Commodity, Currency, Gold, and Equity Market Analysis by Dr. Christian Normann  
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Weekly Market Analysis Based on Closing Prices, Friday October 9th 2009

Introductory Summary:

  • U.S. and World equity markets are presumably still in multi-year downtrends.  However, the S&P 500 has validly broken the 300 day (65 week) moving average.  It has risen up to the start of the next significant resistance range from 1070 to 1120.  It has also recovered almost 50 percent of the 2007-2008 decline (the halfway point is S&P 1120), which is approximately where corrective moves tend to top out.  We believe a second phase down is likely to begin at some point during the fall/winter, but the intermediate trend is assumed to remain up until we see a weekly close over 1 percent below the 65 week moving average. 

  • Gold appears to have broken out of its 19 month long base with a weekly close at $1048.  Gold has expected support between $1033.90 and $978.  A weekly close below $970, while not expected, would indicate a failed breakout.  We expect gold to move much higher over the coming months and years, and are adding to our long gold position at the market open next week.  

  • Increasing the odds that we may see a new bull market in oil is the fact that the 10 week moving average has crossed the 43 and 65 week moving averages to the upside.  From 1999 to 2008, that always indicated a resumption of the uptrend.  If $80 breaks on a weekly close, a new major uptrend is very likely underway.  Should oil have a weekly close beneath the long term 43 and 65 week moving averages, prices could decline anew if there is a second downturn phase in the stock market. 

  • The broad CRB Continuous Commodity Index has confirmed it is likely back in a primary uptrend as its 10 week moving average has, as with crude oil, also crossed the 43 and 65 week moving averages to the upside. 

  • The US Dollar (as measured by the US Dollar Index) may be headed for a test of the all-time low of 70.70 recorded in 2008 after closing 1 percent below the late 2008 low of 77.69.  A weekly close at 82 or higher is needed to resume the uptrend.  There is reason to think it may have some sort of a rally, potentially a large one, from around 74 (see details noted on the chart). 

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Detailed Analysis of Individual Charts of Current Interest:

The Gold/S&P ratio has corrected back to our anticipated target area (1.00 to 0.80), indicating that the time to exit general equities and re-enter long gold positions likely here - or near.
Gold has risen over 400 percent against the S&P 500 since year 2000, which is the same as saying that the S&P 500 currently is down over 80 percent when measured in gold - honest money - and that is after the huge rally in the S&P since March!

U.S. and World equity markets are presumably still in multi-year downtrends.  However, the S&P 500 has validly broken the 300 day (65 week) moving average.  It rose up to the start of the next significant resistance range from 1070 to 1120, but may already be turning down.  It has also recovered almost 50 percent of the 2007-2008 decline (the halfway point is S&P 1120), which is approximately where corrective moves tend to top out.  We believe a second phase down is likely to begin at some point during the fall/winter, but the intermediate trend is assumed to remain up until we see a weekly close over 1 percent below the 65 week moving average.

The high level of positive sentiment in equities combined with extremely negative sentiment toward the dollar indicates to us that it is quite likely there at some point will be a second down phase for stocks, where a second phase rise in the U.S. dollar simultaneously takes place.  That would be the opposite of what the majority of market participants are expecting.   
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.  Initial support is likely around S&P 800, and if 765 breaks on a weekly close, the odds of a continued fall down to test the March low at 666 increases significantly.  A total collapse down to below S&P 500 / Dow 4000 cannot be entirely ruled out either.  An 89% decline as from 1929 to 1932 would take us to about S&P 175 and Dow 1550.  We may not ever get that far, but we may go lower than most can imagine.  However, there is also the possibility that the nominal value of the stock market does not fall very much (or even rises somewhat), while the stock market still collapses further when measured in gold (rather than paper dollars).  Gold has broken out above $1034, and we expect it to go up substantially over the next several months and years.  Unless the stock market starts to rise at an equal rate, general equities will be falling when measured in honest money whose value the central banks cannot inflate away.

A final bottom in the stock market 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 22 months into its current bear market.  There could thus easily be about a year of decline left for the equity markets.

Until next weekend, have a very good week.  Always remember that proper risk management is essential - don't fall victim to complacency just because the markets have seen much lower volatility over the past few months.  There could be - and most likely will be - at least one more major leg down for general equities this fall / winter.

 

 

 

 

           

 
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