Thursday, December 3, 2009

Market shift in equities

I believe that we are about to witness a market shift. For three weeks now the S&P 500 has been pushing above 1100 only to close below that level. Given the fact that there has been very little in the way of selling over the past 8 months, and given the extremely low volume, I think the preponderance of evidence suggests that we are at a market top. I would give equal chances to the S&P first touching either 900 or 1150. Therefore I believe the risk profile of the market justifies being flat or short equities over the next 2 months or until there is a 10% correction.

I'm not sure how this will affect precious metals in the short run. The question becomes - if the equity markets do start to tank like last Sept/Oct. will the dollar keep its anti-correlation or will the dollar fall alongside? If the dollar falls with the stock market than gold and silver could very well rally (particularly gold.) At this point however, I am rather skeptical. Until silver breaks $21.5 and gold demonstrates it is uncorrelated with the stock market, I would be lightening exposure to precious metals as well.

Wednesday, December 2, 2009

Close to meeting the final condition for a gold breakout

Although it is totally obvious that gold has made strong price advances in the past few weeks, I thought it was worthwhile to mention the three conditions that I felt were needed for a sustainable gold advance. The first and most obvious, was for gold to break and hold above its previous nominal high of $1035. This happened in October. The second condition, which was met in November was for the dollar index (dx z9) to hit 75. The third is for silver and the gold equity index to break to new decade highs (~$21.5 in silver and 520 for the HUI.) Although this still has not occurred, we got very close to a new high in the HUI today (516.6).
It is also worth mentioning that in the past week gold has made and sustained a new all time high in euros.

The most important rule in money management is to establish and follow intelligent and appropriate levels of leverage and the use of debt/margin. A level of margin that is appropriate for one asset class, is most certainly inappropriate for another. Financial crisis is almost always born out of using too much leverage for a given asset class, or making false assumptions about future valuation/income. The market where this was most obvious in the past decade was the real estate market.