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#1 Chris G

Chris G

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Posted 09 September 2013 - 09:06 PM

Alan M. Newman's Stock Market CROSSCURRENTS
Alan M. Newman, Editor
Excerpts from our current issue

(Find Alan's article and a free trial at this LINK)

Rationales & Targets

In our last issue, we claimed taking out the first supports at Dow 15,410 and 15,260 would be "important signs the bulls are losing control." Although that has occurred, we also said, "high volume would be a must," and that has not quite come to pass. In fact, 10-day average volume has actually declined. Summer doldrums and vacations can impact the equation so we're not overly concerned for now and still believe stocks are headed for a sizable correction. However, without negative news catalysts, we'll probably just experience stops and stutters for now. The bulls are losing control but only a foot at a time. A continuing correction will require the relatively strong NDX to close below 2980, and that's still 3% away. On the flip side, the bullish action in gold and gold shares was way overdue. Sentiment had eroded to the lowest levels in years and the 12.5% surge in only a month-and-a-half says the game is on again. The trick is for bullion to regain the $1550 per ounce level and remain there as proof the super bull can take it to new highs. We expect gold to remain strong here.


By the end of June, at the most wrenching moment of bullion's huge correction, the Dow/Gold ratio traded as high as 12.51. The ratio was the highest since September 2008, when stocks were already in free fall, affecting all other asset groups as well. As stocks continued to decline, gold prices stabilized or even rose and we suspect the same stabilization process is occurring now. The ratio has rallied to 11.34 and over the last two months, gold is definitely outperforming.

Unfortunately, gold stocks are another matter. There has been complete lack of interest and as bullion has faded, some miners have reduced dividends, cutting interest even more. However, the recent rally in the XAU gold index has exceeded the July countertrend rally by 3% and this is a positive sign. As inflation rises, hugely understated by the government, our 5:1 eventual target now places bullion above $3000 per ounce for the first time ever. We mentioned three stocks on our watch list in the Aril 29th issue, Kinross Gold (KGC), IAMGold Corp. (IAG) and Gold Resource Corp. (GORO). We have yet to pull the trigger but we're still interested.

Sea Changes

Put the children in bed or hide their eyes because this is not a fit subject for innocents. The metamorphosis of the U.S. stock market has taken many ugly forms and we're about to show you another. Anyone who believes in the legitimacy of stock prices and the inherent stability of the stock market needs an intensive course in stock market history. Everything about the market has changed.

No one even mentions program trading anymore. The subject has virtually disappeared from view. When the tech mania was in vogue, programs accounted for 10% of NYSE volume. Today, programs are routinely around the 30% mark and have made occasional forays approaching 50%. The most recent of these was the week of July 5th when programs captured 44% of NYSE volume. The record thus far? For the week of September 28, 2012, programs accounted for 48.6% of all NYSE volume. No one even cares? The official definition of program trading is "the purchase or sale of at least 15 different stocks…." Yet more evidence that individual stocks do not matter. If individual stocks do not matter, their valuations must be suspect.

Still more of the evidence that stocks are not fairly valued can be seen in the much lower volume stats for the NYSE & Nasdaq. If automobiles averaged $60,000 each instead of $30,000, there would be far fewer buyers. And as a result, there would be far fewer sellers. Transactions would decline significantly, exactly as they have for the New York Stock Exchange and for Nasdaq. These are sea changes for the capital markets. For generations, these markets have existed to raise money for both old and new companies to create jobs and create wealth. The markets now exist for another purpose, to enrich financial institutions. If the public can make some money in the process, it will be cited as a beneficial effect of the metamorphosis of the market. However, if prices are cut in half and the public loses $9 trillion, it will always be cited in retrospect as an inevitable consequence of investor greed or a downturn in the economy. Those that run the financial markets are seemingly never responsible nor taken to task for the déneumont.

We have written extensively about the metamorphosis of the equity market since late 2003, when we spoke in front of the International Federation of Technical Analysts in Washington, D.C. and even outlined a scenario that would take us to the secular bear bottom. Our speech and forecast is still in our archives at www.cross-currents.net/archives/dec03.htm. Despite the grave collapse that ended in March 2009 with stocks cut in half, there is no reason to presume an end of the secular bear market. A bottom, yes, an end, no. Until prices are primarily determined by traditional investment methodologies, the end of the secular bear market will remain very much out of sight.

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