Bubbles (Gold/Silver ETFs?) & Crashes
07/29/11 INSIIDE Track: “Outlook 2011… Date With Destiny VII
There are a few things I would like to clarify, with regard to last month’s discussion on shells and bubbles and manias and crashes…
— The first one is a conclusion that I did not spell out as clearly as I would have liked. It had to do with the cycle application to ETFs. In that discussion, I outlined the two 11-Year Cycles that have unfolded in ETFs – the first beginning in 1989 and the second in 2000.
In an intriguing parallel to the 11-Year Sunspot Cycle – and the 22-Year Solar Polar Cycle – ETFs are reaching a kind of crescendo in 2011. The first phase was their Stock Index phase. It culminated with the 2000 peak in Stock Indices and particularly the 2000 peak in the Nasdaq 100 (QQQs), from which this Index has never fully recovered (or even recovered 50%).
The second phase began in 2000 and is culminating in 2011. This phase involved the introduction of – and continued acceleration of – commodity & Gold/Silver ETFs.
I believe that this phase will see a significant culmination in 2011 and that it will also coincide with important tops in the underlying markets (Gold, Silver, many commodities).
The big question is whether this will be an orderly culmination… or a not-so-orderly culmination. If commodities enter an accelerated decline (assuming that they are peaking, as expected), it could place a strain on related ETFs. And, as has been theorized with regard to Stock Index derivatives, the tail could ultimately wag the dog.
In other words, a sharp drop in commodity prices (possibly triggered by a rising Dollar as is projected for the months following July 2011), could trigger a rush for the exits in some underlying ETFs (and ETCs).
These redemptions could trigger increased selling of related futures contracts, many of which now form the majority of these ETFs. And, this selling of commodity futures could trigger more panic and more selling of underlying ETFs… and so on.
This is how these bubbles work. And, almost no one calls them a bubble before they burst.
Instead, they give wonderful reasons why the dramatically increased prices are justified (like the prices for Internet stocks in 1998/1999 and the prices for real estate in 2005/2006… and the prices for Japanese stocks in 1988/1999 and the price for Gold/Silver in 1978/1979, etc.) and why they are sure to keep increasing at the same rate.
They often explain why these prices are spurring increased demand – which is accurate up to a point – the point of diminishing return. Once that point is reached, the reverberations are usually swift and severe.
It is also important to note that this particular phase – of any market advance – is the one when emotions (fear of missing out on the ‘greatest investment opportunity of a lifetime’, etc.) take over the majority of participants. And, once these irrational emotions are exposed to the light of day, the market falls back as quickly as it surged (during that culminating phase).
It is a little bit like Wily Coyote racing off a cliff and suddenly looking beneath him and realizing that he should not still be supported by nothing but air – even though his legs are still going a mile-a-minute. All of a sudden, reality takes hold… and down he plummets (and off goes the Road Runner to live another day).
The point is that these vehicles are likely to enter a new phase in/after 2011…this type of ‘correction’ in commodities – which appears to already be taking hold – could be spurred by diverse fundamental events… and potentially a combination of many of them. They include:
— Dollar rally (which could be spurred by a removal of the debt-ceiling fears once a resolution is achieved).
— Peace – or the illusion of peace – in the Middle East….
— China’s economic bubble bursting… or at least rapidly losing air. Since many commodity prices – like the proverbial pendulum – have swung far beyond what the current fundamentals justify (based on a linear or even parabolic extrapolation of what has transpired until now… just like U.S. real estate prices were supposed to keep moving into the stratosphere after 2006), they are prone to ‘overswing’ to the downside once some of these expectations are tempered… or eliminated.
— Another factor – that has not yet been discussed in this context – is the ongoing PIIGS-fest in Europe. As many of these nations come closer to defaulting, their underlying economies – and their citizens’ ability to purchase goods – weaken. Ultimately, commodity prices will have to return to a range of normalcy when speculators realize that the world is not continuing on a path of unimpeded, never-ending, always-expanding prosperity.
