|
The recent
financial slump has caused economists to take stock of the possibility of a
“double dip” recession.
Most of them, however, won’t admit that the economic contraction
which began in late 2007 is still underway and, worse still, has a few more
years to run according to the Kress cycles. In this commentary we’ll address
this issue and have a look at where the cycles are leading the financial
market and the economy.
One sign that
the long term cycles are leaning heavily against the financial market and the
economy can be seen in the ease with which negative economic headlines can
catalyze a stock market sell-off.
This action is typical of a bear market. The recent sell-off is also a sign
that the positive effects of the peaking 6-year cycle is being somewhat muted
by the longer term cycles which are in steep decline.
The 120-year
cycle, along with its various components cycles, will bottom in late
2014. The final “hard
down” phase of this Mega Cycle began in 2008 with the peak of the
12-year cycle. Currently only the
6-year cycle – one of the smallest cycles in the 120-year series
– is ascending, but once it has peaked in a few weeks the market will
enter a cyclical configuration that hasn’t been seen since 1892. That year was the last time the U.S.
entered a cyclical “vortex” as the 120-year cycle caused a
collapse in asset prices and led to a major economic depression.
Monetary
regulators have had their work cut out for them in the last couple of years
but have been fortunate to have caught a major break thanks to the yearly
cycles. One thing that has been
propitious for the Fed in its attempt to stimulate the financial economy is
the 6-year cycle. As previously
discussed, this important cycle bottomed in late 2008 and helped make
possible the success of the Fed’s first quantitative easing initiative.
The year 2009
witnessed a powerful recovery rally in the major indices, which was a product
of the first quantitative easing program (QE1), the 6-year up cycle and the
10-year cycle peak in late 2009.
The peaking of the 10-year cycle at the end of QE1 contributed to the
“flash crash” of 2010.
With the commencement of the Fed’s second quantitative easing
program (QE2) in November 2010, the final peaking phase of the 6-year cycle
helped the stock market experience eight more months of recovery before the
latest mini-crash descended on Wall Street.
It’s
amazing when you consider that the recent market collapse in less than a
month completely destroyed eight months of recovery work courtesy of the
Fed. As of this writing, the NYSE
Composite Index (NYA) is below where it started in November 2010 when QE2
began.
 
The final
yearly cycle peak of long-term significance is scheduled for around Oct. 1
and should provide the impetus for at least one more rally this year. Once the 6-year cycle peaks, the Fed
will find it difficult to produce any meaningful boosts to asset prices. QE2 has already proven to be largely
ineffective – if not an outright failure – and any further
attempt at asset price manipulation will run counter to the longer term
cycles. Deflation will be the
operative word as we approach the Grand Super Cycle bottom in late 2014.
One of the
hallmarks of this long-term deflationary phase which began in 2008 is rapid
change. The complete retracement
of the November 2010-June 2011 equity market rally in about a month’s
time is an example in microcosm of the rapid change that deflation can
effect. An event bigger problem
that will soon confront us is how quickly small, ephemeral gains made in the
employment rate and other economic indicators can quickly reverse, essentially
undoing the 2009-11 recovery.
Currently the
economic malaise the U.S. is suffering is being misdiagnosed by the
government’s economists.
The slack demand in the economy and persistently high unemployment
levels have been called a “soft patch” by some and a
“recession” by others.
Experience teaches that a true recession is a temporary decline
followed by a reasonably brisk return to normal conditions. What we’re seeing instead is
4-year period of economic weakness with no return to normal. To that end the economic spin doctors
insist on calling this the “new normal” when in actuality these
conditions are abnormal.
The current
economic malaise can best be described as a depression. A depression is essentially a period
of several years in which economic performance is below normal and
unemployment remains stubbornly above the average. But the word “depression”
is a politically unpalatable word.
