It's Time to Get Out!
Source: Toby Connor, Gold Scents (3/14/11)
"Too much liquidity is causing commodity prices to surge out of control."
There are now warning signs that this countertrend rally may have topped, and even if it hasn't the potential upside is so small that it's not worth the risk of getting caught in the next bear leg to catch a few more percentage points.
As of Thursday and Friday the stock market has now broken below the prior daily cycle low. When a daily cycle low gets violated it invariably signals the start of an intermediate degree correction.
The warning bells are going off not so much because an intermediate degree correction has begun, those happen like clockwork about every 20–25 weeks, but because of how quickly this daily cycle has topped—three days. That means we are now locked in an extremely left-translated daily cycle.
It is those extreme left-translated cycles that do the most damage. The daily cycle following the flash crash last year was a left-translated cycle that topped in only 4 days. We all know what that led to.
The bigger picture is the intermediate cycle. Notice the market is now on week 16 of the current intermediate cycle. I noted earlier that an intermediate cycle low is due about every 20 to 25 weeks. On an intermediate term basis the market is now due to move down into that major cycle low. The next larger cyclical structure is the yearly cycle. That is also due to bottom with this daily and intermediate cycle. The combination of all three cycle durations bottoming at the same time will almost always produce a very severe correction.
Because of how the dollar cycle is unfolding (available to premium subscribers) I expect the stock market cycles to bottom pretty close to the 1 year anniversary of the flash crash.
As a point of reference, the last intermediate cycle low occurred in November. The danger is that both the industrials and transports might drop below the November bottom during this correction. If that happens a Dow Theory sell signal will be generated. If a Dow Theory sell signal is generated the odds will be very high that this countertrend rally is over and the next leg down in the secular bear market has begun.
And, unfortunately, Bernanke is not going to be able to crank up the printing presses and rescue the markets like he did last summer. The problem isn't that there is a shortage of liquidity. The problem is that there is too much liquidity. It is causing commodity prices to surge out of control.
Oil is back over $100 despite continued high unemployment and impaired demand. Food prices are going through the roof and have already trigger social revolt throughout the mid east and most emerging markets. Once the next leg down in the dollar crisis gets underway it won't be long before we here in the U.S. will be looking at $4.00 or $5.00 for a gallon of gasoline.
As the dollar crisis intensifies Bernanke will be forced to end QE or risk breaking not only the currency but also the bond market. Without an endless supply of fresh money the markets and economy will quickly start to collapse. We saw this last summer when QE1 ended. The same thing will happen this time only Bernanke's hands will be tied by the dollar crisis and surging commodity inflation. He will be powerless to prevent the return of the secular bear forces. Well unless he's prepared to risk hyperinflation that is.
Personally I don't think Ben is willing to completely destroy the dollar and crash the bond market just yet. I suspect when he finally realizes that Keynesian economic principles have led us down a path of no return he will resign and someone else will put the finishing touches on his masterpiece.
The only question is whether those finishing touches will be to allow the deflationary depression that is required to cleanse 5 decades of debt from the system or whether we will choose the hyperinflationary path to service the debt spiral we've gotten ourselves into.
In any case it is time to exit all general stock market funds and position oneself in cash to ride out the next leg down in the secular bear market. If one has a gold or precious metal fund available in their IRA we should have about two months left of spectacular gains as the parabolic finale unfolds in the gold and silver markets. But once that has run its course even those positions will need to be exited as there is no real way to diversify against another severe bear leg down.
The simple fact is that in a severe bear market everything gets taken down to some extent. Gold will hold up much better than practically all other assets but even gold will take a 20%–30% hit during a D-wave correction. And all parabolic C-wave finales are invariably followed by a severe regression to the mean profit-taking event.
Unless one has the option of a gold fund, it's now time to get out of general stock funds and move IRA's to a money market fund until the next four-year cycle low is reached (probably in late 2012).