virtually guarantee that what Iím about to suggest isnít on anybodyís radar
screen. But before I share my prediction, a little background analysis is in
been seven previous bull markets that were born in the depths of vicious bear
markets similar to what we just went through. Each one of those bulls racked up
impressive gains during the initial thrust out of the final low. Throwing out
the `32 to `37 bull as an anomaly not likely to be repeated, the average gain
for the first two legs of bulls with similar DNA as our own has been between 41%
and 73%. After the second leg each one of these bulls underwent a mild
corrective pullback of 8% to 14%.
looking for that pullback since December and we obviously got it from mid
January into early February.
Next Iím going
to put up a long term chart of the S&P from the `02 bottom to present so we can
make some comparisons for what should and should not happen in a ďnormalĒ bull
marketÖif there is such a thing. Both bulls were born on the back of massive
liquidity injections by the Fed. So itís not surprising they have followed a
similar pathÖwell at least up to now.
will see the most aggressive moves at the beginning and the end of a bull
market. At the beginning smart money piles into perceived value. At this stage
of the game retail traders are still too shell shocked from the bear to trust
towards the end of the bull, retail investors will panic into the market on
fears of getting left behind sending the market surging higher. This is of
course when smart money is unloading their shares.
You can see
that the `02 -`07 cyclical bull followed this script almost to a T. The sharpest
rallies occurred from March `03 to early `04 and then again as the market surged
out of the `06 bottom into the final top in October of `07.
bull we are in right now is about to morph into a completely different animal
than just about any other bull market in history. And most certainly this bull
will not fit in the same category as the `02-`07 bull. I think we are about to
bypass the second phase of a normal bull market and jump straight to phase
three, the ending stage.
This is a bull
spawned by the printing of literally trillions and trillions of dollars by
central banks around the world. You can see by examination of the chart above
that this bull has been much more aggressive than the last one, rallying over
70% in its first 10 months.
move to new highs by the Russell, Mid Caps, and Nasdaq suggests that the third
leg of the bull is now underway. As most intermediate term rallies last 20-25
weeks trough to trough and this rally is on week 4, we probably have at least 10
to 15 weeks left before we can expect a top.
Now keep in
mind that this has transpired while the dollar has been rising. As a matter of
fact, the dollar is the key element in what Iím about to suggest.
So next, letís
take a look the dollar.
the last two major 3 year cycle lows with a blue arrow. Now to understand where
Iím going with this you need to understand the concept of left and right
translated cycle is a cycle that tops left of center. For instance, if the
rally out of a 3 year cycle low were to top out in less than 18 months we would
consider it left translated. Generally speaking the majority of cycles that top
in a left translated manner move below the prior cycle low.
You can see in
the chart (above) that the 3 year cycle that began in December of 04 did in fact
top in less than 18 months. As expected it broke to new lows at the next 3 year
cycle low in `08.
currently in the same position in this 3 year cycle as it has obviously topped
in a left translated manner. As such, we should expect to see the dollar break
to new lows by the next major 3 year cycle low due sometime in 2011.
Now if we zoom
in a bit Iíll tie this together with how it relates to what I think is brewing
in all asset markets.
doubt the rally in the dollar over the last three months has been violent (the
most violent rallies occur in bear markets). However, as you can see from the
chart below, so far the dollar has not been able to move above the
peak of the last intermediate cycle.
We now have a
failed intermediate cycle in the making. If the dollar fails to break the June
`09 highs and continues to roll over it is in jeopardy of succumbing to the
secular bear trend again.
Next Iím going
to note that last week was the 14th week of the dollar rally. The
intermediate cycle in the dollar rarely lasts more than 20-25 weeks so not only
is the dollar getting deep into an intermediate cycle and in jeopardy of topping
at any time but itís also contending with the multi-decade resistance level at
Not only that,
but sentiment has now turned to extreme bullishness for the dollar and extreme
bearishness on the Euro. That is a recipe for running out of buyers of dollars
and a prescription for a violent short covering rally in the Euro.
the stock market has been rallying despite the dollar. Oil is over $80 despite a
strong dollar. Copper is only about 15% from all time highs despite a strong
dollar. Gold, the strongest commodity of all, is holding well above the prior
bull market high of $1025 in defiance of a strong dollar.
classes are now wound up as tight as a drum. If, or should I say when, the
dollar begins the trip down into the next intermediate cycle low all assets are
set to explode higher.
As hard as it
is to believe I think thereís a very good possibility that the third leg of this
cyclical bull could match the first leg and tack on 200-300 points in the next
virtually everyone underestimates the effect that the multi-trillions of dollars
the Fed has pumped into the system is going to have on all markets.
thatís probably the single worst thing that could happen for two reasons.
afraid that not only will the stock market surge higher but so will the
commodity markets in an inflationary explosion. It was $147 oil and $4.00+
gasoline that eventually broke the back of the global economy in `08 when it was
already reeling from a bursting credit and real estate bubble.
afraid the average investor is going to fall for the hype that the Fed has
ďfixedĒ all of our problems. If the S&P is trading north of 1400 itís going to
appear that the coast is clear.
be further from the truth, so when the market tops and rolls over into the next
bear phase virtually no one will recognize whatís happening and everyone will
again get sucked down into the depths of the bear.
Only this bear
will be much worse than the last one.
wonít be caused by problems in the credit markets. No, this bear is going to be
driven by structural problems in the currency markets and soaring inflation.
Unfortunately we arenít going to fix a currency crisis by printing money. Money
printing is going to be the cause of the crisis in the first place.
The only asset
class that is going to offer any protection in this environment is
commodities. And the one sector that will thrive in a currency crisis is the
Not only will
gold and silver outperform in the pending inflationary surge, but they will
protect investors during the inevitable crisis that the Fedís insane monetary
policy is going to unleash next year.
A financial blog with emphasis on the gold bull market.