The Stock Market is Looking Weak & What’s Wrong with the Gold Miners?

Published: July 31, 2011

29 July 2011

The stock market seems to be at an important inflection point: after the massive bear bottom of March 2009, the Dow Jones came to within just 10% of taking out its old highs of October 2007 in late April and again in early July. But the Dow is now losing steam. This is not good, as the Dow Jones is currently forming a huge bearish head and shoulders technical formation. This makes for an UGLY chart, suggesting that a break down in the Dow Jones could result in an even greater decline than the low of March 2009 sometime in the next year or two.

Is such a decline likely? I’d say so, if for no other reason than that the stock market’s valuation is manipulated by the same people who just a decade ago were acclaimed “masters of the universe” by many in the media. You may have forgotten that, but I remember the mainstream media nonsense in the late 1990’s about Maestro Greenspan and his Magic Puts, and the new “ownership society” during the real estate bubble. Yes Mr Bear is going to take down the Dow Jones, but his real target is the hubris of the “policy makers” who for over two decades have been acting beyond the laws of God and man, their machinations manufacturing lies in the prices of commodities and financial assets for the past two decades.

They’ve also bilked the little guys with impunity with their high-tech and housing bubbles, as they looted the Social Security systems reserves and most certainly the gold in Fort Knox, too. The financial system in July 2011 is a heaping pile of garbage. But before Mr Bear packs up his bag and departs lower New York, things will look a bit different than they do now, and the media will still be blaming George Bush (with some justification) and the Tea Party. Well, stupid is what stupid does.

How far could the Dow Jones fall? A lot further!

My views of the markets (financial assets, old and silver) are based on interest rate cycles. What is good for one; is horrible for the other. The current bull market in stocks and bonds began in the early 1980s with double digit interest rates. By 1980, no one was surprised seeing double digit returns on bonds, as fixed rate investments were seen by all as toxic assets that few people wanted. Rising bond yields from 1947 to 1980 had made bonds a horrible deal for bond buyers. But with the decline in interest rates over the next thirty years, how things have changed. Stocks too, benefitted from declining yields and rates, because that is what happens to financial assets when interest rates and bond yields go down – their valuations go up.

But look where we are now with the US Treasury’s long bond yield (next chart). It bottomed in December 2008, and has since developed a pattern of higher lows. Forget about the current bad news about the US dollar or the debt ceiling for the US Treasury, this chart is telling us that since December 2008, the smart money has been selling into rallies in the US Treasury market. Bill Gross announced earlier this year that the world’s largest bond fund had liquidated all of their US Treasuries, several hundred billion dollars worth. They’d be stupid if they didn’t as it’s just not reasonable to expect the yields in the US Treasury 30 year bond to go below December 2008’s 3.02% yield. And everyone knows that no matter what the Department of Labor tells us about consumer price inflation, in reality price inflation is a whole lot more than the current 4% yield of the US long bond. Rising consumer prices are punishing fixed income investors as we speak. It’s just a matter of time before the bond market figures out that we are at the start of a decade of accelerating price increases, which makes buying and holding bonds a mug’s game. But the bond market’s psychology is not there just yet.

Just as no one rang a bell in 1981 when interest rates peaked, signaling the beginning of a 30 year bull market in bonds, in 2011, no one is going to tell us that the bond bull died in December 2008, or that we are already two and a half years into a possible multi-decade bear market in fixed income. But we are.

I’m expecting a big spike in Treasury bond yields sometime before the next presidential election; and where US Treasury bonds go, the stock market will follow. In fact, stock bulls with clearer heads are already backing away from the market.

Here is a chart for the Dow Jones shown in both the Bear’s Eye View, and in dollars. The Dow Jones seems to be having real problems breaking above its BEV -10% line. Ordinarily, I’d say that the Dow Jones was looking really good. Remember, the low of 09 March 2009 was the second deepest bear market bottom since 1885. It takes time to recover from such a body blow to the market.

