Dow Jones Industrial Average 10,765
Value Line Arithmetic Index   1,909
30-Year Treasury Yield (TYX)   5.07%
20+ Year Treasury Bond Price (TLT)   85.25
Gold 1/10 Ounce (GLD)   $56.26

The Big Picture for Stocks
The 4-year cycle calls for a bear market bottom in 2006.

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

I have been waiting for a wash-out selling climax in gold. We may have gotten it yesterday. So I am, though somewhat timidly, buying back our position in gold that we sold back on May 18 at 67.90 on GLD. I say timidly, because all the pieces are not really yet in place. The sentiment figures have not gotten as bearish as I'd like, and there has been no turn-up in price momentum. So we may be premature. But we are on support. The buy will be at tonight's close.

In this decline, gold has dropped 22.8%. There have been other large drops in gold in the current bull market. These periods were Feb 5, 2003 to April 7, 2003 (down 16.3%), and April 1, 2004 to May 10, 2004 (down 12.2%). In each of these drops, gold recovered to new highs. I continue to think of gold as being similar to the tech boom of the late 1990's. Every drop saw prices rally to new highs until large numbers of people were invested in tech stocks. The reason I doubt that the bull market in gold is over is that large numbers of people are not yet in gold. Really, only a few people have invested in gold. Gold is still an under-owned asset. Before the game is over, pension funds, governments, mutual funds, and individuals will markedly increase their holdings of gold. The advent of ETF's for gold has made this possible. In the meantime, paper currencies are becoming more and more suspect, notably the US dollar. Our government is in an uncontrollable spending spiral that politicians have no stomach to stop.

The most likely scenario is that the price of the yellow metal will trade in the low 600's per ounce for awhile, building a technical base, before resuming an uptrend.

I am taking the liberty to reprint today's comments from Bill Fleckenstein's daily newsletter. For those who want daily commentary on the markets, I recommend Bill's letter. Here is a segment of his letter for today as pertains to gold, gold stocks, and fed policy:

Precious Pariahs
Turning to metal stocks, they've been quite toxic for a couple months now, and shouldered their own particular brand of angst. For reasons that I've covered in the past, they weren't able to muster any leverage when the metals themselves were going up. Now, with the metals headed straight down, metal stocks are really being slapped around. I continue to think that on the next leg up in metals, the metal stocks will do better than they did on the most recent one.

In any case, the carnage in the metals has come about because: (1) There is still too much confidence in the Fed, (2) tough-Fed fears have precipitated selling, (3) that selling has "fed" on itself (both in metals and in stocks generically), and (4) the liquidation is now taking on a life of its own.

I'm not sure where the metals will settle out. But if the level of angst in my email is any indication (which it often is), I think they are probably close in time to wherever they're going -- though who knows how far prices can move, once dislocation sets in, as it has. I still plan on beefing up my positions (probably very soon), as I believe that the Fed is a joke (though it's obviously clear that most people have not come to that conclusion yet).

See Dick, See Jane, See Ben Raise Rates
While on the subject of the Fed, I spoke to a friend who is very "plugged in." He said that the Fed is going to take rates up one more time, in an effort to stop folks from questioning its credibility. His view: The Fed knows the economy is slowing down. It's really dying to pause. But since so many have essentially laughed at it, the Fed feels as though it has to do something to make sure it's still perceived as being in charge. If the data cooperate, the Fed will definitely make clear (when it gives us the next 25 basis points) that it's done for now.

Will my friend be right? He's had a pretty accurate read on the Fed in the past, and that's sort of his area of expertise. (I can't go into details as to why.) In any case, at some point, the tough-Fed trade will have been completely discounted by all these markets, and then they will rally. Stocks will just be rallying in a bear market. But the metals' rally will be a continuation of the bull market that they have been in (although it's sometimes hard to keep that in perspective when the action gets as ugly as it is currently).

Remember: The reason to own metals in the first place is because the Fed is not in charge. At some point, when the world understands that, it will cause an acceleration of the bear market in the dollar, and will be the source of additional problems for the stock market. Metals, among other things, are an insurance against that outcome.

I suspect these comments are correct. The fed will raise rates once more, which will be the last. The economy is heading into recession as housing and the consumer wind down.

Further, I think the market will recognize the next rate increase as the last and we will get a bounce in the equities market. Accordingly, I suggest covering two of our bearish positions. Sell the long position in the Rydex Inverse Small Cap Inverse fund (RYSHX, 42.29). Cover the short position in the S&P Depository Receipts (SPY, 123.18).

Any bounce in equities is expected to be short-lived. We are in a bear market that will take prices much lower. The market has only begun to recognize that a significant recession is probable. We continue to prefer cash to any other investment for now.

Our short position in Expeditors International (EXPD, 93.17) hit its downside target of 92.50 on June 8. That was a nice trading profit from our entry point of 107.16 just a month ago.

Elsewhere in our Special Situation list, we continue to hold other bear funds long and ETF's short. Our long microcap stocks are very depressed, bids having evaporated. But at least some of them actually appear to have stabilized and have not gone down with the broad market in the last wave of selling. There ought to be some good buys in this bunch for those with a strong stomach.