It’s much more soothing to the ear to us terms like “soft
patch” or “Great Recession.” No one has the guts to use the cold,
harsh “D word” but it would be more helpful for most Americans if
they informed that a New Great Depression is underway. This condition is being brought to us
courtesy of the 120-year cycle decline which still has a few more years to
run, and sooner or later everyone will have to face facts and address the
problems associated with deflation.
When
deflation sets in to an even fuller extent after the 6-year cycle peaks, economists
will be awe-struck at the rapidity with which economic downside momentum
increases. Investors should
accordingly prepare for deflation in the years 2012-2014.
Price of Gold
One concern
for the near term gold outlook is of a technical nature. The gold price is currently
overextended from its 200-day moving average by nearly 22%. This is the first time in over two
years that this has occurred and it shows how exceedingly
“overbought” gold is right now. Below you can see the SPDR Gold Trust ETF
(GLD), a proxy for the gold price, in relation to its 200-day MA.
The 200-day
moving average is widely followed by investors, both institutional and
individuals alike and is therefore psychologically important. Whenever the gold price has become
this distended from its 200-day MA, a correction of varying magnitude can
always be expected. The gold
price could still make a final high this week before correcting, but the
indicators suggest gold is very close to entering a correction period, be it
a lateral consolidation or a corrective decline. Accordingly, traders and investors
should book some profit here if you haven’t already and tighten stop
losses on remaining long positions in gold relative to your investment time
frame.
Moving Averages
With the
return of volatility anticipated in 2010, it will be important to have a
technically sound trading discipline.
Classical trend line methods can be useful but they aren’t
particularly suited for a fast-moving, dynamic market environment. This is especially true where turning
points occur rapidly in a market that is subject to cyclical crosscurrents as
2010 is likely to be. That’s where moving averages come in handy.
With a good
moving average system a trader can be reasonably assured of catching most of
the important moves in an actively traded stock or ETF while eliminating many
of the whipsaws that attend trading choppy markets. In the book “Stock Trading with
Moving Averages” we discuss some market-tested methods that have proven
successful across most major stock sectors and industry groups, and is especially geared toward the gold and silver mining
stocks and ETFs. Here’s
what one reader had to say about the book: “...you were the one who
supercharged my charting with your moving average book ‘Stock Trading
with Moving Averages’ and your constant analysis of the double and
triple moving average series.”
Clif Droke
Editor, The Daily Durban Deep/XAU Report
Clifdroke.com
In my latest book,
"Gold & Gold Stock Trading Simplified," I remove the mystique
behind gold and gold stock trading and reveal a completely simple and
reliable system that allows the small-to-mid-size trader to profit from both
up and down moves in the mining stock market. It's the same system that I use
each day in the Gold & Silver Stock Report - the same system which has
consistently generated profits for my subscribers and has kept them on the
correct side of the gold and mining stock market for years. You won't find a more straight forward and easy-to-follow system that
actually works than the one explained in "Gold & Gold Stock Trading
Simplified."
The technical
trading system revealed in "Gold & Gold Stock Trading
Simplified" by itself is worth its weight in gold. Additionally, the
book reveals several useful indicators that will increase your chances of
scoring big profits in the mining stock sector. You'll learn when to use
reliable leading indicators for predicting when the mining stocks are about o break out. After all, nothing beats being on the right
side of a market move before the move gets underway.
The methods
revealed in "Gold & Gold Stock Trading Simplified" are the
product of several year's worth
of writing, research and real time market trading/testing. It also contains
the benefit of my 14 years worth of experience as a
professional in the precious metals and PM mining share sector. The trading
techniques discussed in the book have been carefully calibrated to match
today's fast moving and volatile market environment. You won't find a more
timely and useful book than this for capturing profits in today's gold and
gold stock market.
The book is now
available for sale at:
http://www.clifdroke.com/books/trading_simplified.html
Order today to receive
your autographed copy and a FREE 1-month trial subscription to the Gold &
Silver Stock Report newsletter. Published twice each week, the newsletter
uses the method described in this book for making profitable trades among the
actively traded gold mining shares.
|