Financial Sense Blog

Who isn't talking about gold these days? Maybe that's more the appropriate question than not. Of course dial the clock back seven to ten years and serious discussions of gold set against the context of the macro credit cycle, monetary and fiscal policy, etc. were almost strictly confined to the bearish underground.

In this column a few weeks ago I likened the economy and markets to being in the eye of a hurricane. There had been some destruction in global stock markets created by the debt crisis in Europe, but the storm quieted down after the surprise EU/IMF announcement of a $1 trillion debt rescue plan.

Many economists regard deflation as more dangerous than inflation, as it encourages consumers to delay purchases as they wait for a lower price tomorrow. When consumers put off buying in anticipation of lower prices it creates a downward spiral of lower demand followed by lower production.

Last week’s 284 Up Day on the Dow led some Mainstream Financial Media Commentators to launch again into Happy Talk about the ostensible ‘Ongoing Recovery’. Ditto for the Equities Indices Rally on June 2.

With a weak employment report on Friday, problems in Europe, and financial markets in a precarious technical condition, it is helpful to review similar historical stock market corrections. From a fundamental perspective, our present day concerns relate to deflationary forces in the global economy.

In a severe sell-off, 99 percent of ALL stocks can fall. Approximately three out of four stocks go down in a bear market. This ratio doesn't just apply to high beta names; historically, 75 percent of all stocks go down when the general market falls.

With stocks holding support this week, bonds gave back some of their recent gains. The 10 Year Treasury note ($UST) gave back -1.00 point (-0.82%) to close at 120.31. The recent downturn in stocks and commodities resulted in part from the Greek debt crisis and its repercussions for the euro and the EU in general.

It’s been a very exciting week so far for gold and SP500 traders as we take advantage of mass crowd behavior. Trading against the masses can be very profitable during certain situations but more times than not it’s a great way to lose money which is why I focus on taking the opposite side of these moves.

I'd like to return to a theme we were discussing last week concerning our expectations for this year's upcoming 4-year cycle bottom. We touched on this in a recent commentary and we'll discuss it some more here. The theme I'd like to emphasize is that in years when the 4-year cycle bottoms (which always occurs in late September/early October) and the stock market takes a significant hit prior to the 4-year cycle time low, the bottom is in most cases made well before the late September/early October period and the market usually ends up outperforming for the rest of the year.