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-- Posted Sunday, 15 May 2005 | Digg This Article
- HUI, NEM, and the XAU are approaching their Bull Market/very long term upcycle trendlines which suggest that a major low near 33 is possible for NEM and one near 75 is possible for the XAU (see 5 year charts below). HUI's Bull Market trendline is more difficult to ascertain because it's chart is more parabolic, so I haven't taken a stab at it yet.
- Because the long term cycle lows on May 10, 2004 occurred well above the Bull market trendlines, it appeared for a long time that those trendlines had turned up/begun to go parabolic. Since, based on past cyclic behavior, the gold/silver stock Bull Market should last about 18 years (The Bear Market lasted 21 years) it probably didn't sense for the Bull Market trendlines to turn up so early, at least not as much as they appeared to. The good news is that a gold/silver stock Bull Market remains intact.
- Interestingly, at this point the long term upcycle for HUI, NEM, and the XAU is similar to the previous ones (see the first chart below, the HUI 5 year chart). The cycle timeframes are getting longer however. The prior two long term cycles in this gold/silver stock Bull Market (since late 2000) had lower major (intermediate term cycle) highs after long term cycle highs that were followed shortly thereafter by the parabolic/sharply rising segment of the long term upcycle (the long term cycles have been getting longer, see the first chart below, the HUI 5 year chart). The trend of longer long term cycles means that major corrections will tend to be longer also.
- If the long term cycle lows on May 10, 2004 hold (HUI's at 163.81, NEM's at 34.70, the XAU's at 76.79), which is now doubtful, then a long term upcycle probably remains in place and the parabolic/sharply rising segment of the long term upcycle should occur in the next 6 to 12 months as discussed in previous updates (HUI target 330 and NEM target 70-75). However, if the long term cycle lows on May 10, 2004 fail, as appears likely, then a long term cycle low is likely in the near future that should, according to the nature of cycles, be followed by a very respectable (simliar to HUI's 51.50% rise from 5-10-04 until 11-17-04) but not spectacular (on the order of 100% gains in 6 to 12 months) intermediate term upcycle. Or, do gold/silver stocks go parabolic and rise on the order of 100% in the next 6 to 12 months anyway because this isn't an exact science and the 5 year charts (see first chart below) suggest that may occur? I suspect the latter may be the case because breaking the downtrendline since the December 2, 2003 (HUI/NEM)/January 6, 2004 (XAU) long term cycle highs would be a major breakout/buy signal.
- The USD's intermediate term upcycle has gone parabolic and should soon correct (see 1 year chart below), unless a major breakout has occurred, but the COT data doesn't suggest that's the case at this point anyway. The USD Commercial Traders expect substantial weakness in the USD in the near future, even though they correctly traded net long last week. Last week the reliable non contrarian USD Commercial Traders added an unusually large (> 10% increase in long contracts) 670 (616, 403, 1728, 2192, 4322, 3274 sold the six weeks ending 4-19-05) long futures and options contracts and added 307 (2494 added the prior week and 770, 2662, 2421, 1576 added the four weeks ending 4-12-05) short futures and options contracts which portends USD weakness this week (non contrarian indicator), because the unusually large increase in their long position points to weakness (contrarian case).
- The COT (Commitments of Traders) data and NEM Lead Indicator correctly pointed to weakness last week. NEM underperformed the XAU by a wide margin two weeks ago (-2.14%) and the COT data pointed to weakness, so weakness last week wasn't surprising. The COT data points to weakness in gold but strength in silver this week as discussed below. The gold/silver COT data points to substantial strength once a major intermediate term cycle low occurs for gold/silver (keep in mind that the stocks are probably leading the metals, so it's even better news for the stocks), because the gold/silver Commercial Traders have traded aggressively long, adding aggressively to their long position in addition to aggressively short covering. There is a big difference between trading aggressively net long due to massive short covering and trading aggressively long, so the large additions to the gold/silver Commercial Traders long positions the past 2 weeks is a major positive. Also, NEM outperformed the XAU by +0.45% last week and outperformed the XAU in 6 of the past 8 weeks which is a good sign.
- The gold Commercial Traders added an unusually large (> 10% increase in long contracts) 11,417 (9363 added the prior week) long futures and options contracts and covered a large 17,544 (26,014 covered the week before) short futures and options contracts which portends weakness this week (non contrarian indicator), because the unusually large increase in their long position is the contrarian case for this normally non contrarian indicator.
