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06242013 June 24, 2013

Posted by easterntiger in economic history, economy, financial, gold, markets, silver, stocks.
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Weather Report 06212013

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 06/21/13

+0.59, -7.61, -12.09,20.02 (S&P100 compared to exactly 3 weeks before***)

(3 Friday’s ago/2 Friday’s ago/1 Friday ago/this past Friday)

My previous intention to follow-up the last report with just a gold/silver update, due to their importance, was interrupted by the fast moving events in stock and bond markets, plus, the additional unexpected events in gold and silver since the last report.

S&P500 had it’s worst week of the year.  

5 year treasury note interest rates had their fastest climb in 50 years. The rise in the 10-year note from 1.6% on May 2nd to 2.51% on Friday was a 52% rise.  This is the largest rise on record for that time frame since records have been kept. But, since interest rates are tied closely to economic growth and inflation, either proof of economic strength, or, proof of inflation to a similar extent will be necessary to maintain rates at these levels.  (May year-over-year inflation rate is at 1.36%, dramatically below the 3.91% average since the end of the Second World War and over a full percent lower than its 10-year moving average.)  Neither are likely, meaning rates will re-adjust from this panic spike.

This time, rates on the 10-year note moved from 1.6 to the current 2.5.  In 2010, they moved from 2.3 to 3.7 before stopping.  In 2008/9, the moved from 2.0 to 4.0 before stopping.  So, notice that the ‘high’ rate peaks have dropped from 4%, to 3.7%, and now to 2.5%.  Until something else changes, the trend is still down, just as it’s been for over 32 years.

With rising rates and falling stocks, there is nowhere to go in the TSP, except to the G.  This rarely happens except for short periods of time.  Normally, rates fall when stocks fall, showing the shift from risk to safety, or, from safety back to risk.  Bonds lose their safe status temporarily when the Fed is not emphatically indicating intentions to keep rates low.  Their interpretations of economic strength are not well-founded, as proven by the rapid reaction to rising rates weakening housing demand, even at these low rate levels. China’s manufacturing purchasing manager’s index is in a contraction phase.  Plus, a cash crunch is getting a hand’s off signal from their central bank.  Neither of these are good for the rest of the world’s dreams for stability or growth. The rising rates on this chart go opposite from the F fund.  This chart is updated more frequently than the F fund chart.  I’m holding position, due to the enormous spread between rates and inflation, which will correct, without a large ‘drawdown’ occurring.

Two normally diverse markets breaking down at once could be a very bad sign, just as it was at the stock peak in 2007.  Even routinely defensive stock sectors, such as utilities, telecom, materials , consumer staples and health care were some of the worst performers.  One explanation could be that heavy selling in so many sectors is due to a response of over-leveraging; too many people with their resources spread too thinly.  Near-record margin debt levels will ultimately lead to some panic selling.

The  run down in the F fund over the past 5 weeks was deceptive, as it paused as if to stabilize 9 times since the top in mid-May.  Rapid interest rate increases in short periods of time of the type that we’ve seen in the past 5 weeks are just part of the game.  There have been 27 such occurrence just since 2007, and 4 other times in the past 18 months.  These quick, news driven bursts are nearly always followed by an equal or longer period of falling back to an average.  The 6/50 rule says that there is a 50 basis point change in interest rates at least every 6 months.  (50 basis points are equal to ½ percent). For all of the chatter about the impact of higher rates, these rates are no higher than the lows of 4 years ago.  In other words, for the past 24 months, we’ve been experiencing some of the lowest rates in over 60 years anyway.  Bouncing off of 60+ year lows is really no cause for alarm. What is alarming is that even these movements have consumers nervous enough to halt home purchases, showing up in a noticeable reduction in mortgage applications.

Gold and silver appeared to settle for almost 6 weeks following their dramatic corrections in mid-April.  I was looking for another buying opportunity.  Sensing no surprises ahead of the latest Fed meeting last week, I purchased another incremental position.  I was prompted by a ‘sale’ from my favorite purchase site, of 0.99 over the spot price of the day.  I did experience another minor drop in the price of silver after my purchase.

Regardless, these large moves in both directions are classic commodity movements and are no cause for alarm.  Traders do not simply ‘buy and hold’ as retail investors are predisposed to be, or, are led to believe is the right behavior.   Traders ‘trade’ to get the most out of short-term movements, to pocket profits, then, to reposition for the next move.

Statistically, gold and silver are flashing ‘buy’ signals, being further below the mean than at any time since 2003.   Here are some important notes.

* Silver is ‘oversold’, requiring a 147% advance to return to it’s 2011 high.

* Silver rose 428% from 2001 to 2008.  It declined by 60% from that high.

* It then advanced 493% to it’s 2011 high.   It has now declined by 61% from that high as of this past Friday’s prices.

* Of 41 bear markets since 1879 in gold & silver, this 2-year decline from the last significant high is #7 in time and #10 in the percentage decline.

* Of  26 silver bear markets since 1858, this one is #14 in terms of time and #6 in percentage decline.

* A cyclical low is due in the precious metals before September of this year.

Heavy buying at this dip is occurring in both India and China, traditional heavy gold consumption areas. Historically, gold has regained at least 80 percent from each bottom within 3 years.  And, even that would be an under-performance of expectations, since banks have now gone into very strong buying positions.  Even if silver and gold drop further, I plan to buy silver at each additional $2/oz drop in anticipation of regaining profitable positions within 1-2 years.

All indications are that the highs in May, around May 22nd/23rd, are the highest stock prices we will see until a measurable, if not substantial correction is complete.  The 23% advance to 1687.18 on the S&P500, from November 16th  to May 22nd, at 4 months and 22 days is #44 out of 135 advances of this type since 1886, and #56 in terms of percentages since that time.  Because the average advance is 26% in 6 months and 6 days, probabilities are very strong that no further upside can be expected.  We can expect to fall about 10% from that high, and, where 56% of the corrections are completed in just under 2 months., 80% are complete within 3 months, and, 90% within 4 months.  Similar corrections last year lost about 11% each time, and with each pullback being complete in just under 2 months.

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