Daily Updates

Euphoria & That Which Cannot Continue….Won’t

Posted by Dennis Gartman via Rob Zurrer

on Tuesday, 23 August 2011 18:47

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Dennis Gartman,  who correctly forecast 2008’s commodities slump identifies a few reasons for pause in his latest daily trading commentary that he has written for the past 30 years. Dennis is concerned about consensus numbers that “now have 90-95% of those polled bullish of gold”. The author of 22 Rules of Trading posits that anytime consensus numbers get into the stratospheric levels they are now it would be a good idea to “ramp down rather than to ramp up bullish enthusiasm”.
Gartman sold his trading position today  “culling that which we bought last week and upon which we have a tidy… indeed a rather large and all-to-swift… profit”. Despite selling the trading position, Gartman is not selling his core position in gold. He retains his core position in gold and remains long term bullish.
Another reason Gartman is cautious is that very recently the gold ETF GLD suddenly became bigger than the largest known stock market ETF SPY. To Gartman this is  “nonsense; this should not happen but it has, and in our mind’s ear we hear Ben Stein’s father, the noted economist, Herb Stein, saying “That which cannot continue, won’t.” In these days when gold can move $40 -$50 in an instant up or down, when the focus on gold is so passionate, sentiment so extreme Gartman thinks gold is “not an investment that is safe, indeed it is far from safe; it is violent; it is mass psychology incarnate and it is scary”.
Bottom Line, Dennis Gartman remains long term bullish gold, but he is getting nervous and draws his readers attention to where this will all end:
“Such things senseless happen after periods of euphoric rises in prices of some markets. We remember when the land in Japan’s Imperial Palace was said to be worth more than all of California. That could not continue; it didn’t.  We remember when the Nifty Fifty’s valuation was more than that of the rest of the NYSE; that could not continue. It didn’t.  We remember when Petsmart’s capitalization during the dot-com frenzy was greater than that of General Motors. That could not continue; it didn’t.  A tulip bulb once sold for more than the value of a fine house in Antwerp; that could not continue and it didn’t… but not before bankrupting hundreds of seemingly wise investors/traders/speculators at the time. Thus, GLD’s capitalization being greater than that of SPY cannot continue. It won’t. Oh and for good measure, to make certain that gold’s price must decline, the Shanghai Futures Exchange raised its margins today.  Wave goodbye to GLD’s premium over SPY in the process:
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Mr. Gartman has been publishing his daily commentary, The Gartman Letter, since 1987. Over the years, he has also conducted numerous presentations and courses on issues relating to the capital markets and derivatives for various brokerage firms, central banks, and U.S. government entities. In recent years, Mr. Gartman has been a frequent guest on leading financial television and radio networks.



Here is an interesting observation: The value of the SPDR Gold Trust (GLD) is now worth more than the SPDR S&P 500 (SPY)

Click here to read more…

“The barometric needle has switched over to the bear side”

on Tuesday, 23 August 2011 14:02

Last week Lowry’s Selling Pressure Index crossed ABOVE its Buying Power Index, a move that I consider bearish. Thus, the barometric needle has switched over to the bear side. In the past there have been manic periods like the one we have been going through. This switch in Selling Power to the dominant position, is an early warning, and I think it behooves all subscribers to sell their regular common stocks and move to the sidelines, thereby awaiting clearer signals as the market finally calms down. Richard Russell 08/22/11 Dow Theory Letters HERE to subscribe

Demographic Headwinds for US Stock Prices

This evidence suggests that U.S. equity values are closely related to the age distribution of the population. Since demographic trends are largely predictable, we can forecast the path that the P/E ratio is likely to follow in the next few decades based on the predicted M/O ratio.

Figure 2 compares the actual and model-implied P/E ratios for the sample period ending in 2010. We calculate the path for the model-implied P/E during the sample period by feeding in actual M/O ratios. We call the long-run path of the P/E ratio predicted by the model the “potential P/E ratio” and designate it P/E*. Figure 2 shows that the P/E* (red dashed line) is highly correlated with actual P/E during the sample period.

PE_MO2

….read more and view Charts HERE

“The barometric needle has switched over to the bear side”

Posted by Mike Shedlock - Richard Russell Comment

on Tuesday, 23 August 2011 13:42

Last week Lowry’s Selling Pressure Index crossed ABOVE its Buying Power Index, a move that I consider bearish. Thus, the barometric needle has switched over to the bear side. In the past there have been manic periods like the one we have been going through. This switch in Selling Power to the dominant position, is an early warning, and I think it behooves all subscribers to sell their regular common stocks and move to the sidelines, thereby awaiting clearer signals as the market finally calms down. Richard Russell 08/22/11 Dow Theory Letters HERE to subscribe

 

Demographic Headwinds for US Stock Prices

This evidence suggests that U.S. equity values are closely related to the age distribution of the population. Since demographic trends are largely predictable, we can forecast the path that the P/E ratio is likely to follow in the next few decades based on the predicted M/O ratio.

Figure 2 compares the actual and model-implied P/E ratios for the sample period ending in 2010. We calculate the path for the model-implied P/E during the sample period by feeding in actual M/O ratios. We call the long-run path of the P/E ratio predicted by the model the “potential P/E ratio” and designate it P/E*. Figure 2 shows that the P/E* (red dashed line) is highly correlated with actual P/E during the sample period.

PE_MO2

….read more and view Charts HERE

In the last update, despite being extremely overbought, gold was expected to advance to even higher levels, for various reasons, principally the COT readings and the bullish volume pattern. We gave a target in the $1900 area, and that target was very nearly attained on Friday when gold hit $1881 intraday, before reacting back to close well well off its day’s highs.

Gold is now monstrously overbought and has finally caught the attention of the mainstream media who are all over it. These factors alone are regarded as making the probably of it reversing soon very high, and if we look at the charts we can see good reasons why it should react back shortly.

On all its short and medium-term oscillators gold is now horrendously overbought. We can see that on our 6-month chart with gold now super critically overbought on its short-term RSI, with it having been critically overbought all this month to date on this indicator. Meanwhile on its more medium-term MACD indicator it is now massively overbought – these conditions being reminiscent of silver late in April. In addition it has opened up a now huge gap with its moving averages.

….view chart and further commentary HERE

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