Gold & Silver Stock Report performance

They key to capturing the big moves in the gold/silver stock market is internal momentum, which can predict the market’s path of least resistance.  

Below is a graph of the trading recommendations made in the Gold & Silver Stock Report since 2011.  

Compare this with a chart of the XAU and you’ll see why it’s important to have a reliable technical trading discipline in your corner when it comes to navigating the precious metals market.

Our relative strength approach to selecting gold and silver stocks has allowed us to beat the XAU year after year with only a fraction of the volatility in most gold stock portfolios.  Without conservative technical trading method, moreover, an investor following our advice has a zero probability of ruin due to the built-in safeguards afforded by our stop-loss system.

Click here for more information on GSSR.

Drug stocks in the balance

On Monday (Jun. 16) we also looked at the short-term directional indicator for the biotech/pharmaceutical stock group.  We saw that this important leading indicator was signaling an upside breakout for the NYSE Pharmaceutical Index (DRG).  After a spate of mergers and takeover bids earlier this year, the drugs/biotechs spent the last several weeks cooling off with biotechs suffering the bigger correction. 

Until recently, weak internal momentum prevented the drug stocks from participating in the latest broad market rally.  As the short-term directional indicator correctly predicted, however, drug and biotech stocks broke out to higher levels this week.  Below you can see the move to new yearly highs in the DRG. 

The iShares NASDAQ Biotech ETF (IBB) meanwhile was up some 2% on Friday and is now challenging the March highs.  This has great psychological important since the financial press has focused heavily on IBB in the past several weeks, using it as an example of Wall Street’s bearishness on the industry.  The renewed upward trend in DRG and IBB shows just how much that psychology has changed from negative to positive in just the last couple of weeks.

The surge in the drug and biotech stocks is important since it has provided an additional impetus for the broad market to maintain its upward course.  As I wrote in Monday’s report, it should allow the market to “keep making higher highs this month before a potential (and expected) volatility increase later this summer as the yearly cycles bottom.”

[Excerpted from the June 20 issue of Momentum Strategies Report]

Will September witness a crash?

A customer asks: “Come September we will be witnessing the Grand Super Cycle bottom. I wish to seek your views on buy and hold shares people like me. Would you advise that one should not hold any before the 90 days arrive? I am retired and won’t be affected much by career matters. I don’t have any form of business to operate. So, my nest eggs $ is in the stock market.”

Answer: he upcoming Grand Super Cycle bottom will most likely be a mild affair -- much milder than Bud Kress originally anticipated.  I think the main reason for this is because the 2008-2009 credit crash was so severe that it, much like the 1929 market crash, satisfied the demand for the 40-year cycle bottom a few years early.  The odds of a crash between now and September are slim and any correction the market may suffer between now and then should be only temporary and likely won't derail the bull market which began in Q2 2009.

Will the cycles re-emerge after QE ends?

A subscriber writes: “I still am enjoying and using your services( MSR and GSSR reports).  Fortunately, your momentum and technical indicators have been spot on the past 12-18 months, while the Kress cycles have had little impact.  Do you think the cause of so many Kress cycle failures (particularly bottoms) in the past 12-18 months is a result of the market being taken over by Fed liquidity, not ever seen before on this scale?  Do you believe the Kress cycles will begin manifesting a stronger impact once the tapering is complete?  Any thoughts on that? One thing is for sure, markets have patterns, and at some point the Kress cycles will probably start showing their presence again.”

Answer: I think you nailed it in your final statement.  The cycles will undoubtedly re-emerge once Fed interference ends.  I'm convinced that the Kress cycles have become severely muted due to the unprecedented scale of QE.  A case might also be made that the severity of the 2008/2009 market crash took some of the sting out of the longer-term cycles, but I'm more inclined to believe that the Fed has been mainly responsible for the cycle's diminution.  

Oil in the balance

One thing to watch this summer is price of oil.  An oil price spike has been the catalyst to several market reversals in past years and could, should it continue, derail the bull market. 

I’m closely monitoring the 26.00 level in the iPath Goldman Sachs Crude Oil Total Return Index (OIL); historically a breakout above this benchmark resistance level has preceded an interim top in the S&P 500 Index (SPX).  The OIL monthly chart suggests a test of the 26.00 level is coming up this summer after several months of slowly inching up toward this benchmark.

Under this scenario, a potential repeat of the August-September 1998 mini-bear market would be possible.  For now, though, consider that the market’s main trend is up as the bulls still hold sway.

