Could Gold Soon Go Ballistic?

http://www.acting-man.com/?p=9644

Gold and commodities work in the exact opposite manner to stocks. They bottom gradually and make spike tops, whereas stocks tend to make spike lows and usually top out gradually. The reason for this difference in behavior is that the same emotion that drives rising commodity prices also drives falling stock prices: fear.

In stocks we often observe that when the market is very oversold but fails to bounce in spite of that condition, a crash or a mini-crash can happen – as was in fact recently demonstrated. The opposite can happen in gold and commodities -  an overbought condition can lead to an upside blow-off.

We note that the gold market has been overbought for quite some time, but so far has refused to correct. Of course a short term correction remains the higher probability bet, however, one must be alive to the possibility that the recent persistent overbought state could also be the precursor to a blow-off move.

Recall for instance what happened with silver late last year and early this year  – from the point where it exhibited a strong and persistent overbought condition for the first time, it proceeded to almost double in price following a very brief, but hefty shake-out. Again, we are not predicting that the same will happen with gold here and now. We can not know that, and it is the lower probability outcome as mentioned above, but the fact that gold has remained persistently overbought for over three weeks now is a hint that something unexpected could happen.

Spare Change

"Brother, can you spare a dime--or two? Actually, can you spare another $30 billion?" - AIG.

Wow, AIG announced a loss of $61.7 Billion last quarter, for a total loss of almost $100 Billion last year, both record highs in American financial history.

The market is so numb to bad news, it "only" dropped a couple percentage points overseas. While I've always believed the market is headed below 6,000--and it is opening below 7,000 this morning after the bad news, it has fallen so sharply in the last 3 weeks that market conditions are extremely oversold. A snapback rally here wouldn't surprise me (I know some of you think I'm REALLY crazy now), but alas, any rallies for the next several YEARS will be violent but short-lived, as we have not reached our secular low water level yet.

Remember: as a contrarian, you want to do the exact OPPOSITE of what everyone else is doing. However, as an investor, bear market forces are too strong to jump back in. Stay on the sidelines for a couple years--do nothing until we have confirmation of a bottom. As a swing trader, this temporary oversold condition may look tempting, but be careful--no need to catch a falling knife--it could cut you. In other words, even though technical analysis suggests an oversold equities market, sometimes fundamentals out-trump technicals. You can try to play the bounce, but conditions are still extremely perilous. Some high-quality stocks may seem cheap, but they could get cheaper. And many stocks may just get trashed due to lack of liquidity and credit.

Oversold

Even tho I think financials have terrible fundamentals (too much toxic debt), I flipped Citigroup today for a one-day round trip profit of 20%. Regional banks should do okay, as they didn't leverage up on sub-prime mortgage-backed securities, like the big money center banks. But the landscape has changed for partially nationalized banks like JPMorgan Chase, B of A, Citi, and Goldman Sachs. So even tho I went against my investment principles, I repeated my flip of Morgan Stanley last quarter, doubling my money on that trade. The panic selling of Citi shares created an oversold condition, so I pounced. Probably not smart, but I'd rather be lucky than good.

I also nibbled at oil at $34/barrel with the ETF DXO, which leverages crude oil moves. No one is bullish on oil, so my contrarian instincts compelled me to dive in. This is a short-term trade for me, and if oil moves to my favor, I'll take profits. If oil keeps declining, I'll again go against my principles, sitting on it for however many months or years it takes for oil to rebound--I won't put in any stop losses. Oil is still in a secular bull market, so time is on my side.