Big Picture View

Here is a summary of our big picture view of the markets. Note that our short-term views may differ from our big picture view.

In nominal dollar terms, the BULL market in US Treasury Bonds that began in the early 1980s will end by 2013. In real (gold) terms, bonds commenced a secular BEAR market in 2001 that will continue until 2014-2020. (Last update: 23 January 2012)

The stock market, as represented by the S&P500 Index, commenced a secular BEAR market during the first quarter of 2000, where "secular bear market" is defined as a long-term downward trend in valuations (P/E ratios, etc.) and gold-denominated prices. This secular trend will bottom sometime between 2014 and 2020. (Last update: 22 October 2007)

A secular BEAR market in the Dollar began during the final quarter of 2000 and ended in July of 2008. This secular bear market will be followed by a multi-year period of range trading. (Last update: 09 February 2009)

Gold commenced a secular bull market relative to all fiat currencies, the CRB Index, bonds and most stock market indices during 1999-2001. This secular trend will peak sometime between 2014 and 2020. (Last update: 22 October 2007)

Commodities, as represented by the Continuous Commodity Index (CCI), commenced a secular BULL market in 2001 in nominal dollar terms. The first major upward leg in this bull market ended during the first half of 2008, but a long-term peak won't occur until 2014-2020. In real (gold) terms, commodities commenced a secular BEAR market in 2001 that will continue until 2014-2020. (Last update: 09 February 2009)

Copyright Reminder

The commentaries that appear at TSI may not be distributed, in full or in part, without our written permission. In particular, please note that the posting of extracts from TSI commentaries at other web sites or providing links to TSI commentaries at other web sites (for example, at discussion boards) without our written permission is prohibited.

We reserve the right to immediately terminate the subscription of any TSI subscriber who distributes the TSI commentaries without our written permission.

Outlook Summary

TSI's Principles of Technical Analysis (TA)

Our views on TA are not mainstream. In fact, many of our TA-related beliefs are so non-mainstream as to be controversial. Below is a collection of these beliefs. The collection is not comprehensive, but it should provide readers with an overview of how we think historical price action can and can't be used.

Note that there is significant repetition in the following list, in that a similar meaning is sometimes conveyed in separate points using different words. Also, we are not stating that our beliefs are the 'be all and end all' of TA and should be adopted by everyone. For example, if you are able to make good use of a TA method that we believe to be useless, then there is probably no reason why our opinion should prompt you to make a change.

1) Clues about future price action can sometimes be gleaned from charts, but charts tell you a lot about what has happened and very little about what is going to happen.

2) All of the useful information that can be gleaned from a chart is available without drawing a single line or calculating a single Fibonacci ratio. For example, you can tell whether a price has trended upward or downward just by 'eyeballing' the chart. You can also tell, just by looking at the chart, if a market is extended to the upside or the downside.

3) You can't gain an advantage in the financial markets by doing something that could be done by the average nine-year-old, such as drawing lines to connect dots on a chart. Note: We regularly draw lines on the charts contained in TSI commentaries, but this is for illustrative purposes only. For example, for TSI presentation purposes we draw horizontal lines to highlight the previous peaks/troughs that could influence future trading, angled lines to illustrate the point that a market has been making lower highs or higher lows, and channel lines to show that a market has been rising or falling at a consistent pace. We never draw lines on charts for our own trading/investing.

4) The more lines drawn on a chart, the less useful the chart becomes. The reason is that the lines obscure the small amount of useful information that can be gleaned from a chart.

5) The more obvious a chart pattern, the less chance it will be helpful in figuring out what the future holds in store or the appropriate action (buy, sell, or do nothing).

6) Markets invariably retrace, which means that they never move upward or downward in straight lines for long. However, markets are no more likely to retrace in accordance with "Fibonacci" numbers than with any other series of similarly spaced numbers.

7) Under normal market conditions, breakouts above resistance and below support are unreliable buy/sell signals. Manic markets like the one for NASDAQ stocks during 1998-2000 are exceptions. Under these abnormal market conditions, most upside breakouts are followed by large gains.

8) False upside breakouts are more reliably bearish than downside breakouts, and false downside breakouts are more reliably bullish than upside breakouts.

9) More often than not, a "death cross" (the 50-day moving average moving from above to below the 200-day moving average) will roughly coincide with either a short-term or an intermediate-term low. In other words, "death crosses" usually have bullish implications and are therefore misnamed. "Golden crosses" (the 50-day moving average moving from below to above the 200-day moving average) are neither bullish nor bearish.

10) The trend can't possibly be your friend, because in real time you never know what the trend is. You only know for certain what it was. Another way of saying this is that the current trend is always a matter of opinion. That's why, at any given time, there will be a large contingent of bullish traders who believe that the trend is their friend and a large contingent of bearish traders who believe that the trend is their friend.

