-- Posted Tuesday, 20 February 2007 | Digg This Article
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On 12/16/06 I attempted something I had never before tried (and likely never will again). I attempted a call on near term market direction based on several ratio charts and their perceived implications. If it is true that we are all students of the markets, I thought I would grade myself on this mostly ill-fated exercise because if you're going to put out stuff like this, that mostly falls flat on its face, I suppose you should also dig it's stinking carcass back up and answer for it. Self grade = 'D+'. I will break it down by its segments to show why I came up with this.
First up is the gold-silver ratio (GSR). Per the original chart it was noted to watch for the AROON indicator to cross into a positive trend on the daily, which it promptly did. Then it flopped back to negative territory within a few weeks, where it currently resides. In looking at a current version of the chart I still see the ratio above its low and quite possibly consolidating before another up leg. But that is certainly not a given and the ratio is back below the previous support at .48, which could act as resistance. As noted, when gold outperforms silver (along with all the other commodities it is currently outperforming), it is a signal that the economic environment is headed toward contraction. Since I did note that it would be important for this ratio to "confirm" a new trend and did not actually predict one, I'll cut myself a break with a B-.
The next ratio was the TNX-IRX ratio, or yield curve. Now here I really got the juices flowing with a trend reversal, break of resistance and what looked like a great bottom on the chart. For good measure, anyone reading the blog was treated to some Monty Python videos with sheep (bond herd) jumping out of trees. Well, that ratio has reverted to a new down trend and the best my stance can hope for is probably a double bottom. The bond herd appears to once again be calling the "all clear" as the Fed has inflation whipped and the economy is slowing. I am not so sure on either count, but the reality is that the ratio has flopped and I did not expect this. Grade D.
The next chart was a long term monthly chart of the same ratio. It shows nothing having changed with the indicator residing above the support from 2000, and we will maintain the view that whenever it does turn up it will be positive for gold and gold miners and a distinct negative for the broad stock market. Since this was not a timing tool and was not weighted heavily in the outcome of the original article, we will take a B+ grade with the caveat that its impact on the final grade will be muted.
Next up was the chart of the Dow, complete with bearish divergences and an ill-fated timing attempt based on what happened the last time the gold-silver ratio reversed on a daily chart. The result? A total mess. I will take a D- with an F being avoided because it is a neat looking chart :-). The Dow floats ever upward as I write, and in truth, this thesis fell apart when the GSR went into hibernation.
Finally we have the ratio that most of my work has been based on, the Dow-gold ratio. Here a top for the Dow was projected at 13,067 (later amended to 13,007). This was based on what looked like resistance in the ratio at 21.5 ounces of gold per Dow unit on the chart. I strongly believed, and wrote many times that the 605 area (59-60 for GLD) was important support for the metal and this held true. Where the analysis blew itself up was in the ratio's resistance projection as well as its timing. It hit 20.5 and reversed lower and the Dow remains in a short term downtrend vs. gold even as it continues to make new highs in nominal USD. The support for gold at 605 along with XAU holding 131 as noted on the blog were instrumental in my holding all positions (with white knuckles at times), but that gets mostly thrown out the window because my assumptions were incorrect and I went on to speculate on a major yield curve bottom and shorting opportunities for the broad market. I am pleased that gold is doing quite well and the miners look to play catch up as their bottom lines stand to benefit from gold's out-performance vs. just about everything else lately. But this cannot save me from a generous C-.
Notes: The following was added the next day and may still be applicable although as noted, the path taken to get there will have been much different than I speculated:
PS: Edit (12/17/06): Based on some feedback, I may not have made the above totally clear. I am looking for gold to hold support just above 600 before the entire complex heads higher and a top in the Broad markets, which may possibly be a very important top.
So ends the career of a would be market seer. I cannot see. That is why I will continue to listen, which is my MO. Take it all in. The good, the bad and the just plain ugly and run it through my own ongoing technical and fundamental theses which are subject to ongoing revision and finally it is on to the contrarian psych profile and gut test. It has worked so far. Lord knows I am not going to get it done on my grades alone.
