10 November 2011
The markets have been acting in sync. By that, I mean most days have looked about the same recently.
Here is a typical day:
• Interest rates up (bonds down)
• US Dollar index down
• Equities up
• Gold up or down (gold has not been behaving as predictably)
Or you could have a day:
• Interest rates down (bonds up)
• US dollar index up
• Equities down
I am stating that bonds and equities have been in an inverse relationship recently. Same with the US Dollar Index and stocks.
US Dollar Index
The US Dollar Index is down 8.5% through October 28th. This basically means that the Euro has outperformed the US Dollar by 8.5%. Short term I expect the US Dollar to continue to slide. Long term, if we don’t go to a one world currency, I expect the US dollar to go up against the Euro.
Bonds
The interest rate on the 30 year US Treasury bond went from 2.76% to 3.35%, during the month of October. That is an increase of 21%! Talk about volatility. I believe the volatility will calm down soon and we should see more stability in the early part of 2012. Now, when I stay stability do I mean stocks will go up? No. I mean, that we will likely have months where stocks do not move so much (up or down).
Gold
Gold has broken out of a formation that projects to take it to a price target of $1870-$1880. Casey Research has developed a breakdown of global investor holdings by asset class. It reveals that gold was 26% of the total at the height of the gold mania in 1981. During the depression it jumped all the way up to 20%. Currently, the percentage is 1%. If this information is even close to accurate, then I take this as another indication that the gold bull market is not over.
Stocks
The volatility continued to amaze us in October with US stocks surging up over 10%. This type of volatility is not typical and is usually associated with a long term bottom or top. I still believe we are headed for an eventual major correction. Although I don’t expect it in 2011.
In these next 12 months leading up to the Presidential election we have almost always seen the US stock market go up. Pre-presidential election years are the best years of the four-year presidential election cycle. The average gain for the Dow during pre-presidential years has been 10.5% according to Jeff and Yale Hirsch in the “Stock Trader’s Almanac – 2011”. I would be surprised if this next year is any different, especially considering the recent major pull back in US equities.
I believe the stock market likely bottomed on October 3rd and we will see a nice up trend in the coming months. However, I still believe that a crash is coming in the next few years and that our government is making unwise decisions. [I had to clarify that, some of my clients read that I think the US stock market is going up as meaning that I like Obama and think the government is doing great things fiscally for our country?]
I expect more choppiness and perhaps one or two more panic selling periods before a strong rally in November and December. I am staying the course and buying my favorite stocks and ETFs during the selloff days - not during rallies like everybody else and their trading software!