But we have to factor in the reality that the “policy makers” since March 2009 have pumped in untold trillions in support of the financial markets. The recent audit of the Fed showed that Doctor Bernanke lent 16 trillion dollars to American and European banks during the 2008 credit crisis, that’s a larger sum than the current US national debt! The Fed hid these loans, too, so what good are the published figures coming from the Bernanke Fed? I follow them, but it’s getting harder and harder to believe them.

All things considered, we need to ask the question: was this all they could do for the stock market? I guess a trillion dollars doesn’t go as far as it used to – and that is exactly the problem. Financial assets, whether they go up or down, are a losing investment when priced in a currency that is rapidly losing its purchasing power.

Next we look at the Dow’s BEV Chart starting from its -53% lows of March 2009. Here we can see every post March 2009 high, and the declines Mr Bear clawed back from the Bulls. Since March 2009, it is interesting to note what the Dow Jones did after it corrected to its BEV -6% or -7% lines: it quickly snapped back to the BEV Zero line in a month or two. Or it did until its 29 April Terminal Zero (TZ = last BEV Zero). It’s now been three months since the Dow’s TZ. Twice since the end of April, the Dow was within 1% of making a new BEV Zero, but the bulls couldn’t pick this low hanging fruit, and now the Dow is heading the wrong direction, ending the week below its BEV -5% line.

The Dow Jones is very weak, but the Dow Jones is only 30 large blue-chip stocks. For the BIG Picture view of how weak the total stock market actually is, I like looking at the NYSE’s 52Wk High-Low ratio. From the standpoint of how many shares at the NYSE are hitting new 52Wk Highs and Lows, it’s reasonable for us to expect a broad market correction in the coming months.

The data points below are ratios of:

NYSE 52Wk Highs – NYSE 52Wk Lows
Total Number of NYSE Shares trading

Going back decades, this data oscillates between periods, often lasting for years, where more shares are hitting their 52Wk Highs than 52Wk Lows and vice versa. For the last two years, the market has advanced in a bullish cycle, with more 52Wk highs than Lows. Based on it’s history, we can now expect it to slip into a several year period, when the NYSE will once again be seeing more 52Wk Lows than 52Wk Highs.

But there is more to this data than just noting bull and bear market cycles, it also illustrates when peak “liquidity” flows into, or out of the stock market. I have four circles placed on peak values in the chart above. In March 2009, the Dow Jones may have declined to the second deepest bear market bottom since 1885, but the NYSE’s 52Wk H-L Ratio peaked a full five months earlier, in October 2008 as the Dow Jones first broke down 40% from its October 2007 high. By the March 2009 bottom, the ratio was only 25%, indicating that for most stocks trading at the NYSE, the worst was over as the Dow itself bottomed.

In the current bullish cycle in the chart above, we see a circle over the April 2010 peak, telling us that we saw this cycle’s peak number of 52Wk highs at the NYSE in April 2010. So, even though the Dow Jones Index has continued to increase since then, it has been doing so with more and more stocks on the NYSE falling behind. It takes time for shares in the stock market to travel from one 52Wk extreme to the other, and in July 2011, the majority of shares listed on the NYSE began doing just that, declining, unnoticed toward their 52Wk Lows.

A time is coming when the thirty shares in the Dow Jones will follow the general down trend of the overall market. Whether that means we will see a total collapse in the stock market is something I can’t say, as the “policy makers” will resist a big drop – for as long as they can. They can’t resist Mr Bear forever, but they might be able to keep up the manipulation until the next election.

I usually don’t cover the S&P 500. Nothing wrong with S&Ps data, but unlike Dow Jones, they don’t provide extensive market data to the public for only $5.00 a week. Still, I know people like seeing the S&P500, so every now and then I do something, like the chart below, where I deflated the S&P three different ways. Which deflation model is the best? Well, as the CRB (I use the Continuous Commodity Index) is based on commodity prices, and I like to eat and drive around in my car, so I think the green plot deflated with the CRB is the most pertinent for living creatures, such as myself. But to be fair, I have to note that my computer, like CNBC, is just fine with the black plot showing S&P in nominal dollars.