11) When figuring out where to buy and sell it can be useful to identify lateral support and resistance levels. For example, part of a money management strategy could reasonably involve buying pullbacks to support when there is good reason to believe, based on fundamental analysis, that a bull market is in progress. More generally, charts can help identify appropriate price levels to buy and sell for investments that have been selected using fundamental analysis.

12) Charts and momentum indicators can help determine the extent to which a market is 'overbought' or 'oversold', which, in turn, can help identify appropriate times to scale in to and out of positions.

13) One way of determining the extent to which a market is 'overbought' or 'oversold' is to check the price relative to its 50-day and 200-day moving averages. For example, when a market price moves a large percentage above or below its 50-day moving average it usually means that the market is sufficiently extended in one direction to enable a significant move in the opposite direction (note that what constitutes a "large percentage" will be different for different markets). For another example, downward corrections in bull markets tend to end slightly below the 200-day moving average.

14) Acceleration usually happens near the end of a trend. This means that if you are long you should view upward acceleration as a warning signal of an impending top, not a reason to get more bullish.

15) Long sequences of up days create short-term selling opportunities and long sequences of up weeks create intermediate-term selling opportunities, especially if the percentage gain is large in the context of the market in question. It's the same with long sequences of down days/weeks and buying opportunities. A "long" sequence is at least five in a row.

16) Charts showing price ratios can be informative, but traditional TA is even less valid with ratios than with nominal prices. In particular, support and resistance levels only have meaning with reference to the prices of things that people actively and directly trade in financial markets.

17) With the exception of upward reversals in extremely 'oversold' markets and downward reversals in extremely 'overbought' markets, intra-day price reversals are unreliable indicators of the future.

18) History repeats, but in real time you can never be sure which history is repeating. Putting it another way, a market's future price action will almost certainly be very similar to the price action of that market or some other market at an earlier time, but while it is happening you can never be certain which historical price action is being duplicated.

19) Elliott Wave analysis explains everything with the benefit of hindsight, but provides its practitioners with very little in the way of foresight.

Oil Update

The oil price has oscillated within a wide range since the second quarter of last year. It has just moved into the top half of this range.



In our opinion, oil's only hope of breaking out of its range to new multi-year highs within the next 6 months lies with major military conflict or the fear of major military conflict in the Middle East. In the absence of war in the Middle East or burgeoning fear of such a development, oil is more likely to drop back to near the bottom of its range over the months ahead than break above the top of its range. This is due to the combination of abundant supply (in the absence of a politically-driven supply shock) and slowing economic growth. Unfortunately, the risk of war and/or greater political instability in the Middle East is uncomfortably high.

The oil price could reach new all-time highs within the next few years with or without a major supply shock, but if it does it will likely be due more to the depreciation of money than the increasing real value of oil.

The Stock Market

The US Stock Market

A weekly chart of the S&P500 Index (SPX) is displayed below.

The SPX only needed to decline by a few points on Friday to complete a weekly reversal from an intermediate-term 'overbought' level, which would have been preliminary evidence that an important top was in place. Instead, the market rebounded on Friday. This doesn't mean that an important top is not in place; it means that there isn't yet any evidence that a top is in place.



It won't surprise us if the senior US stock indices make marginal new multi-year highs this week. In fact, it will be surprising if the NASDAQ100 Index (NDX) doesn't make a new multi-year high this week on the back of Apple's victory over Samsung in a high-profile US patent lawsuit. However, in the absence of the Fed and/or the ECB implementing new schemes to more rapidly depreciate their currencies, moves to new nominal price highs at this time will do nothing other than increase the downside risk.

China's Stock Market

China's stock market, as represented on the following daily chart by the Shanghai Stock Exchange Composite Index (SSEC), ended last week at its lowest level since the first quarter of 2009. The miserable performance of China's stock market is contributing to the bearish outlooks of some analysts, but it doesn't figure into our bearish outlooks for equities or economic growth.



Thanks largely to the activities of central banks and governments, all stock markets have some casino-like attributes. China's stock market, however, is almost solely a type of casino. The performance of this market is determined by the extent to which the primary focus of the gambling public is on the stock market, which, in turn, is determined by the extent to which the government desires a rising stock market. This is one reason that China's economy has weaker foundations than the much-maligned US economy. The Fed and the government in the US are making it increasingly difficult to allocate capital efficiently, but we get the impression that in the majority of cases the US private sector is still able to overcome the meddling of bureaucrats and politicians. In China, however, almost all capital allocation is either directly made by the government or steered by price signals that have been distorted beyond any association with sustainable consumption patterns or investment returns.