While I might discuss fundamentals like this as a backdrop, the cycles and technicals need to time these signals and corroborate these suspicions. And, on those topics (cycles and Europe), another discussion warrants an update…
An examination of these cycles is NOT undertaken in order to advocate trying to trade the markets based on the cycles of Jupiter… or any other planet. That would be like trying to decide your voting preference in the next local school board election based on cycles that govern the rise & fall of major civilizations. Each has its own purpose and its own place… but the two rarely intersect. One is verymicroscopic (trading the markets or voting in a school board election) while the other is very macroscopic… not to mention the very spurious connection between the two.
This discussion is also NOT to forebode some impending cataclysmic event. To reiterate something I have stated many times before: I seek to be an ‘Aware-ist’, not an Alarmist. However, this discussion is an attempt to distinguish when the greatest synergy of multiple, external forces (like a peak in the Sunspot Cycle coinciding with the time when Jupiter’s gravitational and magnetic influence is at its greatest) aligns with other cycles and analysis. That is when destructive events are more likely. Such was the case in March 2011…
For several years, I have projected a sequence of major earth events for Chile, then Japan and then North American/U.S.. These cycles pinpointed 2010 for Chile, 2011 (Dec. 2010–Jan. 2012) for Japan and2011/2012 for the U.S.
In the case of Chile, the first danger period was in February 2010 (incorporating a 90-degree series of earth events in S. America that saw spikes in the months of February, May, August & November during the years leading up to 2010). In late-February 2010, Chile was rocked by a powerful, 8.8 earthquake.
This turned attention to 2011 and projections for a major event in Japan…
For the next several months (the remainder of 2010 and into early-2011), INSIIDE Track repeatedly discussed these cycles and the focus on Japan during 2011.
In March 2011, Jupiter experienced is closest pass to the Sun (perihelion) at the same time a surge in solar storms was unfolding. At the culmination of this gravitational/electromagnetic ‘double-whammy’,Japan experienced a devastating 9.0 earthquake and resulting tsunami.
(This was also during the 7/14/28 Year Major/Deadly Earthquake Cycle in 2011 – see January 2010 INSIIDE Track – and the 17-Year Cycle of Japanese Earthquakes, adding greater synergy.)
Both the Chilean & Japanese quakes pinpoint a type of crescendo BUT do not preclude other quakes – or volcanoes – from hitting near those areas.
Japan has just reinforced this point with yet another July earthquake (7.3) in N. Japan – the same region where the March quake hit and the same area in which an ongoing series of January/July (180 degrees apart) quakes have struck for several years. Both Japan & Chile have been experiencing swarms of moderate earthquakes in recent weeks. Expectations for an impending N. American quake have been – and will continue to be – discussed separately.
The point is that this very natural, very consistent and very logical cycle for Jupiter reinforced many other cycles that all came into play at the same time. Again, it is not the individual significance or impact but rather the combined, synergistic impact that is so important. Regarding Jupiter, there are two important cycles I am monitoring. One is with its relationship to the Sun and the rest of the Solar System. The March 2011 perihelion is a perfect example of that. The other is its own ‘internal’ cycle – the 11.86 year rotation of the planet…
Jupiter has a unique convergence of cycles from now (2011) into 2016–2018. If Jupiter really is the impetus behind major solar storms – as many have postulated – and the latest Sunspot Cycle is only beginning to turn up, we could be entering an volatile period in our Solar System. Add in these long-term volcano cycles and you have a potentially-explosive mix. More to come… IT
07/29/11 – 3-6 Month+ Outlook:
Stock Indices are in mixed intra-year trends, exhibiting divergent signs that continue to argue for an important peak. The monthly & weekly trends are mixed, as are the weekly 21 MACs. All three Indices already reached their 6-12 month upside price objectives – while peaking in early-May – so the upside potential remains limited.