But who deflates data anymore? Come to think of it, when did anyone ever deflate data? It’s just not a polite thing to do. So let’s keep it “real”, and pretend that a dollar is just a dollar, and a gallon of gas is just a gallon of gas, and never the twain shall meet. So for my next chart I only indexed:

Gold
The Barron’s Gold Mining Index
The Dow Jones Industrial Average
A US Treasury Bond Valuation I follow

To 1.00 = the first week of January 2000.

Everyone on TV has been asking what is wrong with the gold mining shares? Let me tell you, I’d like to know, too! Both the BGMI and XAU declined by over 65% in the credit crisis, while the Dow Jones only fell 53%. Still, both gold mining indexes have broken above their pre-credit crisis highs last November while the Dow Jones has yet to exceed its pre-credit crisis high! True, they have stagnated since then, but blue-chip gold mining shares have been much better investments than the Dow Jones or the S&P 500 since 2000, before or after the credit crisis. So after looking at the chart above, and the table below, you tell me what in the hell is wrong with the gold miners?

Credit Crisis Declines and Rebounds
	Credit Crisis Decline	Exceed Pre Credit Credit Crisis High?
DJIA	-52.98%	NOT YET!
BGMI	-69.64%	1.08%
XAU	-65.66%	2.54%
Gold	-29.00%	58.89%
Silver	-54.86%	92.74%
Based on Weekly Closing Prices. Note: the Dow Jones has yet to exceed its highs of October 2007. All other items have!
Source Barron's Graphic by Mark J. Lundeen

They certainly haven’t kept up with the gains in gold and silver, and I admit this is an issue. If things were as they should be, where the SEC would prevent the big banks from naked shorting mining issues, the gains in the mining shares would be much better than the metals they mine. But the spin in the media is that the major miners of precious metals have been a subpar investment in the stock market, but that isn’t true. Currently, I think the miners are CHEAP, and they will eventually make lots of money for those who have the courage to buy an undervalued asset. But I just want to note who is doing the complaining about the “poor action” in the mining shares: the same “expert sources” (CNBC) who didn’t bother to tell you of the top in tech shares in 1999, and urged people to become members of the “ownership society” in 2006.

The revelation that the Fed lent 16 trillion to the global-banking elite in 2008, without a public paper trail, is reason enough to take as many dollars as you can lay your hands on and get some gold and silver coins. Note the lack of outrage about this in the media, or in Congress. Seeing this willful ignorance of the Fed’s malfeasance by the public’s watchdogs is a VERY VERY BAD SIGN of things to come. So do yourself a favor and get the hell out of the stock market, and take the after tax proceeds and buy as much Junk silver (pre 1965 US dimes, quarters and half dollars containing 90% silver) as you can afford. But unless you’re a wealthy collector, stay away from those MS-69 & 70 eagles, the premium over spot is just too high, which could cause short term losses, and is unlikely to pay off in the long run as well. Low premium items like gold buffalos and maples, silver rounds and junk silver will only have small losses if forced to liquidate them for the melt value, unlike numismatics which always require a collector or specialty store as a buyer to get “full value.” In times of financial collapse, you may not be able to find a wealthy collector when you need one. Numismatics are liquid at the “melt value”, but not liquid at the “collector value.” Mining shares are good, but junk silver coins (or pure bullion bars and rounds) are better for the average investor.

"Any day you can trade fake money for real money, is a good day"
– Silver Shield

"If you are creating money out of nothing, you don't have to charge an awful lot of interest on it to show a profit"
- G. Edward Griffin

"Paper is poverty... it is only the ghost of money, and not money itself."
- Thomas Jefferson

Mark J. Lundeen
Mlundeen2@Comcast.net
29 July 2011

Article Title	Source	Last Comment Date
LGMR: Gold Rises on Weak US Jobs Data, Bull Market "Dependent" on Low US Rates 0 comments	BullionVault	December 03, 2010
Geithner Dislikes Wall Street... Wrong Law, Wrong Time? 0 comments	Appenzell Daily Bell	April 28, 2010
The US stock market is strong but the currency is weak Marc Faber 0 comments	Marc Faber Video Channel	August 30, 2009
Rick Rule: Market Malaise Signals Opportunity in Miners 0 comments	News and Current Events	July 27, 2008

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The Stock Market is Looking Weak & What’s Wrong with the Gold Miners?

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