By Ryan McGuire
www.goldavalanche.blogspot.com
The depressed oil prices of late, and falling gas prices might just be the thing that ultimately signals the beginning of a major decline in the stock market.
How is that possible, you say? Sit down, kind reader, and allow me to spin you a yarn. To be sure, this is not a fairy tale, but a true story of current supply and demand.
The Dow Theory Relationship is heading in the direction of gathering steam in both indexes (see charts below), but here's a plausible scenario. Industrial earnings next week could come in weak (Alcoa's earnings were down from Q2 last year - that may be an indication of what's to come), which would send the Dow to the doldrums. On the other hand, the transports may rally on news of renewed profitability due to lower fuel costs last quarter as they emptied the storehouses of goods for credit card wielding consumers. Specifically, the transports have more of a potential to surprise wall street analysts than the industrials, at this point anyway.
If this happens ... a large piece of the current stock market trend puzzle will be solved, and I will be ensuring that I obtain a sizeable short position in my portfolio for general equities. So far, the strategy I've been using is to buy the dips, hold onto strong positions, and sell rallies on weak holdings. Soon the strategy could change.
So, The transports must rally to a new high, and the Industrials must not confirm the move. This will make the long-term pattern complete enough to sink some capital into. The pattern formed when the Industrials surged to new highs above 2011's highs, while the transportation stocks fell into a pothole. The pattern was reinforced by short term divergence in the indexes, but the pattern has NOT completed, and thus there is no clear overall buy/sell signal for stocks at this point.
One thing we can say, is that in the face of this uncertainty, and with the insane amount of currency central banks are creating out of thin air, it would be nothing short of imprudent to not own some gold, even if it's a mutual fund or an ETF. We strongly urge you, dear reader, to buy some gold for the long haul. If you are a day-trader, then we can't stress long-term gold holdings enough. Something has to protect your base, and bonds and money market funds will eventually fail to do so. This isn't imminent, but rather an unfolding reality that could take years (or months) to pan out. So, take some stake/buy some tranches of gold. As a specific strategy, consider hedging 5-10% of your bond holdings with a Gold Bullion ETF like PHSY.U or GLD.
Here are this week's charts.