Don’t underestimate financial engineering

“Never underestimate the ingenuity of corporate America or the optimism of its citizens.  While the media obsess over multiple economic crisis scenarios and reinforce the message that the economy promises little growth, corporations just keep on grinding out higher earnings.…

“Pressured on the top line, corporations have been cutting costs, downsizing and increasing worker productivity since 2008.  This obviously has its limits and becomes less effective over time, but greater efficiency is a mind-set that takes year to instill in large organizations before measurable saving occur.

“Since markets care more about earnings per share than total earnings, financial engineering is an effective tool that can work wonders.  With interest rates so low, and shrinking sales requiring less working capital, corporations can borrow cheaply and leverage their balance sheets to use the increased cash flow to buy back outstanding shares.  Some 20% of all U.S. corporate stock has thus been bought back since 2005.  Another tool is growth through mergers and acquisitions.  Resurgent stock prices and huge buildups of cash make buying other companies with lower price/earnings ratios an attractive option.  It’s also a way to use overseas cash for foreign buyouts without first having it taxed in the U.S.  Upwards of $600 billion in deals so far this year testifies to the popularity of this trend.”  [Richard Lehmann, Forbes, June 16]

Stock splits in a bull market

One of the problems confronting investors at this stage of the recovery has been the extraordinarily high share prices of several blue chip companies.  Institutional favorites like Google (GOOG) and Apple Inc. (AAPL) are priced above $500/share, putting these stocks out of reach for many investors.  Even institutional investors have shown diminished interest in AAPL this year, according to research reports.  That trend may be about to change, however, if Wednesday’s news is any indication.

Apple announced a 7-for-1 stock split which was greeted with enthusiasm on Wall Street.  This will mean that its share price will be significantly reduced, allowing for more investors to buy in at what many analysts deem to be reasonable prices.  In the days and weeks immediately following a split the price of the splitting stock sometimes declines before bottoming and eventually rallying to new highs.  Historically, though, stocks tend to outperform in the 2-3 years following splits.

Stock splits tend to be popular as a bull market matures, attracting more investors while at the same time keeping stocks within reach of smaller investors. 

[Excerpted from the June 4 issue of Momentum Strategies Report]

Real estate money on the sidelines

“About 20 million families have enough money to buy a home but are choosing to rent instead, according to new data from the National Association of Realtors.  With many workers turning to self-employment and freelance work, many potential buyers are being scared off by down payments and requests to prove years of steady income.”  [MarketWatch.com]

Comment: With the advent of a new 60-year cycle later this year, money building up on the sidelines will eventually be channeled back into real estate.  Watch for the economic recovery to gain steam in 2015 and beyond.

The demographics of the next 60-year cycle

“For the first time since 1947, America’s most common age is no longer part of the Baby Boom generation.  New Census Bureau data shows that 22-year-olds are now the most numerous age group in America, followed by 23-year-olds and then 21-year-olds.  In fourth were 53-year-olds.”  [TheWire.com]

Comment: The ideal demographic structure for America’s next 60-year re-inflationary cycle is now in place.

Will silver shine again?

Question: Do you have any idea what will be the catalyst for the next move up in physical silver?

Answer: The catalyst for the next up move in silver and gold will most likely be something fear-related.  That is, a mass exodus on the part of investors away from equities (at least temporarily) and into the metals is likely required.  What that catalyst will be (political/military/economic) or when it will occur I offer no guess.  But the current move in the metals is reminiscent of the late '90s when the fortune of the metals and mining stocks was inverse to that of equities.

The meaning of the bond market rally

Along with the return of sector rotation, another favored strategy among investors lately has been the return of the long bond trade.  Treasuries have outperformed stocks in the last four months with the iShares 20+ Year Treasury ETF (TLT) adding 12% in the year to date versus only 5% YTD for the S&P 500 (SPX).  Bond yields by contrast have fallen steadily this year as bond prices have risen.

In prior years a bond market rally was considered a safe haven trade as investors flocked to the relative safety of bonds during periods of uncertainty.  At this point, however, much of the money flowing into bonds represents global “hot money” inflows as the promise of ECB President Mario Draghi to do “whatever it takes” to stimulate the EU economy has been followed by a loose money policy throughout much of Europe.  Investors currently favor U.S. Treasuries over European sovereign bonds due to perceived safety issues and relative yields.  An argument has been made that the U.S. is therefore benefiting more from Europe’s monetary policy than Europe is.

The big question is to what extent lower bond yields will push mortgage rates lower?  A decline in the 30-year fixed rate (see chart below) would undoubtedly boost consumer spending via home refinancing.  The lifting impact of the upcoming 60-year cycle bottom this fall could amplify this effect, assuming rates remained subdued until then.  The important thing to keep in mind for now is that the rising trend in bond prices and corresponding decline in yields should be viewed as a net positive for the economy rather than a negative.

[Excerpted from the May 30 issue of Momentum Strategies Report]