Why Investors Should be Cautious on Gold and Silver

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


While U.S. stocks peaked in late April, silver peaked in mid-May and gold in late June. While the S&P 500, Dow Industrials, and Nasdaq have all given bear market trading signals, neither gold nor silver have done so. The technical indicators for both metals are deteriorating however and more serious drops could lie ahead.

Gold and silver are unique in that they are monetary metals and the market treats them as currency subsitutes. The is more the case for gold than it is for silver. Of all the metals, gold has the least industrial use. Only about 13% of annual output is used in manufacturing, mostly for electronic products such as cell phones and computers. Gold is not useless as many commentators claim, unless you live like the Amish. Silver, on the other hand, has a greater industrial role with 50% of its production being used for this purpose. Silver will therefore be more strongly impacted by economic developments than will gold.

Both gold and silver are still trading in a bullish chart pattern with their 50-day simple moving averages above their 200-days. Their technincal indicators though have turned negative on the daily charts. Most have moved below the point that divides bullish from bearish action. The trend indicator DMI (directional movement index) gave a sell signal for gold (GLD) in early July around the same time that the more serious bear market signal took place on the S&P 500 and Dow Industrials. Yesterday, the price of silver (SLV) closed below its 200-day moving average. Gold is still trading above this key line.

In the long-term, gold and silver will prove to be two of the best investments in the market. This doesn't mean that they will go up every day or that they can't have significant reversals. A double-dip recession will certainly be a negative for silver prices, although perhaps less so than for copper or other industrial metals this time around. If silver starts to trade consistently below its 200-day moving average, it too will be giving a bear market signal. It is still too early to tell whether or not gold will follow. A price drop  to the 200-day moving average, currently at 111.61 and rising for GLD, is almost certain at this point though.

Disclosure: No Positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Stocks End Q2 Giving Another Sell Signal

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


After Tuesday's sharp drop, it would be reasonable to have assumed that U.S stocks could have at least had a dead cat bounce. Not only didn't the cat bounce, but prices fell even further confirming a head and shoulders top on the S&P 500. Even worse, a more important sell signal will be given by Friday when the S&P's simple 50-day moving average falls below its 200-day. This is a classic bear market confirmation. The first of the month indicator already confirmed a bear market in early June.

While it looks like there's much worse to come for stocks, the second quarter was bad enough as is. The U.S. stock market was in a correction no matter how you measure it. For the quarter, the Dow was down 10% and the S&P 500 and Nasdaq were both down 12%.  From their highs on April 26th to their lows on June 30th, the Dow, the S&P 500, the Nasdaq and the small cap Russell 2000 were down 13.9%, 15.7%, 17.0% and 18.4% respectively. A market is in correction when it has dropped between 10% and 20% from its high.

A market has entered bear territory once it is down 20%. There is more than enough reason to think that this will be happening soon. Both the S&P 500 and Nasdaq hit their 2010 lows on June 30th. The Dow was only slightly above its low on June 8th. The S&P 500's head and shoulders topping formation indicates a possible additional drop of 20% (based on the work of market technician Thomas Bulkowski). This pattern was confirmed when the S&P 500 fell below 1040.78. Its low on the last day of the quarter was 1028.33. In an article on May 28th, I pointed out that this chart pattern was in formation. Well, now it has been confirmed and is providing one more piece of evidence of a market prone to selling.

U.S. stocks already started a bear trading pattern when the major indices sold off during the first four trading days of the month in both May and June. An article I wrote on June 6th detailed the specifics. The next confirmation will be the simple 50-day moving average crossing below the simple 200-day moving average. This will take place for the S&P 500 this Friday, if not today. The ultimate and final confirmation will be given when the 200-day moving averages for the major indices start heading down.  They have been flattening out and trending sideways lately, so this too will be happening soon.

The technical picture for the major U.S. stock indices is not only negative, but is getting worse. The market is dropping just ahead of the sharp and sudden deterioration of the economy that is beginning to show up in a number of places. The upcoming bear market though is likely to move faster than the previous one that lasted 18 months from peak to trough. Traders will love the volatility. Investors should wait for the signs of a bottom, which will offer them many opportunities for major profits.

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Stocks Trying to Trade Against Negative News

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Stocks have been attempting a recovery in the last few days for technical reasons. While they have managed to hold up despite a wave of damaging economic reports, some weakness is showing up in today's trading. Nevertheless, the market's performance has been impressive.

The S&P 500 and Dow Jones Industrial Average spent 18 days in a row trading either fully or partially below their simple 200-day moving averages. On Tuesday, they both managed to close above their respective 200-days and above the neckline of a possible double bottom. This was technically quite bullish. The S&P 500 fell below its 200-day for a while in morning trade today, which is a sign of weakness however. The Dow managed to hold at that line. The S&P has been trading below its simple 50-day moving average since May 5th and the Dow has been below its 50-day since the flash crash on May 6th. The 50-days for both indices are still above their 200-days. The 50-days falling below the 200-days would be a significant bear market signal. We are not there yet.

The news today did not indicate either a healthy economy or financial system. Weekly jobless claims increased 12,000 to 472,000. Anything around 400,000 or above is evidence of a recession. The Philadelphia Manufacturing Index dropped from 21.4 in April to 8.0 in May. It turns out that 90 banks missed their TARP payments on May 17th and many of them are trying to alter their repayment schedules. Spain managed to sell its full compliment of bonds in its auction, but had to pay very high rates to get them out the door. Spain looks like it will be the epicenter of the next crisis to erupt in the eurozone.

The future economic picture is not looking good. The most disturbing aspect of this is that government spending, the traditional Keynesian solution, just doesn't seem to be working this time. The U.S. federal government borrowed $1.42 trillion in fiscal year 2009 (ending on September 30th) to pump up the economy and the GDP during that time fell from $14.547 trillion to $14.178 trillion. This year the feds are on track to borrow $1.6 trillion. Will the GDP increase by $1.6 trillion?  It's not likely. In order to do so, it would have to be over $15.84 trillion by this September. The most recent figure is $14.60 trillion. So for every dollar of borrowing, we are not getting anywhere close to a dollar of GDP growth, but we do get more debt that we have to pay interest on from now until forever. In the long run this is a losing game. In the short run, things don't look so good either.

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.