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May 4, 2006
$USD trend reversal due, Thurs., May 4, 2006, 8:08 AM
I am a big believer in a concept known as behavioral finance. I'll be absolutely blunt here: I so much believe that market psychology plays a huge role in day-to-day trading of markets that I scoff at the academic work of people like Burton Malkiel and Eugene Fama.
We soon have an opportunity to put my theories to test, and nothing makes me happier than to lay like Mr. Mortality across the proverbial train track. I love challenges.
Tomorrow is the first Friday of the month, and that means we get the all-important U.S. Jobs Report at 8:30am Friday.
Regardless of how silly the construction of this report, it is one that is used by spinmeisters to reverse significant short-term trends in markets.
So the thing I do is look down the list of the major market indexes and see what is most over-bought or over-sold. There is where the reversal is most likely to happen. And interpretation of the U.S. Jobs Report by people like CNBC's Larry Kudlow and Steve Liesman provides the set-up for cyclic reversal of prices.
The $USB and $USD are two indexes that have been oversold recently.
The trend is falling for both bonds and the USD, but a change in market psychology could initiate a short-term corrective action.
For the $USB, there could be a small bump from say 106 to 107.
For GLD, there could be a brief pull-back from a high yesterday of 67.14 ($671.40 spot gold) to say 64-65. That would set up the "Wall of Worry", which would usher in more buying that would take GLD to 70 or higher.
When capital markets (stocks and bonds, which are paper assets or soft assets) are over-priced, I think it makes most sense to switch to cash-gold (unallocated assets). Maybe it's cash and maybe gold. At times like March 9 this year, I wrote that it was time for gold, which for GLD, at the time, was about 64.
When hard asset markets (oil, metals, etc) become over-priced, at the same time as capital markets are over-priced, then it makes sense to switch from gold to cash. So in 8 weeks since I made the call to go to gold, GLD is up about +5 pct. That meets my objective since it's an annual gain of over +30 pct, which I could not have gotten in T-Bills.
So now is the time to switch my unallocated assets from gold back to cash. Maybe I'll be there for a week, maybe 3 weeks. I'll know from the sounds of gnashing teeth from the gold bugs. That's just market psychology playing out.
Then I'll switch back to gold because ultimately I see GLD going over 70.
In time, I expect the air to come out of the equity market, and the losses in the bond market to continue. $USB, for instance, may go from 106 to 107, for now, but longer-term I see it going back to par.
So if I was a bond trader " I'm not " I would lengthen the maturity of my bonds from say 2 years to 30 years for a couple weeks, and then go back to 2 years after the corrective move I expect.
The point is that basic economic factors set up an environment for corporations to operate. Depending on those factors, profits can grow faster or slower or possibly even be forced to go negative, even for solidly managed corporations, for a brief time. Ultimately, those conditions will be positive for well-managed corporations, and that is why, over the long term, capital market prices ought to rise.
But for now, I think those factors (rising interest rates, rising commodity prices, falling $USD, U.S. twin deficits) are such that I'd prefer to be out of the capital market and into unallocated assets.
Like I say, that could mean either cash (T-Bills) or Gold.
So watch for the shift in market psychology, and what that means for $USD, $USB and GLD. Then watch for the timing of the price reversal. It's going to start now, and then briefly react the other way after the U.S. Jobs Report (just to make you think for a few minutes that I'm wrong), and then continue to evolve.
Let's watch.
Posted by Posted by Bill Cara on May 4, 2006 08:11:28 AM | Category: Cara Today in the Market , Trend & Cycle Phases
Discourse
Here's one of Cramer's blurbs from the daily e-mail from the street.com:
It's Loony Not to Invest in Canada
"There's a right way and a wrong way to run an economy, and the conservatives have the right way. Except they aren't our conservatives. If you want to look at the right way to create wealth, create jobs and create prosperity, you just have to look north, to Canada. The Canadians just put through some terrific personal and business tax cuts guaranteed to make their economy even more robust. At the same time, the government is running a surplus. No wonder the Loony has increased from 66 cents, where it was when I visited Canada four years ago, to the current 90 cents."
http://www.thestreet.com/_textbtb/markets/activetraderupdate/10283403.html
***********
I would say Cramer is several days late putting this out. I believe we heard all this a week or two ago right here. Perhaps Cramer is getting his ideas from Bill's blog now ! ;-)
Posted by: cb ![[TypeKey Profile Page]](http://www.billcara.com/nav-commenters.gif)
at
May 4, 2006 9:10 AM [link]
Fama and his ilk are not in the "day-to-day trading of markets" game. I wish you weren't too. Us small individual investors need advice but IMO, trading and investing are two different things.
Posted by: HooHa at
May 4, 2006 9:29 AM [link]
"Speculators who ‘go broke' are usually those who fail to devote as much time to studying the subject of speculation as they devote to the risking of an equally sum of money in their own business. They fail to realize that no profession requires more hard work, intelligence, patience, and mental discipline than successful speculation.� Dow Theorist, Robert Rhea.
It is not a question of calling it trading, investing or whatever. Like any business,it is whether you are making money or not.
Posted by: Marp at
May 4, 2006 12:00 PM [link]
Bill,
Good timing on this call. You might not have know (or maybe you did) that the USD is at or very near it's nominal 80 week nest of lows. This is cycle speak and all it means is that the 80 week cycle and all other cycles below it are bottoming (or did already in the past few days). It definitely looks up from here.
I know I'm probably the only one on this blog currently who thinks the USD bottomed at the end of 2005 and is now in a bull phase. In EW speak, I think the USD is bottoming here at wave II and will soon commence Wave III, which is the longest and best wave to ride upward.
Obviously I just look at technicals and don't care about the fundamentals. We shall see.
Best,
LB
Posted by: LB at
May 4, 2006 12:55 PM [link]
MAY DAY…MAY DAY !!!
Dear Bill:
The comments in your response to me on 5/1/06 at 9:27PM did not go unnoticed, i.e ‘Blogging may be coming to a close.'
It might interest you to know that during most any day around my home, my significant other and I refer to you as ‘Bill'…like in “Bill said�…in our running conversations about many subjects; even though what you had written may have dealt directly with investing.
A day without you will be difficult. But with all the enterprises on your plate, and the full screen on your desk, as you have described to your reading audience, it seems a monumental effort for a retired guy. It is difficult for me to comprehend how you manage, let alone find time to produce this blog.
I know in your later postings there were indications you would not stop blogging, and we all hope this is true, but if you are called away by other demands, please know that I, for one, appreciate our brief encounter.
Your instructive ways have disciplined me, and I'm sure others, to pursue a variety of trading venues. In the process, I've made more profit from the modest retirement funds I have than at any time in my investment experience.
Going forward, each day in the future with you will be treated as if it could possibly be the last. I will savor all you provide with the hopes you will not feel that you have cast your pearls among swine, but to those who are thankful to be on the receiving end of your wealth of business and financial knowledge. I am grateful for your endeavor to protect what little the 'Little People' have in a world full of sharks and cut throats.
Thank you for your patience and diligence in responding to my tedious questions. I'm sure they would make most experienced traders shake their heads and roll their eyes. Mine are now open wider and I am wiser for it.
Posted by: C.Note![[TypeKey Profile Page]](http://www.billcara.com/nav-commenters.gif)
at
May 4, 2006 8:40 AM [link]