The bottom line is that China's stock market is not an economic indicator, it's a gambling indicator. Over the past few years, Chinese punters have been concentrating on other games.

The situation will change if China's government decides, for face-saving reasons, that an upward-trending stock market is important. That could happen at any time.

This week's important US economic events

Gold and the Dollar

Gold

Below is a long-term weekly chart of the US$ gold price. The blue line on the chart is the 65-week moving average.

All meaningful corrections during the first 7 years of gold's long-term bull market ended at the 65-week MA. However, the pattern changed in 2008. In 2008 gold broke well below this MA before resuming its long-term advance. There was also a decisive breach of the MA this year. This is simply a sign that volatility has begun to increase. As the gold bull market ages we are likely to see sharper rises and sharper declines.

Last Friday gold achieved its first weekly close above the 65-week MA since April. This isn't proof that the correction is over, because the gap between the current price and the MA is small. But as discussed in last week's Interim Update, you only get "proof" of an important upward trend reversal after it becomes far more costly to buy.



Anticipation is starting to build regarding what Fed chief Bernanke and ECB chief Draghi will say at the end of this week at the Fed's annual retreat In Jackson Hole, Wyoming. Bernanke is scheduled to speak on Friday 31st August and Draghi is scheduled to speak on Saturday 1st September.

Our opinion regarding the likelihood of more QE anytime soon remains the same: we think it is very unlikely. However, that doesn't mean that Bernanke won't 'throw a few bones' to the markets in his Jackson Hole speech. Reiterating that the Fed stands ready and willing to provide greater monetary accommodation (meaning: create more havoc in the economy by distorting price signals) if deemed necessary is a bone that will likely be thrown even if there is no intention to do anything in the near future. This is the sort of statement that can always be made because it is just a statement of the bleeding obvious. The fact is that the Fed is ALWAYS ready and willing to pump more money into the economy if the halfwits who have been granted the power to manipulate money and interest rates deem it necessary. This is actually the single biggest threat facing the US economy, but that's a separate issue.

The point we want to make today is that the higher gold moves in the days leading up to Bernanke's Jackson Hole speech, the greater the potential for a sharp sell-off if/when no specifics regarding a new inflation-promoting program are offered. At the end of the week before last gold was trading in the low-$1600s and there clearly wasn't much QE anticipation built into the price, but it will be a different story if gold moves well above $1700 during the days leading up to "Jackson Hole".

A sharp rise in the gold price during the days leading up to Bernanke's 31st August speech would significantly increase the short-term downside risk and should therefore be viewed as a short-term selling opportunity.

What about if Bernanke surprises us by making it clear (strongly hinting) that a new inflation program will soon be introduced? In that case gold will do better over the next few weeks than we currently expect, which isn't a problem.

Something else worth considering is the possibility that a specific promise or very clear hint of a new inflation program will come from the ECB rather than the Fed. For example, if the ECB confirms that it will buy whatever amount of Spanish, Italian and Portuguese government bonds it needs to buy to keep the yields on these bonds below certain levels and IF the German government supports this yield-capping scheme, the short-term effects on the markets would probably be similar to the Fed announcing a new QE program. Such a development is unlikely in the near future because opposition from Germany will be a stumbling block, but it is less unlikely than another round of QE from the Fed.

Gold Stocks

The HUI is testing resistance defined by its June peak. It has just risen for five days in a row, but it is only a little 'overbought'. This is because the overall gain achieved over the course of the five consecutive up-days was a fairly modest 4.8%.

The odds are in favour of the HUI breaking above resistance this week.



We don't think there's much short-term downside risk to worry about at the HUI's current price, but, as is the case in the bullion market, risk will increase if the price moves sharply higher this week in anticipation of a new inflation program being announced at the Fed's Jackson Hole get-together. Consequently, if the HUI moves up to the high-400s over the days ahead it should be viewed as a short-term selling opportunity.

Currency Market Update

Regardless of what has been happening in Australia, over the past several years the A$ has trended up and down with global equities (as represented by the DJW). Most recently, this has entailed a sharp decline to a low in early June followed by a rebound. The relationship is illustrated below.



A large stock market decline could begin immediately or there could be 2-3 more months of topping action before it begins. Either way, there's a high probability that a large A$ decline will go hand-in-hand with the next large stock market decline.

As we've mentioned in the past, we are always 'long' the A$ due to the cash and investments we hold in Australia. We sometimes hedge this exposure by purchasing FXA put options during periods when the A$'s downside risk looks substantial, although we are presently unhedged despite the apparent risk. We will possibly buy some FXA puts if the A$ moves up to around 1.08 within the next few weeks, but this time around it's more likely that we will indirectly hedge our A$ exposure via VIX call options and/or SPX put options.

