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October 09, 2008

Stocks, Gold, and The Dollar
by Chris Ciovacco

In a July 24, 2008 article, Commodity Breakdowns Warrant Defensive Action, I wrote the following based on the ugly look of the chart of financial stocks (XLF):

"While financial stocks have hit a violent intermediate bottom and could rally for a while longer the odds favor lower lows in the months ahead as housing prices continue to decline. The chart below illustrates the structural nature of the problems facing the housing and financial industry. There are fundamental reasons financial stocks have been hit so hard, reasons which go way beyond short selling. Additional bank failures in the coming months would not come as a surprise, which is supported by the rapid deterioration of the sector. Since our economy has become so dependent on the availability and use of credit, these problems will continue to impact U.S. and global growth."

Chart from July 24, 2008 CCM Commentary

I bring it up because the two charts below look so bad you have to conclude we still face serious fundamental problems in the months ahead. The chart below paints a disturbing picture for U.S. stocks (SPY, DIA).

Similarly, the chart of NYSE new highs minus new lows is very disconcerting. It illustrates we are way, way overdue for a bounce or rally in stocks. The chart shows a very extreme oversold condition. My concern is the fundamentals behind the chart below - the chart is no accident. We have fear based on fundamentals. Yesterday, the Dow was down 189 points. It would be nice to see these losses overcome with at least a 189 point rally.

We should all keep our eye on the U.S. dollar and future inflation. The inflationary pressures will be very strong on the other side of this credit crisis. For now, there is no need for immediate action.

Gold (GLD, GDX) offers a way to protect yourself from money creation and currency debasement. The fundamentals support gold. However, the technicals are not yet all that impressive.

Chris Ciovacco
Ciovacco Capital Management

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE.

Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. CCM helps individual investors and businesses, large & small; achieve improved investment results via research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions.