By Ryan McGuire
A look at a longer term chart of the Dow shows that it is in the process of forming a "triple crown". This formation can be extremely bearish, but only if the trend line breaks major support levels formed at the base of each piece of the crown (how's that for a non-technical explanation).
Here's a better explanation: http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:chart_patterns:triple_top_reversal
Right now, it looks as if the Dow will be heading for its all time highs of 14198. If it breaks through those highs (i.e. hits 14,199), and the Transportation average does not sell-off, it would be a sign that a new primary bull market is upon us. The primary trend since the market bottomed in 2007 indeed has been up, but there have been significant setbacks to that trend along the way. In other words, the market hasn't been a screaming buy the whole time. This makes it difficult, because we want to be confident with our buy/sell signals. The most confident buy signals came in September 2011, and then again in May 2012, and then again in November 2012 when I called the intermediate market bottom.
We don't want to buy at the top of a market, and we don't want to sell at the bottom.
Right now, I am biased toward taking profits, but not so biased that I am selling all of my longs. I must note that the continued rocket shoot of the Dow Transportation average makes me nervous because the Dow needs to catch up in order for there to be a buy signal. If the Dow doesn't catch up, or reverses, we will have an overwhelming sell signal on our hands for general equities.
Some speculation - "I'll have some Salt with That"
One thing I am buying right now (with enthusiasm) is Gold equities. They are experiencing extreme bearish sentiment and many of the best producers sold off hard yesterday (i.e. Eldorado, Yamana, and Goldcorp to name a few). This is my hedge against the rest of my general equity portfolio, and I keep adding to positions the harder this class sells off. In short, I believe that in the long term, Gold (and commodities in general) are going to inflate even more than they have in the past 10 years. A lot of factors play into this idea, so I'm not advocating for you getting into this space (or getting out of it).
Generally, for commodities to continue surging in price (and gold in particular), I think the US dollar would have to be taken down several notches in it's seat as the world's reserve currency. While it looks like China (the world's second largest economy) is taking steps to remove dollars from their international trade, there really is no telling when, or even if, China will be successful at completely undermining the US dollar. In the future, one can only guess as to what will actually happen. I would thus be weary of anyone who claims to know for sure what will happen to the US dollar.
I've been reading a lot of commentary that has on one hand screamed loudly about the decline of the US dollar, only to have turned around recently to admit that we may now be in a period of bias toward buying dollars. "Don't worry", they say, "This won't last long". The point is that no one really knows what's going to happen. We can only know what's happening at the moment and guess about the future. It's the same when it comes to investing, and views of the afterlife. Both are pure speculation.
The bond market is another thing gold could have going for it ... or not. With the insanely low yields today, bonds look to be about the worst investment one could make right now. If yields begin to rise, as many predict could happen in the next couple of years, where will investors put their money? I would be willing to bet that most investors will simply switch into general equities, and especially dividend paying equities, because that's the simplest solution. This could make equities not only a buy, but a very loud screaming buy over the next year or two. Again, this is speculation - so don't stake your life's finances on it!
Happy Investing,
R
