Monday, October 4, 2010

Die Hard: The Markets

Like Officer John McClane, they continue to expend all of their nine lives.  Is this life number 9?

Without a doubt, my assessment of the state of the markets has got to be called into question.  Two relevant issues to address are:  (1) Has the Hindeburg Omen, become, as Dee Dee Myers used to say, non-operational?; and, (2) Is the Precious Metals arena about to explode?  For more on the Hindenburg Omen, click here

If we do not begin to see a forceful decline commence by the end of this week, it is unlikely to build the kind of downside momentum that would be required to precipitate a crash.  That said, as of this writing, I have not budged from the crash prediction one bit.  The technical reasons were recently outlined in this piece

As far as the Gold and mining stocks sector go, I have some further technical thoughts.  For the record, my position is that Gold is forming an intermediate top, before returning to the proximity of its 200 Day Moving Average (DMA), which currently stands at $1175.  That makes downside exposure in the vicinity of 10%.

One thing that troubles me about Gold is that it has underperformed the weakness of the U.S. Dollar over the past several months.  Since June, the Dollar Index is down 11%, while Gold has risen about 9%.  Ideally, we'd like to see the reverse.

More troubling is just how extremely overbought Gold has become.  It now has a Relative Strength Index of 83.46.  The piece referred to above explains the use of the RSI and how it's derived.

An examination of the relative strength of precious metals mining companies, as represented by the Gold Bugs Index (HUI) to Gold itself is quite revealing.  Ideally, we would desire the stocks to substantially outperform the metal.   Since May, the companies have underperformed, although not substantially.  The HUI continues to be unable to materially break out above the 500-525 zone despite daily new highs in Gold.  Should the HUI return to its 200 DMA at 446, it would get smacked for 11%.  Downside risk is very limited.

Ideally, the HUI ought to also do better than the broad stock market. We can measure this by comparing the performance of the HUI to the Standard & Poors 500 (SPX).  The HUI has gained no ground since November, 2009.  This isn't cause to worry long term, but it does tend to suggest that a modest correction is imminent.

Investors should remain cautious but ready to jump in!

Marko's Take

No comments:

Post a Comment

Take me on!