- The silver Commercial Traders added 507 (5858 added the prior week) long futures and options contracts and added 19 (covered an unusually large (> 10% decrease in short contracts) 14,841 the prior week) short futures and options contracts which portends strength (non contrarian indicator) this week. The most important consideration in timing any market is the cycle channels/trendlines (see charts below).
- Williams %R for HUI at -98.56, NEM at -93.23, and the XAU at -95.75 is in very oversold territory, which suggests that at least a short term bounce is likely in the near future.
- The negative correlation between gold and the USD is high. It's -80% on 5-13 (-81% on 5-6) for the past 180 days for gold, according to Moore Research Center, Inc. For silver the negative correlation with the USD is -45% on 5-13 (-45% on 5-6) for the past 180 days. Silver's negative correlation is much less than gold's because it's more of an industrial metal than gold is, hence it has a more positive correlation with US economic strength and a strong US Dollar.
- The positive correlation between gold and the S & P 500 is 60%, according to Moore Research Center, Inc., probably because NEM is in the S & P 500 and hence is traded by index funds and other funds that want to have a high correlation with that index. This means that the S & P 500 determines 36% of gold's price action/variability (Coefficient of Determination = 60% squared = 36%). The S & P 500 declined the last 4 sessions ending 5-13 which accounts for 36% of gold's (and gold stocks) decline during those 4 sessions. The S & P 500's sharp decline from early March until late April is a major reason why gold and gold stocks were weak during that stretch. So, much of the problem in the gold sector recently has been due to substantial weakness in the S & P 500 from early March until late April as well as last week. The next bullet discusses the Coefficient of Determination.
- The Coefficient of Determination is the square of correlation and explains how much the USD is determining gold's and silver's price action/variability or the S & P 500 is determining gold's or silver's price action/variability. The US Dollar determines 64% (-80% times -80% = 64%) of gold's price action/variability now since the USD's negative correlation with gold is -80% as of 5-13-05. The USD determines only 20.25% of silver's price action/variability since the USD's negative correlation with silver is -45% as of 5-13-05. The correlation coefficient, r, provides the direction of the correlation (+ or -) but only the square root of the strength of the correlation. The coefficient of determination, r2, provides the true strength of the correlation but without indicating its direction. Both of them must be used to fully understand the entire picture regarding correlation's effect.
- As long as reliable lead indicator NEM's Bull Market/very long term upcycle trendline in the second chart below remains intact a gold/silver stock Bull Market should remain in place. The key chart therefore is NEM's.
- A major lesson learned in this brutal correction is that one can trade short term cycles (last about 1 to 2 weeks from cycle low to cycle low) as well as short (last about 1 month from cycle low to cycle low) and long intermediate term (last about 3 to 12 months from cycle low to cycle low) cycles, but not long term cycles, which for some weird reason don't seem to have clearly defined trendlines.
- Gold/silver stocks are correcting the spectacular gains seen in 2001, 2002, and 2003 when HUI rose about 70% in each of those years.
- NEM hit a long term cycle low at 22.70 on 7-26-02 and a major intermediate term cycle low at 24.08 on 3-13-03 in the previous long term upcycle (then entered the parabolic segment of it's long term upcycle and hit a long term cycle high at 50.28 on 12-2-03), so the very flat start to this long term upcycle isn't unusual (cycles tend to begin relatively flat anyway so it jives with the nature of cycles).
- Relatively new components added to HUI/XAU cause the current HUI/XAU versus the old ones to have less than a 100 percent correlation. Very volatile newer components such as CDE in HUI and PAAS in the XAU add to the uncertainty, so one has to keep this in mind.
- I may go to Las Vegas next weekend, so there may not be an update.
- Gold may plunge this week, lagging gold stocks which plunged in April. Gold hasn't experienced it's capitulation/steep/vertical high volatility phase yet, and assuming gold is lagging gold stocks (gold peaked in early December versus the stocks peaking on 11-17-04), then gold will probably take out it's early February low in the $412 area.
