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04082013 April 8, 2013

Posted by easterntiger in economic history, economy, financial, gold, markets, oil, silver, stocks.
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Weather Report 04082013

Current Positions  (No Changes)
I(Intl) – exit; S(Small Cap) – exit; C(S&P) –exit

F(bonds) – up to 60%; G(money market) – remainder

Weekly Momentum Indicator (WMI) last 4 weeks, thru 04/05/13
+17.08, +15.87, +5.25, -2.26 (S&P100 compared to exactly 3 weeks before***)
(3 Friday’s ago/2 Friday’s ago/1 Friday ago/this past Friday)

Although I normally try to issue my updates closer to the end of each month, I found that the positioning from the previous report was more than adequate for the trends in place as the end of March approached; thus, requiring no change and having no significant update in terms of other information.

With the topping/breakdown of the levels of the banking/financial sectors early in the week, this forced a quick 3% decline of the S Fund from the highs, and a near 4% decline of a close proxy, the Russell 2000.  These erase between two to six weeks of gains off the previous levels on the I fund and proxies, including the iShares EAFE Index Fund. This epitomizes the time lost with little gain, and the phrase ‘all risk, no reward’.

In contrast, the positioning that I took in the F fund in late February has paid off handsomely, after a long back and forth pause through late February/early March.  In a clear sign of real demand, heavy volumes of bond buying took place at every low price point over the past 6 weeks.  Following several disappointing news stories this week in the employment sector, this bond buying accelerated rapidly this week, forcing bond prices back to their highest levels since December.

In my humble opinion, I believe that the acceptance of this developing employment weakness is the first crack in the Fed’s fantasy theory of using their latest tactics (QE3 and beyond) to ‘lower’ the unemployment rate.  Until they can stop the fall in the labor force participation rate, and truly IMPROVE EMPLOYMENT and not just LOWER THE STATISTICAL RATE, any so-called ‘improvements’ will be only be superficial.  Fed policy and the unemployment rates are much like you or I controlling the movements of the rabbit we see in our back yard – no tapping on the window is allowed.

Oh, wait…it’s not just me.  Here is a quote from Dallas Federal Reserve President Richard Fisher a few months ago, in a rather weak moment of revelation.

“The truth, however, is that nobody on the committee, nor on our staffs at the Board of Governors and the 12 Banks, really knows what is holding back the economy. Nobody really knows what will work to get the economy back on course. And nobody – in fact, no central bank anywhere on the planet – has the experience of successfully navigating a return home from the place in which we now find ourselves. No central bank – not, at least, the Federal Reserve – has ever been on this cruise before.”

Those who see strength in stock prices are somehow unable to factor in the obvious strength in bond prices, which indicate a greater demand for safety than demand for risk.  Gains in stocks will be mostly backed by vapor, and are subject to unexpected corrections for as long as interest rates continue to fall and bond prices continue their strength due to this heavy buying.  A matter of increasing bond purchasing is something that an $80-85b/month in Fed stock price manipulation, through broker/dealers short-term purchasing, cannot overcome.  The stock/bond ratio I track is back to near a February level, now at 0.377.  I expect stocks to continue to weaken from this level and for this ratio to continue to fall.  This will correspond to an increase of F fund shares until further notice.

The inability of stocks to further exceed or even hold the recent highs, including slight all-time highs on two indexes, the Dow Industrials and the S&P500, could signal what’s referred to as a ‘failed breakout’, and a lost opportunity for equity bulls.  There are short-term sell signals in several key sectors, including energy, materials and technology. Other signs of potential trouble for stocks include the number of stocks declining versus the number of stocks advancing, European financials, falling bond yields, homebuilders, and food & beverage stocks.  Additionally, these factors are combined with continued buying in other safety sectors, specifically utilities.  These combinations do not transmit a good signal to continued stock stability.

In another sign of stock instability, a ‘buying climax’ was reached by a large number of S&P500 stocks.  This occurs when a stock reaches a 52-week high, then reverses to close lower than the previous week.  This occurred in 73 stocks this week.  This is the highest number since May of 2011. In 17 buying climaxes since 1996, stocks have been down 10 times after 1 week, 11 times after 2 weeks, 10 times after 3 weeks, 10 times after one month. On the positive side, after one year, in each case, the S&P500 was higher.

The most recent technical picture similar to the current one saw the S&P500 lose about 100 points, or about 7%, over the next 6 to 8 weeks.  I expect the F fund to continue to rise during that time.  An exit to protect the gain should then be executed.

Although sell/exit zones are easier to detect than buy/entry zones in secular (long-term) bear markets, for at least the past three years, buy zones or lows have occurred between September and November, and sell zones or highs have occurred in March and April.

Gold has broken, by $6, the low of last May.  This puts a question mark on whether gold will find support for a future advance, or, if this is the start of another longer period of near term weakness, taking the price back to recent 2010 levels.

Silver is in the midst of exceeding it’s longest correction in history, in terms of time, 6mo 3d, since the previous high in early October. The longest previous silver correction was 5m 21d, in 2007.  Most silver corrections are from 2 to 4 months.

Unlike gold, silver has not fallen below lows of the past 2 years and remains less of a puzzle, at this particular time, than gold.

Over the past two years, silver has advanced each time it’s dipped between $26 and $28/ounce.  It’s now at $27.22.  Another view is to divide the price of gold by the price of silver.  This determines when silver is in the bargain range by comparison.  In the past 2 years, silver has been a buy when the ratio was above about 57 ounces of silver per ounce of gold.  It has been as high in that time frame as 59 last July. I purchased silver at that time.  It is currently at 57.9.  I plan to purchase again as a hedge against future higher prices, at this point of higher potential reward than potential risk.  A normal advance from this current position would be 42%.

Why do I prefer silver to gold?????

I have a number of reasons, starting with the ease with which silver can be acquired at near spot prices in various quantities, small or large, as opposed to greater markups which are more significant on gold, except at higher quantities.

Follow this video for the #1 reason why I prefer silver to gold.

http://www.bloomberg.com/video/the-day-the-government-took-our-gold-d_oPD_2KTayTnSpqco6kDw.html

Could it happen again?  I’m not willing to take the risk that it will by focusing on gold only.  I will gradually hedge a part of my silver holdings into gold.

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