Dow Jones Industrial Average   10,269
Value Line Arithmetic Index   1,805
30-Year Treasury Index   4.60%
Gold 1/10 Ounce   $47.70

The Big Picture for Stocks
The 4-year cycle remains negative.

Technical Trendicator (1-4 month trend):
Stock Prices   Down
Bond Prices   Down
Gold Price   Up

Recent action of the stock market indexes have broken down, completing a multi-month topping process. This action has come right on schedule for the 4-year cycle. The summer of the third year is often the top, leading to a grinding bear market into the fourth year. There is little doubt in my mind that we are in a bear market.

In case you have forgotten how horrible things can be in a bear market, suffice it to say that the pain can be intense. Also remember that the economic and earnings news at this time in the cycle is generally pretty good. You won't start hearing the bad news until well into the down cycle. The worst news comes at the bottom, which is many months away, if history is a guide here.

As I look at most sectors of the stock market, I can see almost no sector that looks likely to produce better than expected earnings. The financial stocks are at risk; the retailing and homebuilding stocks are done for this cycle; the tech stocks are spent. There is overcapacity in all these important industries. I can only see bad news turning into terrible news over the next year. Even the energy sector is at risk as demand is now retracting.

Gold is overbought, both price-wise and sentiment-wise. For example, the Consensus, Inc. bullish sentiment for gold hit 83% a couple of weeks ago. However, silver is nowhere near that level of bullishness. And sentiment for the dollar index is very high. This suggests that the dollar may be near a trading top.

The recent rally in gold has been unusual in that it has gone up while the dollar has been going up. Normally, these two markets move inversely to one another. Actually, in previous newsletters, we speculated that this divergence from past relationships was a distinct possibility.

What could happen now is that the dollar could drop, and even though gold is statistically overbought, a decline in the dollar could fuel another upward move in gold.

Gold is far from being over-owned or over-hyped. Here is an interesting note from Bill Fleckenstein's newsletter (https://www.fleckensteincapital.com/home.aspx) this week:

"Of course, we don't know for sure whether they're about to do this. But to put it in perspective, if the Chinese move just 1% of their reserves into gold, they alone could absorb al the metal that the Washington Accord allows the European central banks to sell in a year. And if the four big Asian central banks went to 5% of their reserves, it would offset 30 years of gold production. Thus, if all the holders of dollar reserves (essentially valueless, in my opinion) decide to make a change, gold will be headed far higher than we can possibly contemplate right now."

I think it would be unwise to be too cute by trying to trade gold. I don't want to risk losing my position in the yellow metal.

Here is one sign I have been looking for on gold. When CNBC and other market new sources regularly quote gold every time they give you the Dow, gold is coming into its own.

Maintain short positions in ETF's and long bear funds.

The rate of return on closed positions in our aggressive Special Situation portfolio remains in excess of 100% per annum. New positions can be initiated from the open positions Special Situations list.