- "Trade the Cycles" is on a major intermediate term cycle sell signal, but gold/silver stocks are in a very long term upcycle/true Bull Market since October/November 2000 (see 5 year charts for HUI, NEM, and the XAU below) and are in a long term upcycle since May 10, 2004. Major intermediate term cycle highs occurred for HUI, NEM, and the XAU on 11-17-04. Gold peaked a few weeks later, lagging the stocks as it usually does at major highs/lows. Gold began a very long term upcycle/true Bull Market in April 2001 and silver did so in late 2001.
- One of the two major buy signal criteria has been satisfied. The NEM Lead Indicator was bullish for five straight weeks. NEM outperformed the XAU during the five weeks ending 4-22 by +0.10%, +1.83%, +0.08%, +0.44% and +0.97%. See the 3 month chart below, which is the last chart in the first group below.
- The Gold:XAU Ratio (currently at 5.32 using the numbers from the charts below) may become a third major buy signal criterion, along with 5% follow through and a clearly bullish NEM Lead Indicator. Per Myles Zyblock, Chief North American Institutional Strategist at RBC Capital Markets, when it's above 5.0 (12% of the time the past 22 years) the average annual one-year holding period return for stocks in the XAU has been +38.4% and in only one instance was there a loss. When it's below 3.0 (5% of the time the past 22 years) the average annual one-year holding period return for stocks in the XAU has been -24.3% with no instances of an up year. As a stand alone indicator, at least for trading purposes, the Gold:XAU Ratio probably isn't highly useful because obviously both gold and the XAU can fall 10% or more in tandem after reaching 5.0 or rise 10%+ after reaching 3.0. However, I need to research/backtest this.
- The fact that NEM's rate of descent decreased rather than increased, as normally occurs in downcycles, from 11-17-04's major top/intermediate term cycle high until the early February Cycle low, was a sign that an intermediate term downcycle was probably still in effect. See 6 month chart below. More research is required however.
- My system/work is NOT about me making educated guesses and calling bottoms, even though I (mistakenly) did that in this major correction, partly for reasons such as HUI having, until recently (early April), a well developed trendline since 5-10-04's long term cycle low that appeared to be it's long term upcycle trendline. The reason why I'm developing a backtested system ("Trade the Cycles") is because it's impossible to consistently time the market (by educated guessing) using an unbacktested approach comprised of technical analysis and indicators. From now on, where major bottoms are concerned, I'll only indicate that a likely major bottom has occurred after the two major buy signal criteria are satisfied (The 5% follow through requirement in concert with a clearly bullish NEM Lead Indicator for a few weeks).
- Once a major buy signal occurs, waiting for the gold Commercial Traders to make a substantial addition to their long position, as opposed to just engaging in massive short covering, makes sense.
- The 5% follow through major buy signal requirement (after breaking through the intermediate term downcycle trendline connecting short term cycle highs) weeds out the December 8, 2004, January 6, 2005, and March 29, 2005 cycle lows from being a major intermediate term cycle low, but not the February 8 (HUI/XAU)/9 (NEM) 2005 cycle low. However, the NEM Lead Indicator clearly indicated (weeds out) that the February 2005 cycle low probably wasn't a major low. It appears that the 5% follow through requirement in concert with a clearly bullish NEM Lead Indicator for a few weeks will work well for timing major buy signals.
- Buying and holding major intermediate term upcycles (that last about 3 to 12 months) makes a lot of sense, but not long term or very long term upcycles, because they're too flat (rising bottoms) and one loses too much during major corrections (However, with good stock selection, one can do very well with buy and hold during this gold/silver stock Bull Market/very long term upcycle that began in late 2000). This is a change from my belief that one should hold during long term upcycles. One should wait for a major intermediate term cycle buy signal before buying. So, it makes sense to be long during major intermediate term cycle buy signals and in cash and/or short during major intermediate term cycle sell signals.
- Cycles are the most important consideration when timing any market. A very long term upcycle has been in place since late 2000 and a long term upcycle has been in place since May 10, 2004 for HUI, NEM, and the XAU (gold began a very long term upcycle in April 2001). Very long term upcycles (and downcycles) tend to last about 17.5 years on average. Gold's previous very long term downcycle lasted from 1980 until April 2001.
- Cycle channels/trendlines are the most important consideration in timing any market. As I've said before, if you find that the detailed technical work is too much to digest, the cycle channels/trendlines in the charts are by far the most important consideration, so one can still use my system even if the indicators/technical work are difficult to grasp (right now, sometimes with perseverance one might grasp it).