As discussed last month, there was still the potential for new highs before a substantial decline takes hold. This would fulfill a Golden Ratio relationship between the two major moves of the past 4 years. The 2007–2009 decline lasted 17 months. In July 2011, the ensuing advance would have lasted 1.618 times the duration of that preceding decline – 28 months – creating a total high-high cycle of 45 (geometric) months.
This possibility was reinforced by a 14-15 week cycle that has also been developing between the lows. A 14-15 week low-low-low-(low) Cycle Progression recurred on June 20–24th & June 27–July 1st. The DJIA set is lowest weekly close on June 24th and was expected to advance into July 18–22nd. (The next phase of this 14-15 week cycle is September 26–October 7, 2011… when another low is likely.)
This possibility – for a rally to new highs in at least one Index – was further corroborated by a unique cycle that has governed the action of the Nasdaq 100 for over a decade. To review, one of the most consistent weekly cycles – that was discussed in 1999–2002 and multiple times since then – is a 22-23 Week & 44-45 Week Cycle.
The 44-45 Week Cycle incorporates the 14-15 Week Cycle (3 xs 14-15 weeks = 42-45 weeks) but the breakdown – into a 22-23 Week and even into an 11-12 Week Cycle – is where this cycle differs. The most recent occurrences of this cycle included an 11-week rally from Nov. ‘10 into Feb. ‘11 and a subsequent 11-week high-high cycle from Feb. ‘11 into May ‘11.
This created an 11-week low-high-(high) Cycle Progression targeted for July 18–22nd – precisely when the Nasdaq 100 did set new highs. This was validated by the weekly trends, which turned neutral but could not turn up in the DJIA & SPU.
Looking forward, the next phase of this 11-week cycle comes into play on October 3–7, 2011 (go back and reread when the 14-15 week cycle low next comes into play)…related points that are already hinting this time frame should be a low. The first is the 14-15 week cycle. The second is that a 50% retracement in time – for the DJIA & SPU, which peaked in early-May after a precise 44-week advance – would involve a 22-week decline and would bottom on October 3–7, 2011.
A related 15.5 month (approximately 66-week) cycle divided the last two multi-year lows – in March 2009 and June/July 2010 – and next comes into play in October 2011. (An exact 66-week cycle from the mid-2010 low comes into play on Oct. 3–7, 2011.)
And, then there is the preponderance of the Stock Indices to set important lows during the month of October (1987, 1989, 1990, 2002). This cycle did invert in 2007, but the month of October did time another multi-year turning point in 2007.
IF Oct. 3–7, 2011 is going to pinpoint an important bottom, Stock Indices should drop below their June 2011 lows AND turn their intra-year trends down before then…
07/29/11 – 3-6 Month+ Outlook:
Gold & Silver rallied into the latest convergence of intermediate cycles on July 18–29, 2011. This creates a high 180 degrees from the late-January low, 360 degrees from the late-July 2010 low & 540 degrees from the early-2010 bottom. These three lows created a 25-26 week low-low-low-(high) Cycle Progression that came into play on July 18–29, 2011.
…Gold had to turn its weekly trend down in order for the May 2nd high to be considered anything more than a 2-3 month peak. Gold was never able to do this, which allowed for this recent rally to new highs. At the same time, however, Silver has only rebounded about 50% of its May 2011 decline.
This kind of divergence is indicative of a more convincing peak in the making. And, it comes at – cyclically-speaking – the ideal time. However, this is based on a much larger cycle that I have been watching – and discussing – for over a decade…
It is a 40-Year ‘period of testing’ from when the U.S. slammed shut the Gold window in August 5–15, 1971. August 5–15, 2011 is 40 years later and could be the time when the Dollar/Gold relationship sees another sharp turnabout… August 2011 could provide another dramatic reversal in this Dollar/Gold relationship.
3-6 month, 6-12 month and even 1-2 year traders & investors should begin to lighten up on long positions in Gold & Silver, looking for a sharp correction in the coming months.”
Dollar should turn up & Gold turn down in 3Q 2011. Commodity/metals ETF bubble about to burst. Stock market cycle low in early-Oct.