with reality. Trends that only sustain themselves for the sake of their own continuation, which are divergent from the condition of the economic and political environment are doomed to succumb to a quick rush for the exits as soon as the music stops.

A quick thought on moving averages. I read many opinions on the market and technical analysis. Almost everyone I hear or read uses the 20, 50, and 200 period moving average. When I ask them why, their only response is “that is what everyone uses, so it becomes self fulfilling. I have a problem with that line of thought. First, it is true that any of those three moving averages seem to provide support at certain swing points, and once penetrated they do seem to give a good summary of the trend direction. But one can pick any period moving average at random and also find that it will provide support at certain swing points and provide a good indication of trend. Probably different swing point and trend indication, but any moving average will appear to turn back a swing occasionally, and certainly will define a trend. And most randomly chosen averages will define a trend if it happens to be in sync with the ever changing cycles of the market. In fact a moving average is nothing more than a mechanism to filter out the shorter cycles. The problem is the cycles keep changing. So no single moving average can be perfect. So many traders use a combination of several moving averages in the hopes that one will be in sync with the market. That can be fine as long as the trader understands what the moving average is really doing. Blindly following common moving average lengths because everyone else seems to be using them is not logical in my opinion. There is no edge in what everyone can see. I don’t see how it is logical that a trend will turn around when it hits the 50 period moving average on the assumption that everyone will act in some way at that point. That just doesn’t make sense. If there were an edge in such an approach the market would quickly eliminate that edge.

I find it much more useful to use indicators that attempt to adapt in real time to the ever-changing market cycles. The problem is trying to find a method that extracts the cycle the market is attempting to express as that cycle is being formed. If markets maintained the same cycle over a long period it would be easy to pick the best moving average parameters. But the cycles are a constantly moving target. The best work I’ve seen in extracting cycles as they are forming is the work by John Ehlers. The moving averages I’ve been using on the blog are his Mesa Adaptive Moving Average. I just use the default parameters as he has written the formula, which is widely available on the interent, in one of his books, and on his website, as I recall.

And a quick note on gold. This is one market that has fundamentals supporting the uptrend. But a negative development is the failure occurring this week as the market tried to break-out of the swing high from last December. The trend is still up, but so far that break-out looks like a trap. The daily chart is sitting right on the moving average line, so I’ll be watching to see if it provides support. My guess is that the market needs to clean out the excessive bullish sentiment, which would probably be a healthy thing. I’ll try to update as this develops.