- The remainder of the charts can be found at the bottom. The very long term upcycle trendlines are now flat rather than parabolic (with a segment having turned up), but the major buy/sell signals shown still apply. The last HUI chart below shows the major cycle highs/lows in this gold/silver stock Bull Market, but the very long term upcycle trendline is now flat rather than parabolic, or at least much flatter than it was, so the very long term upcycle trendline in that chart is now wrong.
- The report I received via e mail from Marketocracy for the week ending 5-13-05: "JFR - Joe F. Rocks's Mutual Fund, Net Asset Value (NAV): $8.21 on 5-13 vs $9.17 on 5-6, Compliant: Yes, This past week Return: -10.40%." HUI (AMEX Gold Bugs Index) was down -9.01% last week for comparison, so JFR outperformed HUI in 8 of the past 17 weeks. HUI is a better yardstick than NEM or the XAU, since it usually outperforms NEM and the XAU (in upcycles). HUI was up about 70% each year in 2001, 2002, and 2003, so outperforming HUI is no easy task. My imaginary mutual fund JFR is down 18.10% since it's inception on 1-5-05.
- I update my gold/silver stock "Current Assessment" near the top of my home page (middle of the second bullet) regularly, so near critical times especially, you may want to check it out. Also, you can see how I use the indicators in concert with cycles just above the "Current Assessment." Fascinating!
- XAU Implied Volatility rose +0.67% to 29.900 on Friday 5-13 from 29.700 on 5-12 versus a -1.67% decline in the XAU on 5-13, which is a significant (0.50-1.99%) 1.00% rise in complacency (+0.67% + -1.67% = -1.00%. The XAU wall of worry shrank by 1.00%, therefore complacency rose by 1.00%) that portends weakness/a downtrend on Monday 5-16 (complacency is usually contrarian and therefore normally portends weakness, until it reachs an unusually large level (> 6% increase) where it becomes non contrarian). That weakness/downtrend could follow a gap up at the open and early strength. XAU Implied Volatility tends to indicate a trend/tone rather than necessarily up or down for that session. The XAU Put/Call Ratio is another very important indicator that may disagree with XAU Implied Volatility. These indicators must be used in concert with cycle channels/trendlines (very long term, long term, intermediate term, and short term).
- The XAU Put/Call Ratio is at 0.67561 for the May expiration on 5-13 versus at 0.67561 for the May expiration on 5-6 versus at 1.13583 for the May expiration on 4-22 versus at 0.48700 for the final April expiration on 4-15 versus 1.04250 for the final March expiration on 3-18 versus 0.94130 for the final February expiration on 2-18. The XAU Put/Call Ratio was at 0.65704 for the final January expiration value as of 1-21. The XAU Put/Call Ratio was at 0.79348 for the final December expiration as of 12-17-04. The XAU Put/Call Ratio was at 1.03065 for the final November expiration value as of 11-19-04. The XAU Put/Call Ratio was at 0.85989 for the final October expiration value as of 10-15. If it rises 6% or less it portends strength following likely early weakness (indicated by XAU Implied Volatility). If it falls 6% or less it portends weakness. At unusually large greater than 6% moves the XAU Put/Call Ratio becomes non contrarian, so a greater than 6% rise portends weakness (unusually large rise in fear) and a greater than 6% decline portends strength (unusually large rise in complacency).
