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Selective Thinking

Over the years that I've published my research letters, I have routinely observed selective thinking. In reality, what I have found is that rather than seeking the truth, people actually seek out opinion that supports their own. Now, this may or may not always necessarily be a bad thing. If you think about, it's really only human nature as we see this with religion, politics, hobby interests and other preferences in life that brings like-minded people together.

However, when it comes to the market, such practices are more often than not, unwise and are usually a function of not thinking, selective thinking and ultimately, herding. Worst yet, most people that do this, don't even realize what they are doing. Let me give you some examples to illustrate how we can be victims of such practices without even realizing it.

Back in 2008 as crude oil ramped up into its parabolic top, I warned of that top and was able to identify it based on my statistical based research. It is a historical fact that 100% of the time the 3-year cycle in the CRB has peaked in the manner in which it did in 2008, that it was not only associated with a major top in commodities, but that it also collapsed down below its previous 3-year cycle low. Thus, once the top was identified with the applicable DNA Markers, it was merely a matter of the associated probability. As a rule, I do not make market calls public, because that is proprietary information that subscribers are paying for. But, in the case of commodities back in 2008 they had gotten so much attention that I could not resist. The herd mentality at the time was pretty extreme. I remember making the call on the air in an interview in July 2008. Immediately, I began receiving e-mails and phone calls telling me how wrong I was. I was told that I was stupid, that Stevie Wonder could see that oil was going to $200 per barrel and even why my statistical based analysis was wrong this time. I received subscription cancellations because, in spite of the fact that my research was based on statistical fact, it did not mesh with popular opinion. Those that cancelled were obviously looking to support their opinion rather than objective statistical based analysis. I can say this, because within 3 months of that call, the CRB had collapsed below its previous 3-year cycle low just as the statistic suggested and crude oil followed with a 76% decline in price. The point here is not to talk about an old market call, not at all. Rather, the point here is to try to show you how easy it is to fall into the trap of biased thinking, which leads to herd mentality without even realizing it, so please keep reading as this is but one example.

The primary reason I was given for the continued parabolic advance in commodities was the belief in the "inevitable collapse" of the dollar. I was told that my statistics were not applicable because of the new money printing practices, which had not previously existed. In reality, this was merely a means to further justify the flawed thinking. Fact is, such thinking is a function of herd mentality and again, the ones guilty of that thinking, or non-thinking I really should say, were not even conscious of it. The popular belief had become that because of the money printing practices, the dollar would automatically continue to move lower, which automatically equated to higher commodity prices. Admittedly, this sounds logical. But, it's not reality and a quick look at the charts proves it.

For example, at that time, the dollar index was trading in the low 70s and the perception was that the dollar was on the verge of an out right collapse. Reality was, the dollar was moving into a long-term cyclical low and was in the process of forming what I continue to believe was part of an important longer-term base, much like that that was formed during the 1987 to 1995 period when the dollar index oscillated between the high 70 and the mid 90 range. Now, this brings me to a point, which I covered then and which now serves as a good example of selective thinking. During the 1987 to 1995 period, we obviously did not have the level of money printing going on that has been seen in more recent times. If more money printing automatically equated to a lower dollar, then why is it that much less money printing, during the 1987 to 1995 period, resulted in a dollar index in the high 70 to mid 90 range? And, why is it that in spite of the continued money printing that the dollar index is currently some 11 points above its 2008 low of 71. Yes, the dollar is currently 15% above its 2008 low. All the while the money printing has continued at unprecedented levels. Obviously, this perceived correlation it just not true. This absolutely disproves the notion that more money printing equates to a lower dollar index.

Now, as for crude oil, it is a historical fact, that with the exception of the blip in price during the 1990 Gulf War incident, crude oil traded between 13 and about 25 dollars a barrel during the 1987 to 1995 period. So, this in turn also proves that a lower dollar index emphatically does not automatically equate to higher crude oil or commodity prices. If it did, then why is it that a dollar index in the 70 range back in the 1987 to 1995 period didn't equate to 120 plus dollar oil? The reason is, the correlation does NOT exist. When we look at the charts, they tell us that these correlations are merely perceptions. I'm mean, HOW can anyone argue or deny these historical FACTS?