Update on Stock Selections

Notes: 1) To review the complete list of current TSI stock selections, logon at http://www.speculative-investor.com/new/market_logon.asp and then click on "Stock Selections" in the menu. When at the Stock Selections page, click on a stock's symbol to bring-up an archive of our comments on the stock in question. 2) The Small Stock Watch List is located at http://www.speculative-investor.com/new/smallstockwatch.html

Company news/developments for the week ended Friday 24th August 2012:

  *Clifton Star (CFO.V) announced that it had employed three engineering firms to complete the Preliminary Economic Assessment (PEA) for its Duparquet gold project in Quebec. InnovExplo, a Mining Consulting Firm from Val-d'Or, will update the resource estimation and will design the mining sequence for the open pit operations. InnovExplo will also be responsible for the integration of all other aspects of the report as the lead author. Bateman Australia Pty Ltd will design the metallurgical treatment circuit and mill, and also provide a comparative study on the capex/opex of the alternative BIOX and Albion processes. Stavibel Engineering Services, a subsidiary of SNC-Lavalin, will study all the environmental and social aspects of the project. The PEA is expected to be completed at the end of 2012, with results published in January of 2013. This is in line with the tentative schedule previously advised by the company.

CFO also announced that Dr. David Dreisinger will join the company as Vice President Metallurgy on a part time consulting basis. Dr. Dreisinger is a Professor and Chairholder (Industrial Research Chair in Hydrometallurgy) at the University of British Columbia and consults to the metallurgical industry worldwide through Dreisinger Consulting Inc.

  *Energy Fuels (EFR.TO) announced that it has bought-out its 50/50 joint venture partner in a small exploration-stage uranium project in Utah. The total cost to EFR in cash and shares will be about $2M. In exchange for this payment EFR will add about 1.4M pounds of uranium and 9M pounds of vanadium to its in-ground resource. This move by EFR to consolidate ownership of the project is reasonable, but not financially significant at this time.

  *International Tower Hill Mines (THM) reported results from 45 geotechnical and condemnation drill holes. Although there were a few interesting intercepts, the results generally aren't significant. The purpose of this type of drilling isn't to expand the existing deposit or find new deposits, it is to determine the appropriate location of mining infrastructure.

  *Orvana Minerals (ORV.TO) reported production results for the month of July for its EVBC mine in Spain and its UMZ mine in Bolivia. Total production for the month comprised 5.9K ounces of gold and 1.7M pounds of copper. These results are on plan (the plan for the current quarter is for production of 19.1K ounces of gold and about 5M pounds of copper).

  *Pretium Resources (PVG) has completed the small equity financing announced two weeks ago. Gross proceeds of $20.7M were raised by issuing flow-through shares at C$18.00/share (a roughly 20% premium to the current market price).

  *Prodigy Gold (PDG.V) announced a large increase in the estimated gold resource at its Magino project and a confusing alteration to the Magino project's engineering schedule (the insertion of a PFS into the schedule, implying that the FS will be completed many months later than previously advised). This news was discussed in last week's Interim Update. Later in the week PDG issued its MD&A (Management Discussion and Analysis) and financial report for the June quarter. The MD&A didn't include the aforementioned engineering schedule alteration and reconfirmed the overall plan to commence mine construction in 2014 and production in 2015. The financial report showed that PDG had about $50M of working capital as at 30th June, which should be more than enough to fund its activities over the next 12 months.

Endeavour Mining (TSX: EDV, ASX: EVR). Shares: 254M issued, 289M fully diluted. Recent price: C$2.00

EDV's stock price plunged a couple of weeks ago in reaction to news that the company had agreed to buy Avion Gold (AVR.TO) in an all-stock deal. We aren't keen on the deal, because at the current gold price it adds more risk than potential reward. However, it's important to put things in perspective. This is not a Tye Burt (former Kinross CEO) style asset purchase that wipes out a lot of shareholder value in one fell swoop due to an absurdly high price, it is the purchase of a relatively risky asset at a fairly low price.

The continued downward pressure on EDV shares due to the AVR takeover news combined with the recent gains in other gold mining stocks has led to EDV becoming one of the gold sector's best candidates for new buying.

GDXJ Trading Position

The plan with our GDXJ trading position has been to take profits at around $26 by October, but it will make sense to take profits at a lower level if the price surges in the days leading up to the Fed's Jackson Hole meeting. For TSI record purposes, the position will therefore be exited if the price rises to $23.90 this week.

Note that we aren't forecasting a rise to $23.90 this week. We are saying that if it does happen we will view it as a short-term profit-taking opportunity.

Chart Sources

Charts appearing in today's commentary are courtesy of:

http://stockcharts.com/index.html