- A major indicator (NEM Lead Indicator) portending strength this week (but all indicators and cycle channels/trendlines (most important consideration) must be considered collectively, not in isolation. Think "system.") is the fact that NEM outperformed the XAU last week by +0.45% (underperformed the prior two weeks by -2.15% and -1.17%, outperformed the five weeks before that by +0.10%, +1.83%, +0.08%, +0.44% and +0.97%): -2.16% vs -1.67% on 5-13, -2.93% vs -3.64% on 5-12, -0.93% vs -0.96% on 5-11, -1.99% vs -2.08% on 5-10, +0.45% vs +0.34% on 5-9. NEM underperformed the XAU the week before last by -0.91% vs -0.25% on 5-6, -1.00% vs -0.46% on 5-5, +1.94% vs +2.02% on 5-4, +1.06% vs +1.10% on 5-3, -0.66% vs +0.17% on 5-2. NEM outperformed the XAU three weeks ago by +3.10% vs +1.68% on 4-29, -2.31% vs -1.70% on 4-28, -6.34% vs -4.02% on 4-27, -1.64% vs -1.73% on 4-26, +0.47% vs +0.22% on 4-25. NEM outperformed the XAU four weeks ago by +0.10%: -0.10% vs -0.69% on 4-22, -1.09% vs -1.09% on 4-21, -1.51% vs -0.91% on 4-20, +2.45% vs +3.14% on 4-19, +2.72% vs +1.92% on 4-18. NEM outperformed the XAU five weeks ago by +1.83%: -1.09% vs -0.91% on 4-15, -2.97% vs -3.27% on 4-14, -0.89% vs -1.99% on 4-13, -0.10% vs -0.47% on 4-12, -0.31% vs -0.55% on 4-11. NEM outperformed the XAU six weeks ago by +0.08%: -0.57% vs -0.35% on 4-8, +0.14% vs -0.28% on 4-7, +0.93% vs +0.75% on 4-6, -0.12% vs +0.35% on 4-5, -1.48% vs -1.65% on 4-4. NEM outperformed the XAU seven weeks ago by +0.44%: +0.47% vs +0.30% on 4-1, -0.38% vs +0.54% on 3-31, +2.24% vs +1.43% on 3-30, -0.53% vs -0.72% on 3-29, -0.22% vs -0.41% on 3-28. NEM outperformed the XAU in the holiday shortened week eight weeks ago by +0.97%: -0.17% vs -1.01% on 3-24, -1.99% vs -1.94% on 3-23, -1.86% vs -2.06% on 3-22, -2.77% vs -2.75% on 3-21.
- There's an early warning system in place! When NEM underperforms HUI/the XAU for a few months then the long term upcycle that began on 5-10-04 will probably be in trouble, as was the case during the last few months of the prior long term upcycle that ended on December 2, 2003 (HUI/NEM)/January 6, 2004 (the XAU) (began on July 26, 2002).
- The reliable non contrarian (in terms of their trading activity) gold Commercial Traders are short gold. They are clearly positioned for gold weakness with only 104,443 long futures and options contracts versus 224,286 short futures and options contracts (data as of 5-10-05).
- The notoriously contrarian (in terms of their trading activity) gold Speculators are correctly positioned for gold strength with 134,144 long futures and options contracts versus only 45,002 short futures and options contracts (data as of 5-10-05).
- The gold Commercial Traders added an unusually large (> 10% increase in long contracts) 11,417 (9363 added the prior week) long futures and options contracts and covered a large 17,544 (26,014 covered the week before) short futures and options contracts which portends weakness this week (non contrarian indicator), because the unusually large increase in their long position is the contrarian case for this normally non contrarian indicator. The most important consideration in timing any market is the cycle channels/trendlines (see charts) and keep in mind that the data is as of 5-10-05, so the data is somewhat stale (for short term cycle trading) by the time it's analyzed, but is highly useful nonetheless, especially for intermediate term cycle trading (a few weeks/months).
- The gold Speculators (hedge funds and other speculators/traders) sold an unusually large (> 10% decrease in long contracts) 19,091 (22,590 sold the prior week) long futures and options contracts and added an unusually large (> 10% increase in short contracts) 8331 (10,107 added the prior week) short futures and options contracts which portends weakness this week (contrarian indicator), because the unusually large decrease in their long position and increase in their short position points to significant weakness (non contrarian case). The most important consideration in timing any market is the cycle channels/trendlines (see charts below).
- The reliable non contrarian (in terms of their trading activity) silver Commercial Traders are short silver. They are clearly positioned for silver weakness with only 31,153 long futures and options contracts versus 76,040 short futures and options contracts as of 5-10-05.
- The notoriously contrarian (in terms of their trading activity) silver Speculators are correctly positioned for silver strength with 36,544 long futures and options contracts versus only 15,190 short futures and options contracts as of 5-10-05.
- The silver Commercial Traders added 507 (5858 added the prior week) long futures and options contracts and added 19 (covered an unusually large (> 10% decrease in short contracts) 14,841 the prior week) short futures and options contracts which portends strength (non contrarian indicator) this week. The most important consideration in timing any market is the cycle channels/trendlines (see charts below).
