Originally published July 15th, 2010.
When I was at school in England and about 15 years old I opted to play golf on sports day, in order to get out of playing rugby, and one of my happy memories, apart from using the same sick note forged by a friend about 17 times to get out of sports altogether, is strolling around the golf practice area at school, which happened to be adjacent to a rugby pitch, occasionally whacking a ball idly with a 7 iron while the rugby teams charged around like oxen after an oval shaped ball, play being interrupted occasionally for one of them to be carried off with concussion or a broken ankle or whatever. If this seems like irrelevant rambling bear with me for we are soon going to get to the point.
After taking us through the basics the golf teacher, Mr Furlong, used to drive us to a very good golf course in Bristol, but whatever else he knew, he wasn't much good at predicting the weather. One afternoon he took us there and it was boiling hot and very humid and hazy. I told him there was going to be a thunderstorm, but he ignored me because I was just a kid so what did I know, and marched us all off a huge distance from the clubhouse to a practice area. The sky grew dark and threatening but no thunder, and I grew exasperated knowing that I was going to get soaked and that we might possibly be struck by lightning, and that he wasn't going to apologize later for me having to cycle home soaked to the skin. He carried on hitting the silly ball around until there was a massive flash of lightning not more than a mile away and the heavens opened. "I think we'd better go" he said. "Yeah - right" I thought and off we trudged in lashing rain and hail.
I relate this story to you because most market commentators right now are just like that Mr Furlong moments before the storm broke - "Don't worry, everything is going to be alright, earnings have recovered and companies are paying dividends - the stockmarket has recouped most of its 2008 losses so everything's back to normal - that drop in 2008 was just an aberration and now everything's back to normal and its business as usual." According to our interpretation of the charts if you fall for this spin you are going to get seriously fleeced in short order, and this could also apply to those who listen to the siren calls of those exhorting the virtues of Precious Metals stocks at this time. So let's make this as clear as possible - if there is another market crash soon as expected, investors are going to do what they always do, which is go into blind panic and toss almost everything overboard, and that can be expected to include gold, silver and PM stocks. Yes, we fully understand that the fiat money system is rapidly approaching its nemesis and that gold is the ultimate safe haven and is set to soar as currencies become worthless, but that won't help it much short-term during the crash phase, which is likely to result in a heavy reaction in gold back probably to its long-term uptrend support line. Silver will be treated as a base metal and will plunge precipitously as in 2008, which it is now perfectly set up to do. PM stocks will tank and many PM stock investors will be devastated as their cheerleaders slink into the shadows. All of this looks very, very close.
Think I'm joking, or have "lost my marbles"? - it's time for a little mental exercise then. Take a look at the 2 charts below, one a 2-year chart for the S&P500 index and the other a 3-year chart for the large PM stock XAU index. Having given a Dow Theory bearmarket signal at the turn of the month by dropping to clear new lows, the market has rallied as expected and predicted to alleviate the short-term oversold condition, back up to a target near its falling 50-day moving average. Whilst acknowledging that there is an outside chance of it rising up as far as its January high at about 1150 before turning lower, it looks very close to rolling over to complete the Head-and-Shoulders top shown on the chart, breakdown from which will lead to a severe decline. This rally is therefore regarded as presenting a final chance to get out, and is also viewed as an excellent shorting opportunity. The MINIMUM or rather first downside target is the early 2009 lows below 700, but this time it won't come back up again, as governments around the world have used up all their options (no pun intended) and blown their credibility to boot. The likes of Bill Gates and Warren Buffett can afford to lose a third or a half of their fortunes on the next plunge like they did the first time round - after all if you are only worth $20 billion compared to $40 billion the year before it doesn't make much difference to your lifestyle, but most of us can't afford this kind of complacency. Pensions Funds invested in stocks will be trashed.
Now here's where you are asked to exert your grey matter a little. Look at these 2 charts, one then the other and ask yourself where you think the XAU index will be if the S&P500 drops to the bottom - or off the bottom of its chart THIS YEAR. Get my point? - it's not likely to be up is it? The XAU index HAS NOT CONFIRMED GOLD'S BREAKOUT TO NEW HIGHS, NOR HAS SILVER - AND BOTH ARE CLOSE TO FAILING BENEATH MASSIVE RESISTANCE. Watch out for a heavy down day to confirm that the 2008 style crash has started.
Remember all those poor fools who froze like bewildered sheep in 2008 and were then summarily fleeced - that doesn't have to include you this time round, does it?
Rather than putting your trust in an army of so called "experts" whose unstated mission and objective is to turn you into a bagholder for their masters, you would do well to instead take a look at a rock solid lead indicator like the little followed Baltic Dry index. On our 3-year chart we can see that it started to drop in July and August of 2008 and accelerated into a plunge that preceded the stockmarket crash. It bottomed in December of that year and then rose strongly, thus also presaging the stockmarket recovery that began after it bottomed 3 months later. The Baltic Dry Index has broken down from a top area and has been falling steeply for weeks, so that it has ALREADY DROPPED BY MORE THAN 50% FROM ITS MAY PEAK. What this means is that the second major downwave has already begun, it's just that the stockmarket doesn't yet realize it - and you sure don't want to be around when it does. There's trouble ahead, big trouble. Why does recent action in the Baltic Dry presage this? - because this index reflects international shipping prices of a range of dry bulk cargoes, and is thus an accurate monitor of the state of the world economy. The message could not be clearer - a severe deflationary contraction lies ahead that is expected to precipitate a stockmarket crash.
The great thing is that you can do more than just protect your interests and watch idly from the sidelines as all hell breaks loose, you can position yourself to reap massive profits from bear ETFs and Puts etc, as set out on www.clivemaund.com as the market plunges - we just have to hope that the markets survive long enough for you to cash in your gains.