Commodity, Currency, Gold, and Equity Market Analysis by Dr. Christian Normann  
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Weekly Market Analysis Based on Closing Prices, Friday May 22nd 2009

Introductory Summary:
  • U.S. and World equity markets are in multi-year downtrends. For now, the recent rally pushed up to precisely the lower end of our expected 930-945 resistance range for the S&P 500 index.  Many individual stocks and indices also reached significant resistance, and we closed most of our long positions with large profits a bit early rather than risk holding on too long.  For anyone still long the S&P 500, we think this is a very risky proposition at this point.  We shorted the S&P 500 at 923 with a stop above 940.  We are also short REITs via a long position in SRS.
  • Crude oil finally broke out of its $37-$56 range, and has rallied past $60.  We went long oil when it corrected to around $47 (the level around which we previously noted that we expected short term support), and have moved our stop up to about $49.50, locking in a moderate profit with and the potential for significantly larger profits to come.  A further move to somewhere between $68 and $80 over the next few months appears plausible.
  • Gold has been in a correction of the move from $681 to the recent test of the $1000 level / $1033.90 record high.  We have long stated that the likely target for the correction was around $855-$823, and gold has hit a low of $860 so far.  Gold may now be moving up for another attempt at breaking the $1000 level.  On a clear break of the $1033.90 high, gold's multi-year uptrend will most likely have resumed.
  • The US Dollar appears to still be in a significant uptrend against most other currencies, although the future borrowing needs of the U.S. (as we've long stated is likely to be accomplished through money-printing) could end that uptrend very suddenly.  In fact, it is possible Bernanke ended it on March 18th.  Right now, the U.S. Dollar Index is sitting right on the critical 80 level, and it needs to rally soon, or else odds will greatly increase that a new downtrend is underway.  Owning other currencies such as the Euro, Japanese Yen, or Canadian Dollar might help protect your wealth.  However, owning gold and commodities may well turn out to be much better insurance against enormous bailout and stimulus packages to be implemented not only by American, but also European and Asian governments throughout the next several years in misguided attempts to boost borrowing and consumption.  Rather ironic, given that it was precisely too much borrowing and consumption that got the world into this situation in the first place.
  • Follow Normann Financial for clear and concise chart and market analysis, as well as updates on whether the Federal Reserve and the other central banks of the world are failing or succeeding in inflating (destroying the purchasing power) of the U.S. Dollar, Euro, and other fiat currencies.  The charts provide far better information than government officials or Wall Street.
  • Given the events presently occurring in world financial markets and the global economy - the likes of which have not been seen since the 1930s - it is vital to protect oneself.
Detailed Analysis of Individual Charts of Current Interest:

The Gold/S&P ratio has corrected back to our anticipated target area, indicating that the time to exit general equities and re-enter long gold positions likely here - or near.

U.S. and World equity markets are in multi-year downtrends. For now, the recent rally pushed up to precisely the lower end of our expected 930-945 resistance range for the S&P 500 index.  Many individual stocks and indices also reached significant resistance, and we closed most of our long positions with large profits a bit early rather than risk holding on too long.  For anyone still long the S&P 500, we think this is a very risky proposition at this point.  We shorted the S&P 500 at 923 with a stop above 940.  We are also short REITs via a long position in SRS.

When the current bounce ends - as it looks increasingly as though it already has - the most plausible target range for the next intermediate bottom for the S&P 500 remains around 620-580 and 5900-5500 for the Dow Jones Industrial Average.

For the S&P 500 (chart below), note the significance of the 200 day (43 week) moving average.  It tends to offer stiff resistance during major downtrends (a good example of which can be seen during the 2000-2003 bear market), and is currently located near 950, rapidly declining deeper into the 930-980 resistance range.  The plausibility of breaking 980 any time in the next several months has significantly diminished now that the 200 day (43 week) moving average has fallen so far.

Once the market hits a final bottom, all the moving averages are eventually certain to be broken through to the upside, but that may be another year or more away from happening.  For example, during the 2000 to 2002 bear market, the S&P took 31 months from the peak to the ultimate low (down 51% from the peak).  During the 1929 to 1932 market collapse, the Dow Industrial Average took 34 months to hit bottom (down 89% from the peak).  So far, the S&P is only 18 months into its current bear market.

When the S&P and most other major world indices eventually successfully clear both the 200 day (43 week) and 300 day (65 week) moving averages, we are likely to see - at the very least - a cyclical bull market lasting a couple of years, and - depending on how things turn out - possibly a new major bull market lasting several years. 

More than anything, the longer-term outcome may depend on the future world energy situation.  Will there be sufficient crude oil and natural gas production?  Will (and can?) alternative energy sources be scaled up quickly enough to compensate for potentially declining world oil and gas production?  For now, the start of any kind of bull market (and not just a multi-week or multi-month bounce) is likely well into the future, but these questions will quickly take center stage when the world economy attempts to resume its growth.  The level of the oil price - measured both in terms of paper currency and in ounces of gold - will likely be the single most important factor with regard to the future of the world economy.

Global, European, and Asian (ex-Japan) equity indices are displayed below, and the strong correlation with the U.S. stock market is unmistakable.  All the talk over the past few years about the rest of the world having decoupled from the United States appears thoroughly discredited and naive at this point.  Perhaps some level of decoupling between different regions of the world might eventually occur, but it is likely to be a long-term process and to happen only to a limited extent.

Smith & Wesson reached likely resistance, and a correction is underway.

Commodities started a mini-breakout the day before Bernanke spoke on March 18th (please see intra-week updates posted on March 17th and March 19th).  The 2001 to 2008 uptrend ended with what looks like a buying panic where commodity prices went parabolic and then crashed through both the 200 day (43 week) and 300 day (65 week) moving averages, as well as the thick, blue uptrend line.  A close back above both long-term moving averages is necessary in order to say with some confidence that the downtrend likely has run its course and that the final bottom is in.  However, a rally at least up to test the 200 day (43 week) moving average appears possible at this point.

The crude oil chart strongly resembles the commodity index / basket chart shown two charts up.  We stated that "if crude can break the $56 level (and thus break back into the channel - marked in orange - that it followed from 1999-2008), a rally up to test the 200 day (43 week) moving average and resistance in the $68-$70 or even $78-$80 range is likely."

Crude oil finally broke out of its $37-$56 range, and has rallied past $60.  We went long oil when it corrected to around $47 (the level around which we previously noted that we expected short term support), and have moved our stop up to about $49.50, locking in a moderate profit with and the potential for significantly larger profits to come.  A further move to somewhere between $68 and $80 over the next few months appears plausible.

Copper has accelerated to the upside, but remains solidly below its rapidly falling long-term moving averages.  We are still far from proclaiming that copper likely has entered a new bull market, but its persistent rise in recent weeks has added credence to the possibility that the current equity market rally could carry all the way up to test the long-term moving averages rather than failing at lower levels as originally appeared more likely.  Please note that it is coming very close to likely significant resistance, and this may very well indicate that both copper and the general equity markets are nearing a top after which a significant drop in both likely will take place.  Should copper later come down and break its $1.255 per pound low, it is likely that world equity markets will be breaking down to new lows either simultaneously or within a few weeks to months afterwards.

The DBB base / industrial metals fund has rose on huge volume increases recently and surged up to test the 200 day (43 week) moving average.

Until next weekend, have a very good week.  Always remember that proper risk management is essential - and even more so during volatile markets.

 

 

 

 

           

 
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