Anyway, because of the money printing and lower dollar index, people were persuaded by popular thinking that the only direction crude oil and commodities could go were up and that the dollar was on the brink of collapse. All in spite of the fact that the dollar had been at similar levels before with crude oil trading between 13 and 25 dollars. This is another perfect example of herding that is based on a popular believe rather than fact. What the herd does not understand is that price is a function of every single market participant and everything known or perceived to be known by those participants, which is in turn discounted into price. Thus, the price action is indeed as relevant at present as at any other time in history and it always will be. In turn, the underlying technical structure and statistics are also as relevant as at any other time in history.

Back in 2011 as gold moved into the 9-year cycle top I began presenting my subscribers with the evidence in support of that top. Gold continued to hold up and flounder around below the 2011 high during the remainder of 2011, 2012 and into early 2013. All the while, the evidence continued to mount in favor of the 9-year cycle top and as it did, I presented that evidence. Yet, once again, true to human nature, people did not want to believe what they did not want to believe. I watched as they looked for all the reasons that the cyclical and statistical data was wrong. Among those reasons, was, again, the money printing and "inevitable collapse of the dollar." To illustrate the point, I want to show that once again, popular, and what seemed to be logical thinking, proved wrong. Fact is, at the 9-year cycle top in 2011, gold was trading at just over 1,900 dollars an ounce. At the same time, the dollar was trading in the high 70 to 80 range. We'll, if there were truly a correlation between the dollar index and gold, why is it that when the dollar index was trading in the high 70 to 80 range back in the late 1980's and into the mid 90's that gold wasn't at 1,900 dollars an ounce back then as well? The reason is simple. The correlation is a perception that sounds logical and which has become popular thinking. But, as hard cold historical facts show, it just isn't so. Many, if not most of you reading this, are now struggling with what you have just read. If so, it is probably because you have not looked at the historical facts and you have likely been unknowingly indoctrinated with the flawed popular thinking. The real point of this article is to try to help people see and understand that they can have a bias that they don't even realize they have and that more often than not, these biases are based on popular opinion rather than reality. So, we can find ourselves with beliefs, that are based simply on nothing.

This now brings me to the current situation with equities. I have said, ever since the rally out of the 2009 low began, that the advance out of that low was occurring within the context of a much longer-term secular bear market. But, I have also made it perfectly clear that this advance would continue until the statistical based DNA Markers, which I have found have occurred at every major top since 1896, are in place. Once this occurs, the data tells me that the resumption of the longer-term secular bear market will continue and that it's not apt to be pretty. I further believe that not only is the advance in equities occurring within the context of a much longer-term secular bear market, but that this is also true of commodities. The fact that commodities have not also moved to new highs, in spite of the continued money printing practices, tells us that the deflationary forces are overcoming the money printing practices and that the money printing practices are loosing their effectiveness. If this isn't the case, then why is it that gold is off some 30% from its 2011 high? If this isn't the case, why has oil not moved to a new all time high? If this isn't the case, why is natural gas still off of its 2008 highs by over 75%? Remember when natural gas could go no where but up? Aluminum is off over 43%. Lead is off 46%. Nickel is off 74%. Does this sound like a recovering economy? With these commodity prices down, in spite of the continued money printing re-inflation efforts, doesn't this prove that more money printing does not automatically equate to higher commodity prices? Rather, the message the charts seem to be sending is that equities are the last man standing and that in spite of the continued money printing practices, which have only gotten worse, the fact the dollar has not experienced it's "inevitable collapse" and commodities have not moved to new highs, the effectiveness of the money printing is failing. For the record, I want to remind everyone that during the 1966 to 1974 secular bear market equities also moved to a new high in early 1973, just before the 45% decline into the 1974 secular bear market low. So, for those of you that were not aware of that fact, don't fall into the trap of thinking that a new equity high can't occur within a secular bearish period as that too is flawed thinking that is based on popular opinion.

 


If you would like more detailed analysis that is based on sound statistical methods that are not influenced by popular opinion or emotion, it is available at www.cyclesman.net.

 

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