Warning! Markets Are Shifting Gear

In the short term, it appears that several markets may reverse directions.

I have been saying that I believe the general stock markets will go up since end of March. I’m changing my short-term stand now. I believe that there are too many clouds in front, and the forward picture is simply not clear at all. Most likely there will be a short pull-back if not already. But more importantly after that, the markets need to decide whether to resume upward or downward move. Right now, that is not clear at all. There are simply too much uncertainties.

While I believe that the more likely resolution is for markets to trade in a range between January/March low to probably with SPY less than 150, I must admit that both breaking new lows and breaking out above 150 are distinct non-zero possibilities. I am moving to the sideline cash again on my general stock market bets.

Definitely the shorts have been hurting, but I think the longs may have gotten too gleeful and ahead of themselves.

On the other hand for precious metals, if it pulls back, I would say buy. If it breaks new low, I would say double your bets. Why? HUI has shown significant correction, on daily, weekly, and monthly charts. That should be very sufficient. Again, it’s likely that precious metals will pull back from current level. But due to the its nature of extreme volatility, the probabilities for both breaking new lows and breaking out are even more significant non-zero. Certainly, I will not want to take a bet on that, but simply staying my current course on my asset allocation.

How Far Will Things Fall

I really should tip my hat to Hussman for his insights. He has been exceedingly successful in navigating the bear/bull markets.

I truly think that the coming 2 months will not be pretty at all for many markets, and unfortunately gold included.

First thing first. Judging from the crude oil chart, it appears that we are probably near the end of wave 3. Of course, calling the top is the hardest thing, especially in a parabolic rise. But wave 3 should be coming to the end. What that means is that probably one should get out of oil stocks. Assuming a sizable correction from this point, I think it’s possible for oil to go from $135.09 down to $86.33, a similar magnitude from $79.86 to $51.03 last time.

It’s quite counter-intuitive that gold is leading the charts of oil, no matter how I look at the charts. I always think that the biggest driving factor for inflation is the rise in the crude oil price. Maybe gold does foretell the future inflation rates. Anyway assuming that is indeed the case, gold may or may not have bottomed already. At the previous oil bottom, the gold/oil ratio was at the peak of 11.94. Gold bottomed at a ratio of 7.72, while the next intermediate bottom was at the ratio of about 9.5. Using the ratio of 7.72 or 9.5, I get a gold price of $666.46 or $820.14. If I try to be more conservative on gold by using a ratio of 9 instead of 9.5, I get a gold price of $776.97.

Now using the ratio charts of Gold/HUI, the extreme values have been at 2.355. Anything above 2.2 is pretty high. Using the gold prices of $820.14 and a ratio of 2.2, I get a HUI at 372.79. If I go more extreme by using $777 gold price and a ratio of 2.40, I get a HUI of 323.75. I don’t believe that it’s possible for HUI to go that low, since HUI always leads gold price plus lower oil prices are good for miners. So if I take the middle road, using a gold price of $835 and a ratio of 2.4 (HUI leads gold), then I get a HUI of 347.92.

While I believe that HUI has seen the bottom already at 384.53, the market can certainly prove me wrong. Whether going down to $372.79 or $347.92, it’s going to be a quite a big ride down. With the stock markets getting quite flaky, I must reckon such possibilities.

While I believe that the Elliot wave count for HUI is probably at 1 of 3 or 2 of 3 in progress, it’s not clear whether gold prices are at the same count. I think the count for gold is probably at the same count of HUI, or 1 count behind (just started intermediate wave 2 down rather than beginning of wave 3). Presented with the evidences & numbers, I think the most probable count for HUI is in 2 of 3, assuming that gold price will correct further. Obviously wave 2 can go down a lot in respect to wave 1. Therefore $347.92 or lower is definitely a possibility.

With that said, the general markets probably will re-visit the lows if not breaking lower. Bond yields should fall, and anyone who wants to refinance should take this “last” chance again. Since the next wave in gold is probably going up or UP, bond yields which hate inflation (a high gold price) will certainly not be low. Most likely after the next wave down, the global markets will “turn the corner” and US dollar may fall precipitiously to jumpstart an extended wave 5 in HUI and maybe wave 3 or 5 in gold.

My crystal ball is cloudy at best. But it’s showing big storms ahead. I hate my own analysis, since I’m emotionally attached to my current investment. But markets will always have the final says.