NFTRH Interim Update 3.5.13, Market Review and Strategy

Broad Market

With Europe up this morning and the US market closing yet again right at resistance yesterday (Dow at the top of its Reverse Symmetrical Triangle and SPX/NDX at lateral resistance) it looks like today could be the day that decides whether or not recent corrective activity “was it”, in answer to the question that NFTRH 228 asked in its opening segment.

Additional upside from here could signal that the drive to SPX mid-high 1500’s is on and it is probably not a good idea for bears to stand in the way of it unless operating on a time horizon measured in months.  I have a list of individual stocks and global ETFs, some of which I would plan to deploy into this atmosphere for a ‘drive toward 5’ trade as we’ll call it going forward.  A drive toward, but not to, 5 years for the current bull cycle.

The cycle can be interpreted to have begun in March, 2009 although you may recall that many leading items bottomed in Q4 of 2008 and then put in higher lows in March, 2009 when the S&P 500 made its final low.  Funny how those same leading and relatively strong items (precious metals, commodities, China, NDX, Emerging, etc.) are now relatively weak leading into the end of the cycle.  I think the symmetry here is important.

If the US dollar takes an over bought near term decline, it should allow commodities and foreign (esp. emerging) markets to find support and rally as well.

Bottom Line

If markets continue upward now, we will probably get very guarded and respect the “sell in May and go away” jingle this year, unlike last year.  Ideally this would be engaged this spring above SPX 1550.  In the diminishing likelihood that markets do take the harder correction in the near term to SPX low 1400’s, we would hold open the prospects for a bullish backdrop for the majority of 2013 before big changes come about.  This week should decide which plan wins out.

If the bull is to continue here and now, we are able to start painting in time frames.  If the bull cycle were to terminate in July, that would make a cycle of about 4.6 years for the leadership markets (except for the gold stocks, which are already in a cyclical bear) and 4.3 years for the SPX since their respective bottoms in 2008 and 2009.

Precious Metals

And what a leader the PM’s have been!

Again, think about the symmetry to 2008/2009.  This sector is the ultimate canary in the coal mine.  It turned and burned so hard in Q4 of 2008 that it made peoples’ heads spin. As the greatest inflation attempt (still ongoing) of all time was being engaged.  This would ultimately launch ‘Hope 09’ and the great cheer fest Wall Street has got going today.

Now, near the end of the cycle gold stocks are declining so relentlessly and seemingly so inexplicably that people have trouble wrapping their heads around it.  Gold and silver are on the mat.  Take away all the conspiracies and what you see is a simple picture of just maybe the beginning of the end of a 4+ year market cycle.

The parameters are clear in gold and silver.  Gold should not decline below 1524 and silver below 26 or the bull markets will be broken, maybe not in a secular way, but such breakdowns would indicate rapid additional downside before any recovery.

The gold stocks are now setting up for a trade, and a potentially excellent one at that.  Given that the precious metals may be leading the end of a cycle, I am not prepared to call a coming bottom and rally a new bull market.  If it is, great.  If not, the rally should pack enough power to be a profit maker, given the extreme over sold capitulation that it is likely to launch from.

HUI weekly chart

The weekly chart shows us what we are dealing with.  If a rally comes from the low 300’s (currently favored), then the target could be as high as the low-mid 400’s where there is a lot of congestion in the form of our old friend the neckline to the 2011 topping pattern (upper red dotted line), the declining weekly EMA 50 and (not shown), the daily EMA 200’s currently around 440 and declining.  Initial resistance would be the lower dotted line, which is the neckline to the big H&S from 2009 to 2013 that some people are worried about.  It currently intersects 375.

In the less favored near term scenario, if HUI were to bottom in the mid 200’s, the ensuing rally might only make it to the 375 neckline (lower red dotted line).  That would be a great trade, but if we buy and go all in at 300, then it would not feel so good after the trap door to 250 falls out.  So it could be tricky, and it remains a market for people willing to trade in my opinion.

So first HUI needs to find a bottom.  The chart is self-explanatory.  Here I prefer to take what the chart is saying (low 300’s or mid 200’s for a bottom) and subordinate it to what I actually see, hear and smell during any given day or week.  The sector is in capitulation mode and in watching quality items like Franco Nevada and Silver Wheaton finally get puked up, it smacks of forced institutional selling; i.e. redemptions.

We who are interested in the sector should make this dynamic work for us.  There are big time events in play and the whole sector is being taken down.  My personal tack is to take known quality only.  Quality comes in the form of cash flow, management track record, stability of business, manageable political risk profiles, etc.  The thing about a sector capitulation with forced redemptions is that the good stuff comes on sale right along with the crap.  So why mess with the crap?

A few ‘good stuff’ items by my eye are FNV, SLW, RGLD, AG, AUY, RIOM, NGD, SAND, BGLPF and over in the less favored but potentially explosive exploration patch, PVG, AAU, AKG and PIRGF.  This is of course just one non-stock analyst’s interpretation of quality.  Please do your own DD.

This could be a significant buying opportunity.  But again we’ll close with the question “what are the precious metals forecasting?” we have been asking lately.  In 2008 they forecast the great, inflation-fueled rally in hope and greed that is now getting long in the tooth.  There is a Yang to inflation’s Yin, and it is called deflation.  The precious metals (and now commodities) may have entered the realm of ‘economic and market indicator’ as opposed to being simple ‘plays’.