The long-term monthly chart below depicts the Gold to Dow Jones Industrial Average (DJIA) ratio from 1990 to the present. After making a bottom in 1999, the ratio had a successful retest of the 1999 low in early 2001, before forging ahead until early 2003. If you had bought gold at the second bottom and shorted the Dow in early 2001, you would have made 100% on your money by early 2003. The ratio then formed a basing pattern until the end of 2005, and now appears to be breaking out to new multi-year highs. The two moving averages displayed on the chart (10 and 30 month) seem to suggest a bullish long-term pattern. The out-performance of gold compared to the Dow puts all the media excitement about Dow 11,000 in perspective. In terms of real money, the Dow has done nothing in recent years.
The former statement is clearer when looking at the Dow in the Numerator of the ratio between the two indices, as illustrated below.
If this long-term chart above were evaluated as a stock, the technical decision would be an easy one – sell! If the pattern is seen as a head-and-shoulders reversal, the neckline would be at about 22, and the measurement principle would suggest that the Dow to Gold ratio would reach approximately 11. There is also support at about 9.5. With stocks selling at the high end of their historic valuations, and governments around the world printing paper money, it wouldn’t be too difficult to conceive of this chart reaching its technically-based measurement principle goal of 11 over the next few years. The clearly bearish DJIA to gold ratio chart puts perspective on the so called “bull market” by presenting the performance of the Dow in terms of actual money.
One could correctly argue that the DJIA is a lagging indication of stocks in general. Therefore, it would be more useful to examine the relative performance of gold to a leading (not lagging) stock index such as the S&P mid caps. Below is a similar ratio chart of the S&P mid cap to gold ratio from 1990 to the present.
The pattern suggested by the gold to mid cap ratio indicates some bullish potential as the 10- and 30-month moving averages are both moving up. The Gold to mid cap ratio is now above both of these upward sloping moving averages. (This is bullish.) MACD (and a host of other momentum indicators), suggest a bullish pattern. If viewing the long-term technical pattern from an Elliott Wave (EW) perspective, a case could be made for the completion of the first 2 waves of a 5 wave upward EW trend. If this is the correct pattern, we could be in EW Wave 3, and 3rd waves tend to be sharp and decisive. Pullbacks tend to be of relatively short duration and minor magnitude. A drop of the ratio to below the point at 2 would invalidate the EW pattern.
The major indices were down marginally today on volume that was less than the day before. The conventional wisdom is that today’s action was a healthy and overdue pullback. It has been successful to go with conventional wisdom on the bullish side, and avoid it on the bearish side. Example: A year end rally (bullish) was successful use of conventional wisdom, while expectation of a January swoon similar to what happened last year would have been failing use of similar conventional wisdom.
Our current service economy has shown resilience with respect to its ability to absorb the impact of high oil prices in both the economy and stock market. Again, use of bearish conventional wisdom would have been a loser’s game. The reason why the stock market is so resilient to rising oil prices is that our economy is now much more dependent upon a different commodity - debt. Therefore, it would be more useful to examine trends with respect to the price of debt and this is likely to provide insight into the future trend of the stock market. Generally speaking, the stock market lags the bond market (price of debt). It is with that introduction that the 5-year weekly chart of the 10-year US Treasury Note Price ($UST) is presented below. As can be easily seen, there is descending triangle forming, with important support at 107.5. If this support were to be broken, it is likely to have serious bearish implications on the stock market. It is worth watching, but until support is broken, this is just conversation.
Looking at the 10-year note from a point-and-figure perspective yields a similar conclusion and a similar price objective as the classic technical analysis measurement target as illustrated below.
Light crude oil was up another 0.93 today while the weather on the east coast was sunny and mild. The action of many oil-related stocks is confirming the recent bullish trend in oil prices too.
Speaking of point-and-figure, this has been a successful way of objectively predicting the correction in oil prices. The low price of the correction was a bit higher than the $54 price target referenced in the 6 October 2005 article. Now the point-and-figure chart of crude oil has a bullish price objective of $79. Although this price is not justified by fundamentals (according to Joe Kernan!), point-and-figure has, in the recent past, worked well for oil.
While today’s market’s pullback was apparently a healthy one, there is nothing healthy about the recent action in the Dow Jones Transports over the last 12 trading sessions. The transports were down almost 51 points today. I cannot discern a reason for the transports rally (especially the airlines which are multi-decade dogs), and I don’t know why they are now falling, either. However, if support below 4100 is broken, there is no support until about 3700. At that level the dividend will still be miniscule, too. There will not be a point-and-figure sell signal until the Transports break below 3550, which is still a long way off.
The point-and-figure chart of gold suggests a price objective of $712 an ounce. Since I’m not smart enough to trade this bull run in gold, I’m holding my position in gold and gold stocks.
Have a great evening.
James J. Puplava Financial Sense™ is a Registered Trademark
P. O. Box 503147 San Diego, CA 92150-3147 USA 858.487.3939