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| 2008-09-03 18:00:00 | |||||||||||||||||||||||
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Why leadership in commodities is shifting to Gold By Mike Swanson We just had the summer rally. You may have missed it, but the S&P 500 managed to finish the month of August up a whopping 1.1% while the Nasdaq ended with a gain of 1.8%. You might detect some sarcasm here and there is a bit. You see despite the lack of conviction in the market action many people are calling for a new bull market in the financial media and on TV. This week's Barrons has a story titled The Reluctant Bulls. It quotes Francois Trahan as saying that the "the US is the best stock market to be in." He claims that oil is going into a bear market, wage growth is shrinking and therefore inflation should fade. Combine that with interest rate cuts made by the Fed earlier this year that should begin to kick in to the economy and you have a recipe for "reviving domestic economic prospects," he says. Trahan ignores that fact that we are not in a normal economic contraction, but a full blown credit crisis and a confirmed bear market. But he's not alone. Others expect to see a stock market explosion upwards after the election on the assumption that the election will excite people and cause them to throw money at the stock market no matter who wins. I see clear signs though that the bear market rally that began in July is reaching its end and that means the next downturn in the market is ahead of us. Despite Monday's drop in oil and commodities I also am one of the few people who still like the action in gold. Gold didn't make a new low yesterday when oil did and gold stocks are still nicely above their August lows too. Leadership in commodities seems to be shifting into gold. Before I continue I want to give you this disclaimer - I am short the market since the S&P 500 was around 1300 on Thursday and am long gold stocks from August 11th, positions I alerted my WSW Power Investors subscribers to as I took them. I did the same thing when I shorted the market in May a few days before it topped and then covered the morning it made its bottom in July. In reality it is the rally that is getting these people excited about the market and when I look at the rally I see reasons to believe that it is failing. Volume on the rally has steadily contracted throughout the month of August while the VIX, which measures the premium investors are paying for puts and acts as a "fear index" has dropped, warning that complacency has once again returned to the market - the type of complacency seen in December and in May when the market made its last two peaks. Volume finally did pick up Tuesday, but that was on a day that the market was down so is a sign of distribution. The market has been in bear market since October and in bear markets you want to use rallies like these to get out and if you are aggressive to short. But almost no one has admitted to themselves that this is a bear market or taken action accordingly to protect themselves. The hope is still alive and you can see that in the way so many of the so called experts grasped on to this rally and became believers again - despite the fact that it has been the weakest rally of the whole bear market. Bear markets end when everyone faces reality and in the United States most investment advisors and so called professionals are in steep denial. It is very difficult for a Wall Street broker or an investment advisor to tell their clients to sell. You see Wall Street makes money by being in control of your money. If you sell you may move your money somewhere else and that is the last thing they want you to do. It is not so much that these people are consciously lying to you it is that they have rationalized all of their thoughts and thinking processes to align them with what is in their best interest. Most brokers and investment advisors believe the Wall Street propaganda themselves and really have no clue about how the stock market really works. Of course you also have to understand that if you have a broker or investment advisor they are actually under a lot of pressure by you to stay bullish all of the time. Here is the deal- if your broker thought the market was topping out and called you up and convinced you to sell your positions you would most likely get extremely angry at him if the market then went higher. You would think he is crazy and probably move your money elsewhere. But if the market drops you may get upset about the market, but you won't blame him for that. He'll tell you to stay disciplined and most people will do it - because when you get down to it most people would rather lose money by holding then face the possibility of making a decision and being wrong especially when everyone is telling them to keep holding on TV. So the broker stands to lose everything by being negative on the market and being wrong and very little by being positive on the market when it is even in a bear market. Wall Street has defined being "disciplined" as allowing them to control your money forever. Continued... |
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