Financial Sense Blog

It has been a wild start to the year. The market finished 2010 surging higher. Many have seen the market ripe for a pullback for the last several weeks. Corporate profits, by in large, have been well in excess of analyst expectations. The debate about the end of the advance in gold and silver prices has reached a fevered pitch, and just to keep things interesting we had a little turmoil in the Middle East thrown in at the end of the month to keep us on our toes.

I recognize that I may be guilty of beating this issue to a pulp, but given that (1) Wall Street spent most of the first quarter of 2000 figuring out new, creative ways to value companies with no earnings (remember the introduction of the price-to-sales ratio?) (2) few, if any, individual investors gave the mania that was occurring a second thought ("It's a new era"), and (3) ditto on that for the mortgage/credit crisis (which took more than a year to develop, by the way), I'm not terribly convinced that the public is going to see the next big thing coming. Thus, I prefer to let the market "tell me" what's important and what isn't.

It's widely accepted that stocks are in a correction at this time. The question remains: "what kind of a correction and how long and how deep will it go?". My analysis has been and continues to be that we are in the initial stages of a bull market (in Elliott Wave terms SPX is currently in Wave 3 of a five wave bull run).

Most of this week’s newsletter was about the release last week of China’s fourth quarter GDP growth numbers by the National Bureau of Statistics (NBS). You can find the full NBS report on their website, but here is the key paragraph

That’s what the stock market is right now more than anything else in terms of importance – it’s a culture of complacency and corruption (from last week) that is perilously addicted to the Fed’s liquidity. And I am certainly not the only one voicing concern in this regard, where you will find a recent interview with Mark Faber attached here on this subject addressing the root of this problem, which is of course the Fed’s increasing inflationary policies.

All markets are subject to the forces of regression. Newton's basic laws of motion; Action and reaction. At current levels both the S&P and Nasdaq 100 are stretched further above the 200 day moving average that virtually any other time in the last 10 years.

Once again to my surprise, the structural changes in the Commitment Of Traders report continue to change for the better. Despite the increased volatility the past couple of weeks, the four and eight largest commercial traders continue slowly cover their massive net short positions, paving the way for much higher prices in the future.

I was watching the financial networks after the “Egypt sell-off” and some commentators such as Larry Kudlow and a few of his guests mentioned the Fed’s easy money policy as at least a partial cause of global food inflation. Of course I attribute it to the unworkable symbiotic relationship between China and the US and consider those countries' monetary policies to be a major part of the food and input goods inflation issue.

This week I had the privilege of being on the same panel with former Comptroller General David Walker and former Majority Leader (and presidential candidate) Richard Gephardt. A Democrat to the left of me and a self-declared nonpartisan to the right, stuck in the middle and not knowing where the unrehearsed conversation would take us. As it turned out, to a very interesting conclusion, which is the topic of this week’s letter.

Dominic Frisby looks at some key moving averages for gold and gold stocks and argues that not only is the correction normal, we could be a close to a buying opportunity ...