Dow Jones Industrial Average 10,930
Value Line Arithmetic Index 2,021
30-Year Treasury Yield (TYX) 4.69%
20+ Year Treasury Bond Price (TLT) 90.25
Gold 1/10 Ounce (GLD) $56.00
The Big Picture for Stocks
The 4-year cycle is negative into late 2006.
Technical Trendicator (1-4 month trend):
Stock Prices Down
Bond Prices Down
Gold Price Down
This week's sell-off in gold triggered a sell on our Technical Trendicator model for gold. This is a 1-4 month trend model that considers psychology and technical trend data.
A comparison of Newmont Mining's chart today versus Cisco System's price chart during the tech boom might give us some insight into where we are in the cycle.
First, it seems to me that gold is in a similar boom period as technology stocks were in the late 90's. In fact, there are reasons to think that gold could perform even better than technology did then. Included in those reasons are that gold is a univer sally recognized asset and can be owned by governments as well as individual and corporate investors. Also, gold has a limited supply (though admittedly, gold mining shares can issue new stock). Further, gold is very much under-owned by most investors.
But in the near term, a correction may be in the making. Take note of the Chart on Cisco in mid-1999. It had just broken out above several previous tops. After a run-up, it had about a 10% correction that lasted a few weeks. But after that, the march upward continued until the final top in early 2000.
The chart on Newmont looks similar today to the Cisco chart in mid-1999. There may be a lot of bull market left, but a short-term correction is possible.
On a trading basis, gold bullion goes to a sell on our model. But the mining stocks on our Special Situations list remain in tact. We want to be in these stocks for the rest of the bull market that we think will continue. In fact, I would be inclined to buy the junior miners on this pullback. Many have only recently broken out of base patterns that count much higher. And most of our recommended stocks are event driven situations that potentially have good news coming soon. See our Special Situations list for specific ideas. We may be adding more names. (Closed positions on our list have experienced average annualized rates of return of in excess of 100%. Of course, past performance does not indicate future results.)
This period in a major market move for an asset class is the most risky but offers the most reward. The kind of sell-off we had in the commodities markets on Tuesday is typical of a bull market. The sharpest corrections occur in a dynamic bull market. Even if industrial commodities have made major tops, it seems probable to me that gold will resume its bull market in the not too distant future.
Bull markets are characterized by three stages, as described by Eric Hommelberg on an article at www.321.gold: The first stage is being characterized by climbing a wall of worry and denial. The second stage will be characterized by acceptance and large inflow of institutional investment capital. The third stage will be characterized by mania.
I doubt that the second stage is anywhere near complete. How often do you hear institutional investors mention their gold component? And even after the nice move in gold so far, CNBC still generally ignores it, except when they really have to mention it after some notable daily movement. I just observe that gold is not YET an accepted part of main stream Wall Street thought.