The stock market continues to be pressured by bad economic reports that never seem to end, poor technical conditions and a mountain of uncertainty as to whether the Fed and the government are taking the right steps to turn the economy around.
There is just no justification to be invested on the long side of the market. I don’t care how cheap stocks may seem. Yesterday’s breach of important supports means we really don’t have a safety net underneath us. Even still, the stock market could rally in a short covering squeeze given oversold conditions. New lows are pretty high at 931 for the NYSE and 567 for the OTC.
Do you remember a month or two ago when everyone was talking up gold as a safe haven and touting a hyperinflationary explosion that will drive gold to $2000 an ounce in 2009?
In the last seven trading days gold has reversed course from a high of $1,005 to a low today of $906. This safe haven has just fallen 10% in seven days. Intermediate-term cycles are now negative, with %K at 61 and %D at 80.
Fidelity Select Gold (FSAGX) is now trading below both its 50 and 200-day moving averages. FSAGX reached a high of $47.50 in early 2008 and failed to get anywhere near these highs on the latest gold rally.
FSAGX almost touched $34 a share and is now dropping fast. In technical terms, this is a bearish pattern because it has established a much lower high than last years high.
The fact that gold bullion also failed to reach $1017, although very close at $1005, looks more like a double top formation. The fact that gold stocks are significantly below last year highs is confirmation that this is no safe haven. Gold finished down $26.1 an ounce to close at $912.9 an ounce.
I know a lot of investors are getting caught up in the idea of a hyperinflationary scenario, but I think the risk the economy is facing is deflation on a global basis and gold might not play out as you envision it.
What may be a surprise to you is how well the U.S. dollar has been doing, which has been in a steady uptrend and has recently taken out its November highs on an intermediate-term basis. The dollar is now in a bull market and it is pretty clear to understand why, when on a global basis in Asia and Europe as well as in the emerging markets are falling faster than the U.S. markets.
Strange as this may seem, the dollar is being viewed as the safe haven, as foreign currencies are falling much faster. Think globally as if you were a foreign investor. Whatever we might believe about the dollar, the technical realities we see is our currency is now trading well “above” its 50 and 200-day moving averages, with its 50-day moving average trading “above” its 200-day M.A. This means we have a bull market in the U.S. dollar.
Now let’s talk about the stock market. After yesterday’s breach of key support levels, we removed the technical argument that a major bottom had developed last November. What yesterday showed us is the bear market is alive and well.
This is not a surprise as our technical indicators have been struggling for months now, but it did confirm on an intermediate-term basis, the pattern of lower lows and lower highs to still be very much in place. What this tells us is trying to cherry pick cheap stocks in downtrends can kill you.
Last year a subscriber called me asking for some advice. She had inherited a large amount of shares in an oil and gas company that was priced at approximately $15 a share. This was her largest asset and her entire fortune was resting on this company. The stock was considered at the time significantly undervalued and its growth prospects excellent, given the steady rise in oil prices in the first half of last year.
I advised this lady to sell her stock holding as I felt a recession was coming and that crude oil and natural gas prices would fall as the economy deteriorated. The lady sold her shares. I called this lady back to see how she was doing and she told me she repurchased her shares back but at a lower price. I told her this was a mistake. I don’t know what she did with her shares.
However, in the last eight months the stock has fallen from $15 a share to today’s price at 47 cents a share. When the stock was $15 a share it was a value based on its forward looking earnings forecast. At $10 it was an even better value. It was a screaming value at $1 a share. But if you had bought the stock at $1, you would now be down 53 percent.
The moral of this story is cheap stocks don’t make it a buy if it is still in a downtrend. If you buy a stock, have a plan in place to make sure a little loss doesn’t become a big one. This is the first rule of investing!
Remain defensive.
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