After last week’s market shake up, the questions of “what happened” and “what next” is definitely on all of our minds here at Dent Research. I’ve no doubt it’s on your mind too.
The biggest question everyone’s trying to answer: Is this the end of the bull market?
I still think that January 26 looks like a top, with its parabolic nature, but thanks to one technical indicator in particular, I have some idea of what might come next…
Yesterday, I emailed to say that I believe we’re seeing Rising Bearish Wedge Scenario Type 2 unfolding right now. The markets tested the bottom trend line three times last week on Tuesday, Wednesday, and Friday – yet still managed to rally even after a clearer break on Friday. Now, it’s likely that markets will move up somewhat and then mostly sideways for a while… then they’ll retest and finally break the critical bottom wedge trend-line in the weeks ahead. Then we could be down 40% from the top in a matter of a few months. But we need to convincingly break that down trend line. And Friday was obviously not enough, despite a clear break, which makes me suspect that the Federal Reserve stepped in and bought stocks to support the market as China’s government did in late 2015.
John Del Vecchio, our resident forensic accountant, and Charles Sizemore, our Boom & Bust portfolio manager, both agree.
In his most recent Economy & Markets article, appropriately titled “What the @#$! Just Happened?!”, John explained why he doesn’t think last week’s market action is the start of a bear market just yet.
Understand, John is possibly more bearish than I am right now! Still, he has good reasons for believing that the recent market action related more to the short volatility trade than a market event that could take down stocks to major bear market levels.
Charles expressed a similar view in his latest Economy & Markets article entitled “It’s Not Time to Go Bargain-Shopping Just Yet.” As he says, “Expensive markets can always get a lot more expensive in the short-term, particularly when the economy is strong as it is today.”
It may not be time to go bargain shopping just yet, but there is an opportunity you can take advantage of now. Adam O’Dell, our Chief Investment Strategist, uncovered it recently, and it’s something I have been seeing in an uptrend for a while now. I’ll let him give you the details below.
In short: now’s a good time to buy gold!
But, before I hand you over to Adam, I want to make very clear that I’m still bearish on gold in the medium term.
I still firmly believe that gold prices could slide to as low as $700 an ounce between now and 2020. When the commodity cycle turns around, gold will regain its former glory and then some. But, that’s still years away.
Gold is an inflation hedge. I expect deflation to grip the world in the coming years. That’s the biggest mistake that gold bugs make. They think gold is a crisis hedge. It’s not. I detail this and more – in fact, I lay out my full case for gold $700 – in my eBook, How to Survive and Thrive During the Great Gold Bust Ahead.
However, the key to Adam’s recommendation below is that it’s a short-term play. I have been saying for many months that gold was due for a bear market bounce up to a range of $1,375 minimum to $1,428 maximum. There are clearly inflationary fears in the market now, and Adam intends to take advantage. Here’s what he has to say…
Gold’s Day in the Sun?
I usually warn against reading too much into the financial media’s (backward-looking) explanation of a market move that just happened.
But it really does seem that everyone’s suddenly worried about interest rates moving too high, too quickly.
We all knew rates had to go higher. The Fed drove them to the floor, kept them pinned there for years and then, in 2013 (remember the “Taper Tantrum?”) began talking about the beginning of the end of their zero-interest rate policy (aka “ZIRP”).
Inflation and a one-way train of higher rates have been brewing concerns for years now. But until February 2, when wage growth came in hotter than expected, these concerns hadn’t been enough to spur a sea change in investor behavior.
Now, though, everyone’s panicked.
Yesterday, the 10-year Treasury rate hit a high of 2.88%. That’s as high as it’s been since, well, the height of the Taper Tantrum in late 2013.
The market has absorbed five solid years of concern over a future with higher interest rates, inflation… and yes, potentially even the hyperinflation that gold bugs are infamously on guard against.
And then on February 2, it’s as if the market just couldn’t absorb an ounce more. Alongside that wage growth report, interest rates leapt higher and bond prices sank sharply lower.
Realize though, inflation concerns aren’t contained to the bond market.
Utilities stocks are more than 15% off their highs and lagging every other U.S. stock sector – a tell-tale sign of concern about inflation ahead.
And the real estate sector is now off more than 20%, entering an official “bear market” during last week’s swoon.
The bottom line is: everything that’s sensitive to higher interest rates is getting dumped.
And gold prices looked primed for a rally.
It’s been a rough road for gold bugs since the mid-2011 peak in precious metals.
Gold prices have steadily trended lower, in the classic pattern of lower highs and lower lows.
But that five-year trend has already turned and gold prices are currently in an uptrend.
The turn began in 2016, when gold (GLD) gained around 30% by July. That move was “too far, too fast” and the excess was slowly worked off into early 2017.
But gold never made lower lows. Instead, it began to establish a new bullish trend – marked by higher highs and higher lows.
This was a newly-budding and still-risky trend until last week’s sharp sell-off in stocks and bonds. Alongside the loss of confidence in paper assets – stocks and bonds alike – gold prices are up.
There’s no way to know just yet if last week’s swoon was the beginning of the end for stocks.
But investors are scared!
Scared of bubbles in overvalued paper assets – from stocks to bitcoin. And scared of higher interest rates, inflation, and maybe even hyperinflation.
If we’re in the midst of a “topping process” for stocks, gold prices should rally through that process and awhile longer.
Shares of the SPDR Gold Trust (NYSE: GLD) gained 18% and 26% in the first three and six months of the 07/08 top that began in October 2007.
In short, gold is almost always a top-performer during the topping process of an aged bull market.
Combine that with the now-palpable concerns over inflation and higher interest rates and it’s clear: it’s a great time to make a bullish play on gold!
Buying shares of GLD is an easy way to add a little exposure.
Editor, Cycle 9 Alert
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