- The silver Speculators (hedge funds and other speculators/traders) sold 823 (sold an unusually large (> 10% decrease in long contracts) 7580 the prior week) long futures and options contracts and covered an unusually large (> 10% decrease in short contracts) 2750 (unusually large 13,999 added the prior week) short futures and options contracts which portends strength this week (contrarian indicator), because the unusually large degree of short covering is the non contrarian case. The most important consideration in timing any market is the cycle channels/trendlines (see charts below).
- The reliable non contrarian (in terms of their trading activity) USD Commercial Traders are now correctly positioned for US Dollar weakness with 6792 long futures and options contracts versus 11,352 short futures and options contracts as of 5-10-05. Last week they added an unusually large (> 10% increase in long contracts) 670 (616, 403, 1728, 2192, 4322, 3274 sold the six weeks ending 4-19-05) long futures and options contracts and added 307 (2494 added the prior week and 770, 2662, 2421, 1576 added the four weeks ending 4-12-05) short futures and options contracts which portends USD weakness this week (non contrarian indicator), because the unusually large increase in their long position points to weakness (contrarian case). The most important consideration in timing any market is the cycle channels/trendlines (see charts).
- The notoriously contrarian (in terms of their trading activity) USD Speculators are now incorrectly positioned for US Dollar strength with 8692 long futures and options contracts versus 5261 short futures and options contracts as of 5-10-05. Last week they added 361 (unusually large (> 10% increase in long contracts) 1515 added the prior week) long futures and options contracts and added an unusually large (> 10% increase in short contracts) 662 (22 added the prior week) short futures and options contracts which portends USD weakness this week (contrarian indicator), because the unusually large degree of shorting is the non contrarian case. The most important consideration in timing any market is the cycle channels/trendlines (see charts below).
- Detailed analysis regarding the important long term upcycle buy signal and other important "big picture" information as well as information about my system/indicators can be found at this link.
- I've created a Joe F. Rocks imaginary mutual fund at Marketocracy that will trade gold/silver stocks and maybe also precious metals via Exchange Traded Funds (ETF) like GLD (new gold ETF) using my "Trade the Cycles" system. The Fund Manager name should say Joe Ferrazzano not "joefrocks." I bought "en masse" on 1-5-05 and was more than 90% invested on that date. This will be a way of establishing an independently calculated track record. I'll track it's performance weekly in these updates, but the link above updates the fund share price/NAV the day after each session I believe.
- The Joe F. Rocks fund at Marketocracy will provide a great independently tracked way of assessing "Trade the Cycles" as well as my trading ability and you can compare me to other market timers. I think I have a great shot at being very near the top of Marketocracy's rankings following this major correction, partly because of how great the gold/silver stock market is, but largely because of my "Trade the Cycles" system. Given how volatile gold/silver stocks are it would be easy to have a substandard rate of return relative to HUI and the XAU if one wasn't good at timing gold/silver stocks. I'll be doing mostly intermediate term cycle trading (cycles that last about 4-6 weeks from cycle low to the next cycle low) and some short term cycle trading. Once the long term cycle high occurs probably in about 6 to 12 months I'll be 35% in cash and will find low volatility stocks to park most of the rest of the fund. I have to be at least 65% invested, which ties my hands some, but I should still do very well. Margin and short selling aren't allowed by Marketocracy because they're following typical mutual fund guidelines. I could end up running a real mutual fund for them if I rank very high.
Happy trading, may the force be with you, Joe F. Rocks!
-- Posted Sunday, 15 May 2005 | Digg This Article
Joe Ferrazzano is the Market Strategist for Joe F. Rocks! Growth Stock Investor & Market Strategist, http://www.JoeFRocks.com/ which was launched in September 2000.
Joe F. Rocks! is not a registered investment advisor. Investing in stocks involves risk. Joe F. Rocks! is not a registered broker or dealer. Each investor has to ascertain what percentage if any of one's investments should be allocated to growth stocks. Please see a financial planner, registered investment advisor or at least do your homework and decide what is right for your situation. Growth stocks tend to be extremely volatile which creates opportunities but also can be very painful and risky.
Each investor must take complete responsibility for his or her investing actions. Joe F. Rocks! should be considered as one source of information out of many from which to derive a decision on investing.
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