Why the Bull is Not Back

Last week’s dour jobs numbers out of the US seem to have had a major effect on market sentiment. Overnight, the Dow jumped another 120 points to extend its rally to four straight days.

Does this mean the worst is over? Is it safe to jump back into the market? I’ll have a crack at answering these questions in today’s Markets and Money.

Before I do that though, just a quick word on the Precious Metals Investment Symposium that I’m presenting at in Sydney on 27 October.

Some of you have asked if we’re making it available on video. No we are not. This is not a Markets and Money event. I’m just one presenter among many. And because I think it’s a great event, I’m passing the information onto you. We have no organisational input, or financial incentive for you to come. The decision is yours.

But if you do want to attend, get in quick. The early bird discount ends this Saturday. You can go here to book.

It certainly is an interesting time for precious metals. Gold peaked in September 2011. Since then it’s been all downhill. That’s a four year bear market. All good and bad things come to an end.

Perhaps this is the beginning of the end of the gold bear market? Gold stocks have been strong lately, especially the Aussie producers. Even in US dollar terms gold has performed well over the past few months. Since bottoming around $1,080 an ounce in August (when every man and his dog said it was going to $1,000) US dollar gold has bounced back. It’s now trading near $1,150 an ounce.

It’s still in a bear market though. The trend, in US dollars at least, is decidedly down. Which brings me back to the recent market action.

As you probably know, this recent rally kicked off on Friday following a weaker than expected jobs number. This ‘bad news’ on the US economy was good news for the leveraged speculators who drive stock prices these days. It seemed to settle the debate — for the time being at least — that the Fed will hold off on its plans to increase interest rates.

That’s bearish for the US dollar and bullish for just about every ‘non-dollar’ asset in the world.

So the rally over the past week has much to do with traders’ positioning. For many months now, traders have ‘positioned’ for an imminent interest rate move from the Fed. That means selling commodities, emerging markets and Aussie dollars. And buying US dollars and getting out of debt.

But now that the Fed’s move is under a question mark, you’re seeing traders scramble to reverse their positions. The result is the powerful global rally you’re now seeing.

You can see this in a chart of the Dow Jones Industrial Index. After plunging in August, the Dow is now clawing back some lost ground.

Here’s a chart of the Aussie market, the ASX 200. The critical support level I mentioned is at 5,000 points. It only closed below this level once in the recent sell-off, and quickly bounced back.

Source: StockCharts

But is it any reason to get excited?

Not at all. Look at the chart. The downward sloping moving averages (the red and blue lines) suggest the Dow is still in a downtrend, albeit one that is moderating.

Technically, the market still looks weak. You really want to see a rally back above 17,250 at the least before becoming comfortable that the worst of the selling is over.

My guess is that the Fed still wants to raise rates as soon as they can. So this long running narrative of ‘interest rate normalisation’ hasn’t changed. The recent weak employment data just bought the bulls some time.

For this rally to continue, you’ll want to see more weak economic data coming out of the US…but not weak enough to cause worries about recession. Growth that is ‘too weak’ will see the sell-off resume.

My guess is that this is a bear market rally. It will soon run out of steam.

In Australia, it’s a similar story. The economy is weak, but not quite weak enough to see the market fall below critical support. If you’ve read Vern Gowdie’s work, you’ll know it’s just a matter of time before this happens. If you haven’t read it, you can get your free copy here. But be quick, copies are running out and we’re not printing anymore.

Here’s a chart of the Aussie market, the ASX 200. The critical support level I mentioned is at 5,000 points. It only closed below this level once in the recent sell-off, and quickly bounced back.

Source: BigCharts

Many people dismiss 5,000 as meaningless. It’s just a round number, they say.

It’s much more than that. As Cycles Trends and Forecasts editor Phil Anderson told his subscribers a few months back, 5,000 represents the exact mid-point between the market’s high point in 2007 and its low point in 2009.

And as Phil learned from the legendary WD Gann, these mid-points are very significant. So scoff at 5,000 points if you wish. But the bottom line is that it’s a strong level of support for the market. If prices break below here on a sustained basis, it’s a warning about the waning health of the Aussie economy. And it will tell you that the market is destined for much lower levels.

In the meantime, Aussie stocks are hanging in there. Like the Dow chart above, the ASX 200 is in a clear downtrend. The rally over the past few days doesn’t change anything.

But analysing an index only gives you part of the story. A market is made up of stocks. When the market goes down, there are some stocks that still manage to go up. You just have to work harder to find them.

If you want to find out how, go here.


Greg Canavan

Editor, Markets and Money

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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:


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