October 19, 2011
Alan M. Newman's Stock MarketCROSSCURRENTS
Alan M. Newman, Editor
Excerpts from our current issue
Rationales & Targets
It is clear from volume patterns that thecurrentrally is likely counter trend and not the real McCoy. As well,evidencecontinues to grow that the U.S. stock market is an increasinglyunattractiveplace to park savings for the public. The signs of discontentremainapparent across the globe and frankly, it is disturbing. Thegroundswellof protest near Wall Street is a sign of the times and it is a cleardeclarationthat too many have been impacted by a recession that never ended.
Money continues to flow out of domestic mutualfunds ($4.3 billion in the week the rally began), thus higher pricesareprobably being driven substantially by a short covering panic. Thatfactor is capitulation of a very different kind and would of course,implya reversal very soon. While we are aware the sentiment is nowherenear as optimistic as it was a couple of months ago, we believe alastingbottom can only be achieved with a true capitulation– tremendously onesided. We would allow some room on the upside but remain firmlyinthe bear market camp.
Richard Russell “Scared”(forgood reason…)
Talking about the signsofhard times he sees, 87-year old Richard Russell, publisher of the DowTheoryLetters for 53 years,
said, “It all brings backbad memories of the 1930s. And to tell you the truth I’mscared.” To read more:
We saw the quote from Richard Russell as we werefinishing up the newsletter and we realized Mr. Russell has good reasonto fear a similar outcome. It’s not only what is occurring inGreeceand elsewhere in Europe as the viability of the Euro remainsthreatened. American banks are in trouble and after hundreds of billions inbailoutspaid for by taxpayers, many of whom remain out of work two years afterthe recession supposedly concluded, one can only wonder withtrepidationwhat comes next. Bank of America closed Friday at $6.18,down 60%from the January high and down a shocking 89% from November 2006. A number of litigations await adjudication, including a $50 billionclaimby shareholders, alleging that BAC withheld pertinent information aboutlosses at Merrill Lynch to ensure the transaction would succeed. Subsequently, a loss of $15.3 billion for Merrill was announced and BACreceived $20 billion in bailouts. The easy assumption is thatshareholderswere sacrificed for the benefit of those on the high end of bonuspayouts. BAC’s entire market cap is $62 billion. When the case moves forward inOctober 2012, we’ll find out if Bank America shares can survive (see
New Target Ratio 5:1
At bullion’s recent closing and intraday peakprice,our long held target of a 6:1 Dow/Gold ratio was met. Long timesubscriberswill remember that initially, we put forward a 5:1 ratio as a targetandlater raised the target to 6:1 as efforts to contain terrorism attacksin the U.S. had apparently met with great success. As well, werepeatedlyshowed our inflation adjusted chart, equating the January 1980 peakwithmajor resistance for bullion. As time passed and the CPI rose,ourresistance level eventually climbed to approximately $1969 perounce. In September, Gold traded as high as $1913 per ounce, thus we believeourmajor resistance level was sufficiently proximate to have “held” forthetime being.
What next? Clearly, all bull marketssuffercorrections and super bull markets can suffer dramatic corrections,likethat we have recently seen for bullion. Most important toconsideris that our 6:1 ratio target was not the end all of the bull market,justa target that we expected to be met before major resistanceoccurred. At this juncture, given the dire situation affecting several Europeancountries,the virtual guarantee of continued money printing here and abroad andunrestseemingly everywhere, we are again lowering our target ratio to 5:1,backto where it was not that long ago. Thus, for every iterationinvolvinghigher prices for stocks, bullion should still outperform by a widemargin. Even at Friday’s close, a 6:1 ratio would favor goldsignificantly. At 6:1, the Dow at 12,000 would imply gold at $2000 per ounce. At5:1, the Dow at 12,000 would imply gold at $2400 per ounce. Inthesecases, the Dow would advance by 3.5%. Gold would advance by closeto 20% at 6:1 and by 44.5% at 5:1.
Below, the difference between our 6:1 and 5:1ratioslooks small and it probably is, especially when you consider that theratiohas been far lower at key points. There is every reason to expecta speculative phase perhaps matching that of the last enormous spikethattook gold to $850 per ounce in January of 1980. Although thatepisodetook the Dow/Gold ratio to just above 1:1, we’re not anywhere near thatpessimistic on stocks. In a worst case scenario of a retest oftheMarch 2009 Dow bottom at 6469, it is difficult to see how gold might bemuch above $2000 per ounce. The stock market remains a store ofwealthand if that much wealth can be destroyed, it must negatively affectgoldto some degree. Thus, a 3.23:1 ratio is probably the best caseforgold and the worst case for stocks. From 1975, just after aterriblebear market for stocks concluded, to 1982, after another bear marketandrecession and the start of a new bull market, the ratio averaged4.08:1. Thus, we believe there is still plenty of room for gold to run.
Our regression chart made little sense to anyoneyears ago when we first displayed the picture and almost no one paidanyattention, but it clearly relevant now. Despite the incrediblesuperbull market for stocks from 1982-2000, stocks can be expected to riseata rate of only 5%+ over the course of the very long term. If itwerepossible for stocks to do far better, they would obviously become theinvestmentof choice for all and would then necessarily vault to unrealistic andunsustainableextremes. The proof is in the pudding. After two episodesina decade where the price of stocks were cut in half, our regressionlinemakes more sense than ever before. The regression line allows usto interpret a “fair value” for the Dow 11,241, 3.5% lower thantoday. A 5:1 Dow/Gold ratio, would place a “fair value” for bullion at $2248perounce, 33.7% higher than today. And in the final analysis, themoredollars printed, the more gold should shine. [Thisissuewith the regression chart is available upon request]
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ABOUT ALAN M. NEWMAN
Alan M. Newman has been the Editor ofCROSSCURRENTSsince the first issue was published in May of 1990. Mr. Newman is alsoa member of the Market Technician's Associationand has been widely quoted for years by the financial press, media, andother newsletters and has written articles for BARRON'S.
The newsletter is published roughly every threeweeks and focuses on economic and stock market commentary, oftencoveringcontroversial subjects. Several proprietary technical indicators areusuallyfeatured in every issue accompanied by current interpretation. Broadsamples of our work can be viewed at
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