Finally! It seems like the stars have returned to their proper
alignment and the world has gone back to normal.
With the exception of Treasury yields, all asset classes are
finally performing as expected. Is this a sign of better days
ahead, or is this constellation merely luring investors into a
false sense of security?
After a rough 18 months, equities have begun to rally and
continue to do so. The Dow Jones (NYSEArca:
) and S&P 500 (NYSEArca:
) rallied as much as 37% from their March lows. Gold prices also
have been in rally mode, providing much needed encouragement for
frustrated gold bugs. The same holds true for silver.
According to plan, and as expected by many, the government's
spending spree weakened global confidence in the US dollar. The US
Dollar Index dropped from 90 to 78 over the past 90 days.
Environments like the current one make it seem like one could
figure out the markets. This, however, reminds me of the old
saying: 'If something is too obvious, it's obviously wrong.' Is
something wrong here?
Treasury bonds are the only asset class to deviate from the
expected path. For the first time since Operation Twist in the
1960s, the US government has decided to buy its own bonds in an
effort to lower long-term interest rates.
As many other government efforts, this too has backfired. Yields
for the 30-year Treasury bond (NYSEArca:
) have risen from below 3% to over 4%. A similar scenario has
played out in 5 and 10 year Treasury bonds represented by the
iShares Barclays 3-7 Year Treasury (NYSEArca:
) and iShares Barclays 7-10 Year Treasury Bond Fund (NYSEArca:
More than just a current snapshot
Even though everything is going according to plan, we have to
remember that the current state of affairs is simply a snapshot of
the present. Successful investors profit by accurate bets on
tomorrow, not on today. What will tomorrow bring?
At first glance it may not make sense, but the US dollar should
actually begin to rally and remain strong for the next couple of
years. The investment community is extremely bearish on the
greenback and expects the dollar to continue falling. This kind of
bearish sentiment often appears before a low is reached. The
opposite holds true for extremely bullish sentiment.
Back in December 2008 for example, the
Profit Strategy Newsletter
commented on the mounting bullish sentiment, 'Optimistic sentiment,
which should be more visible above Dow 9,000, will give way to
further declines. These should draw the indexes to new lows.'
Concerning US dollar pricing, the sheer amount of outstanding US
debt should prove bullish for the longer term. Here's why: The US
dollar is by far the most inflated currency. It is also the most
commonly used currency in the world. As such, most of the debt -
and toxic assets - in the world, is US dollar denominated. As those
toxic assets continue to deflate, US denominated wealth will
continue to shrink.
The law of supply and demand teaches us that scarcity of any
product results in higher prices. In other words, the fewer dollars
in circulation, the more valuable the remaining dollars will
become. One ETF that stands to benefit from this trend is the
PowerShares DB US Dollar Bullish Fund (NYSEArca:
The gold - silver - US dollar connection
The recent fall in the US dollar also explains the bounce in
silver and gold, at least to a certain degree. Gold and silver
trade denominated in dollars. A weak dollar translates into higher
silver and gold prices, and vice versa.
A strengthening dollar should put some pressure on precious
metal prices. The same, by the way, holds true for oil and oil
ETFs, such as the United States Oil Shares (NYSEArca:
). A look at the chart of gold and silver, represented by the SPDR
Gold Shares (NYSEArca:
) and iShares Silver Trust (NYSEArca:
), shows a diverging price pattern between the two metals (see
While SLV was able to reach new recovery highs, GLD was not.
This kind of non-confirmation often carries a bearish undertone.
This should result in falling prices for GLD, SLV, the iShares
COMEX Gold Trust (NYSEArca:
), and the PowerShares DB Silver Fund (NYSEArca:
Searching for safety, investors have poured billions of dollars
into gold and gold related investments. With over $31 billion in
assets, the SPDR Gold Shares (NYSEArca:
) has become the second biggest ETF in the world. Despite tons of
money pouring into gold, gold failed to reach new highs.
The failure to do so, may turn hopeful goldbugs into frustrated
goldbugs. As the base of gold owners and goldbugs has skyrocketed,
there is now a bigger pool of gold owners that can morph into
sellers, putting more pressure on prices. At the point where gold
owners outnumber gold buyers by a large margin, gold sellers are
likely to outnumber gold buyers.
A look at the technology sector from a decade ago shows the
risks of a saturated market. At a point when nearly everyone was
invested in the Nasdaq (Nasdaq:
) and Technology Select Sector SPDRs (NYSEArca:
), dot.com stocks had nowhere to go but down.
The effects on gold won't be nearly as pronounced. Unlike
dot.com stocks with no earnings, gold is backed by real assets. The
above mentioned bearish non-confirmation, however, suggests
considerable pullback for gold, and a huge profit opportunity in
What's next for stocks?
Like the proverbial suspicious older brother, the
Profit Strategy Newsletter
has continued to warn investors about the troubles in the financial
), and equities in general.
Previously in September 2008, the newsletter considered
financials a 'downward spiral with no stop-loss provision' and
recommended to buy short ETFs, such as the UltraShort Financial
) and UltraShort S&P 500 ProShares (NYSEArca:
). The sell signal was reiterated again at Dow 9,000 in January
A special Trend Change Alert, sent out on March 2nd, 2009,
recommended selling short ETFs and buying long ETFs. According to
the Trend Change Alert, this rally from the March lows would last
for several months and propel the indexes by 30 - 40%.
According to the newsletter, even though the major indexes
should push to new recovery highs over the next few weeks/months,
the worst is still to come. The stock market is plagued by issues,
too numerous to discuss in one brief article.
The most recent
Profit Strategy Newsletter
and ETF Weekly Pick, analyzes the prospects for the U.S. and
international stock markets, along with a target range for the
ultimate stock market bottom. Also included are more details about
silver's big move and the ETFs to own.