Market Comments

There wasn’t any earth shattering moves this past week. The Dow gained 1.2% and the transports 1.4%. The S&P was up 0.2%. Note the difference between the Dow and the S&P gains. Could this be a sign of things to come, with the broad market weakening while the Dow holds up.

The McClellan Oscillator seems to be hinting at the same conclusion. If this trend continues, it will signal a top is in place and that the next big move will be down. The bear may be slowly rising from his winter slumber. We sit, we watch, and we wait.  

 

 

 

Of particular interest was how many different markets appear to be in the process of trend changes – mostly to the downside.

Crude Oil fell to $61.84, which is a fair distance from its recent highs of $70.85. It is fast approaching its 50 dma – sitting on top of it as the chart below shows.  

 

Chart Courtesy of StockCharts.com

 

Not to be out done, Natural Gas (NG) was down 15%, adding more proof that the saber rattling about gas shortages and spiking prices this winter was much to do about nothing.

NG is in a sharp decline, having pierced through its 50 dma, and approaching its 200 dma. See the chart below.

 

Natural Gas Index

Chart Courtesy of StockCharts.com

 

We remain bullish on the energy markets. However – they were extended and needed a rest and consolidation. We are watching for a bottom and a good entry point to establish new positions. Remember that energy is one of our main long-term paradigm themes regarding bullish trends.

Speaking of commodities, ou r favorite: gold – was down as well – off a solid $17 per ounce. The XAU gold/silver index took a hit of 6% and the HUI 9%. The XAU is fast approaching its 50 dma, this is the first major support level. If it holds then the upside will resume. If it doesn’t hold further downside action towards its 200 dma will be in store.

This move was expected, as the HUI was bumping up into long-term resistance at 155 – going back to two previous tops: one 10 years ago, and the other 19 years ago.

We took profits over the last 2 weeks in the gold and silver stocks, selling into strength. Now we are in a position to take advantage of lower prices to accumulate new positions.

First, the 50 dma needs to hold. So, hold off buying new positions. Making a shopping list of the best candidates for purchase will do for now. The chart below perfectly illustrates an extended market that pretty much went

parabolic. Such moves are very difficult to sustain, which is one of the reasons to take profits as we did – when we did.

 

XAU INDEX

 

Considering the weakness in the precious metals and energy sector, the weakness in the CRB Index is of no surprise. Commodities are one of our three paradigm themes for investing in based on the bullish primary long-term trend.

However, no market goes straight up without short and intermediate term corrections. The energy and precious metals just showed that quite empathically.  

They may even have more to show us in this regard – and we will patiently wait on the sidelines – watching for a good risk to reward entry point.

  

CRB INDEX

Chart Courtesy of StockCharts.com

 

The Canadian Dollar has been very strong for a while now. This makes perfect sense, as Canada is a commodity rich country in regards to exports. Commodities have been doing well, thus the Canadian Dollar has been doing well. Expect this relationship to remain the same in the short and intermediate term. See chart below.

According to conventional analyses, this would also be true in the long-term, however, the markets are presently entering into uncharted waters – especially the currency and debt markets. It is very possible that many types of analyses that worked in the past will not work now and even less often down the road.

Even many of the tried and true relationships between certain markets may come undone. We suspect that a time will come in the not too distant future when interest Rates rise yet the dollar falls. It will not be a pretty site to behold.

At any time the fiat currencies can blow up. The name of the game going forward into the future is to expect a worldwide currency debasement contest as to which currency devalues the least.

 

Canadian Dollar

 

 

 

Trade Imbalance

 

The goods and service deficit in 2005 w as $725.8 billion.  

As a percentage of U.S. gross domestic product, the good and services deficit increased from 5.3% in 2004 to 5.8% in 2005.

That is ¾ of a trillion dollars – just in case you didn’t know.

The U.S. net international investment position is approximately minus – $2.5 TRILLION.

Source: U.S. Bureau of Economic Analysis

 

Two-year Treasury yields were up 9 bps to 4.68%. Five-year yields were up 7 bps to 4.58%. The bellwether 10-year Treasury yield rose 6 bps to 4.58%. The 30-year long-bond yield declined 7.5 bps to 4.55%.

The yield curve has inverted. The two-year is yielding more than the five-year, which is yielding the same as the 10-year, and all three are yielding more than the 30 year.

We believe this is just the prelude to the drama to come, and suspect that the yield curve will continue to steepen. The real estate market is already beginning to feel the effects.

The name of the game is liquidity for now, and the Fed keeps providing it in many ways. The money supply was down 1.8 billion for the latest week, however, for the year, they have been expanding M3 by approximately 9%.

The money supply is presently over 10 TRILLION dollars.

 

M3 Money Supply

Patience is called for, as we have had a good run with the gold and energy stocks, and should be very pleased with our good fortune. Sit tight and keep your powder dry. Don’t shoot until you see the whites in their eyes. During times like this, it is good to remember the old Chinese cookie jar proverb.  

On the geo-political front things seem to slowly be defusing over the Iran issue. If it was serious the energy markets would be rising – which they aren’t. Remember both Russia and China have the power to veto any Security Council ruling.