Month: February 2011

Dow and Gold

Hamilton

Dowandgold2011

These are both semi-log scale charts, the top one the Dow Jones and the bottom one that of Gold, the stuff. The period is about 30 years, not by choice but simple because of availability.

At the outset gold is about $825 at the 1980 peak and the Dow is  roughly, very roughly, about the same so 1 on 1. Gold then crashes to $253 in the 2000 low and the Dow rises to 12000 a ratio of , again roughly, 50 to 1 in favor of the Dow. Then gold starts its climb to about $1400 an ounce, the Dow does nothing all this time and stays at , for the sake of simplicity, at 14000, a ratio of 10 to 1 in favor of the Dow. So if one thought that gold was a hedge, a good investment, or whatever, you were either born too soon or too late as it certainly did not happen in this 30 year period.

By the way, the Dow pays a dividend, gold costs. Perhaps not much but at 2.5% your money still doubles over 30 years.

Dow Jones, long-term

Hamilton

Dowjones feb 15 2011

Just as I was making this chart an e-mail came in to inform me that Mr. Prechter had added 2 pages to his “Theorist” publication that came out 2 days ago. As I do not wish to be accused of plagiarism  I will happily acknowledge that it is Mr. Prechter’s observation that in the last cycle degree up-move the Dow worked itself against the trend-line before falling into the 2009 low (in green at the top on my chart). He further points out that we are about to do the same thing again but against the super cycle degree trend-line (in red). All of this in the context of this being a bear market and not the start of a new bull trend.

I have a few observations that he does not mention. The red lines define the super cycle degree up leg from the 1929 lows. There are 3 up legs (in green) as there should be. Wave 4 is not surprisingly a megaphone or, in the more proper vernacular of the E-wavers, an expanding triangle. Notice that waves 3 and 5 are perfectly equal , in both time and magnitude ( on semi-log scale) if the graph had stayed between the parallel trend-lines. In reality it had a throw-over caused by the tech bubble and then another bubble in 2008 (top of B-wave), both undoubtedly caused by the Fed, which is now working hard on the third one! The fact that we were above the line is a measure of how over-extended the Dow really  is. Now we are  a few days away from hitting that line again. (at about 12400).

A logical first and possible only low in the next few years, say 2016 would be around 3000. See light blue trend-line.

TSE, is EW wrong? What now?

Hamilton

The basic call coming from EW analysis, my version and that from others,was that from 2007 the market should drop and lose 50/60% of its value. Well before the lows in March of 2009 the bearish scenario became very bullish as it called for a retracement of the previous drop of , again, 50/60%. So in total the call was correct for the first 11000 points. Then the market charged on for another 2000 so far which EW did not , unfortunately , anticipate. As seeing your neighbor making money while you are treading water or worse, is extremely painful and this could pull the hesitant investor into the game, which is no doubt what the market wants. But there are a few good reasons not to buy now!

tselongterm2011

treasuries

In the top chart is the TSE and beneath it the 30-year US treasury in yield terms. I use the US rather than the Canadian as it is much easier to find and the Canadian one would actually amplify the point as our rates travelled a wider range. The point being made here is that the two are highly correlated through the “discount factor” discussed elsewhere in this blog. All you have to do is turn the bottom chart around so that you are looking at it from the back (SeitenVerkehrt). and the correlation is startling. Even the numbers are almost proportionate. Also the individual swings get bigger as the numbers get bigger and v.v.. All this of course does, is anecdotally demonstrate that interest rates are a huge factor in determining stock prices. With a 1.6 trillion deficit how much lower and for how long can the US keep this up (down)?

Looking at the top chart, the green arrows marked X,Y and Z, all 3 drawn vector equal, show that the up leg from the March low is now equal to the leg up into the tech stock bubble of 2000. As of today this is the fastest up move in the 150 year history of the TSE, travelling more in less than 2 years than it did in the first 145 years of its existence! But it does not have to stop here. The next level is where c=a (of the B-wave)at around 14400 (all numbers are monthly!), the parallel trend-line is a few hundred points higher. Then comes the old high at 15000 followed by 16500 where this leg would be vector equal to the preceding two. In between are slightly different levels (light blue) where the vertical distance is equal. The point is that out of the 5 or 6 possible ending levels, the very highest one is at “only” 16500 or about another 2500 points or roughly 18%. All others are much closer.So to get in now to get, say an extra 10% by possible risking 60% is not a good proposition.But then this call could also be wrong!!

By the way, the TMX group (X) itself, has been declared a strategic asset so that take-over/merger is dead on arrival.

SC,Shoppers Drug Mart

Hamilton

SC feb 2011

Shoppers held the $37 level more or less (see previous comments) and appears to have completed a flat for a B in (at least) an A-B-C up. Next logical target would be around $45 and then, perhaps $50 (the highest point of the triangle).