Here's the Call top
December 16, 2006
Note: See Blog entry titled Slight Adjustment to Dow Target dated 12/20/06.
Don't we all wish we could know what we know today but bring that information back in time and then really clean up? Well, we can't, but for the purposes of this analysis the next best thing is a combination of history, logic, simple math and of course, charts. Now that Stockcharts.com is finally back up and running, I got right down to hitting the ratio charts after the impulsive reversal in the Gold-Silver ratio. It felt as though something important happened yesterday and indeed I think did. Giving credit where it is due, Bob Hoye and his staff and Steve Saville have been very aware of the Gold-Silver ratio and its implications for a long time. I have simply gotten behind them and am drafting. We will use the GLD-SLV ratio as a proxy here as Stockcharts has not yet updated yesterday's gore fest in the metals. When gold starts to out-perform silver, it can be a signal that a pronounced economic contraction is upcoming. It will be important to confirm that this is a trend in the making and the impulsive nature of this move argues that it might be.
For further evidence that something is afoot in the speculative playground where most participants do not even question the idea that liquidity will continue in abundance, we look at the old reliable yield spread represented here by the $TNX-$IRX ratio. It appears the bond market is getting a bit spooked relative to the Fed's ability to maintain their inflation hawkish stance. A spooked bond market is not a liquidity engine. Let's see if this break above resistance holds. Edit (12/17/06) based on an email received: Note that we are talking about long rates rising relative to short rates; interest rates can decline with short rates declining faster than long while the spread rises.
Since it is always important for investors to keep the big picture in focus, here it is for the bond market on a monthly chart.
Finally and importantly, let's get to the call mentioned in the title. I may well be wrong here and as I always say on the Blog, please do feel free to fade this analysis at will, but as of this writing this is the game plan as I see it. As always and especially in the world of financial voodoo, it is subject to change. We will ease into the call for the next few weeks by first presenting a chart of the Dow from the time of the Gold-Silver Ratio's reversal in April to the current status of wonder market and confounder of many market watchers and the public alike. Notice that the rise to the May peak off of the GSR reversal was 5%+.
Now take a look at the all important Dow-Gold Ratio chart that is often harped upon on the Blog. While I think gold and the miners are in a sustainable rally pending the completion of the current correction (see the targets I have laid out on the Blog for GLD/gold, XAU, HUI and the USD), I have been nagged a bit by the idea that according to this chart the Dow had a little unfinished business on the upside in its counter the major trend rally vs. gold. Again we use GLD as the proxy here.
A strong case can be made that nominal GLD is headed for support in the 59/60 area which would satisfy the above noted 216/217 area resistance level in the Dow-Gold Ratio at, drum roll please............Dow 13,000! In fact, a 5% rise in the Dow (similar to the one in April/May) immediately following Friday's Gold-Silver Ratio reversal brings us to 13,067. So there you have it. Get your party hats and noise makers ready. I will allow for a week or two after the new year begins and then look for a major correction similar to that of May and June or more likely, a resumption of the secular bear market in gold terms and quite possibly, nominal terms. Meanwhile, I expect the beat to go on. The players will have offloaded to the greedy, inexperienced and simply naive. Wash, rinse, repeat as they say. One final note; I am expecting the precious metals complex to head higher soon after the above noted gyrations take place just as they did in 2001 following the previous major yield curve bottom. Additionally, that "shorting opportunity of a lifetime" that everyone is looking for may be mere weeks away, although that is always risky business.
I am not an investment advisor so by all means fade me at will in favor of more conventional and comfortable views. Also, please review Biiwii.com's terms and conditions located here http://www.biiwii.com/about.htm. This is a "call" the likes of which I have never done and may never again attempt. But it is a sincere effort to portray something that hit me over the head as striking.
Best of luck.
PS: Edit (12/17/06): Based on some feedback, I may not have made the above totally clear. I am looking for gold to hold support just above 600 before the entire complex heads higher and a top in the Broad markets, which may possibly be a very important top.
Gary Tanashian
http://www.biiwii.com
http://www.biiwii.blogspot.com
-- Posted Tuesday, 20 February 2007 | Digg This Article
