Market Timing Update: What are they celebrating in the stock market?

Market Timing Brief for 7-21-2011

1. The SP500 index (SPX; SPY) has made good progress over the past three market days in a relief rally predicated on a budget deal. The question is, “What are they celebrating in the stock market?” A budget deal they say. Well, examine what the economic impact of a budget deal will be and it’s lower spending with no new taxes. That is what the Republicans are pushing for. Say they get their way. That will mean less stimulus to the economy. A big source of tech spending at least up to the end of last year had been government spending in the absence of enough private demand, at least here in the U.S. IBM says they are doing great business overseas where they make products for…the U.S. So with the U.S. lagging most of the world in this recovery, the rest of the world is going to hurt too.

That is what the raising of Chinese interest rates is about. There was too much investment going on that was out of proportion to end demand, so the government was smart enough to cut back the blood supply to their economy by making it harder to get loans and with higher interest rates.

So our economy is slowing and dragging down China and every other country that supplies us with goods. Congress wants to cut spending, which can only hurt the economy. So they are offering a “negative stimulus plan.” I am not saying whether they “should” or “shouldn’t” cut spending. Over the long term, it will be helpful, because it should bring down our future interest rates. Yes it is important, because they will be on the rise at some point. This means that what they are doing is going to make the economy worse, not better, so stock valuations will have to decline with the further drop in growth that Congress engineers. I know it sounds crazy, but this is what investors need to know.

Practical Investing/Trading Pointers: No need to buy this market (just about any stock market) until it makes a new recent high, which for the SP500 Index would be a close over 1370.58. We are only 1.87% from that high. If you buy below there, be prepared to set a stop when it retests that top, if we get that high based on a budget resolution and Europe calming down.

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2. Gold (GLD, IAU) and silver (SLV) are correcting a bit today, because of the net effect of two things:

The US dollar index which measures the US dollar in terms of other major currencies has broken support of a major uptrend line on the daily chart. That helps gold and silver prices.
There is net selling due to the high level of gold selling because a) the European panic is subsiding enough that some of the flight to safety to gold and silver is being reversed and b) the potential resolution of the US debt situation is causing traders to take profits. You may want to trim or exit trading positions in silver and gold for this reason over the very short term.
Longer term forces will keep a bid under the metals despite pullbacks due to the further problems with other endebted nations in Europe, namely Italy (top in economic size), Ireland, Portugal, and Spain. Greece may resurface and is not fully “solved” even for the short term, but things seem better today.

Practical Investing/Trading Pointers: No need to buy gold until it reaches a new high or more likely until it falls back to the breakout point of 1575.79 (see my GLDTracker ™ page for GLD numbers): GLD Tracker™ You can buy it there with a stop close below or wait for it to bounce back up to a new high.

The silver ETF SLV market timing parameters are these: 37.72 to 37.90 are support at this point. We are at 38.22 at at 2:18 pm on 7-21-11. A fall or close below there will cause SLV to drop within the prior consolidation to about 35.34ish or to around 35.53 which would be a retest of the June low. We’ll discuss what a break of that low would mean if we get there.

Core gold and silver positions (“savings”) are a hold as they have been since the uptrend began in 2001. I urged investors to aggressively buy gold as it rose from the low 300’s in 2002. That followed the shorting of gold by the Hollywood stars near the lows.

3. The US dollar index (ETF: UUP; or dollar index itself, USDX; DXY), has now broken the base of the ascending triangle and you can see on the UUP chart that it has broken the July low as well. CLICK on the chart to ENLARGE IT.

White uptrend line has been broken!

Chart courtesy of FreeStockCharts.com, Worden Brothers. CLICK chart to enlarge.

Practical Investing/Trading Pointers: UUP must close back above 22.19 for a “save” today (chart not shown; chart above is the near month US dollar futures). The dollar index really must continue up above that prior uptrend line mentioned to recover fully and maintain a rally. It could be that today was just a blast of hope and that it will dissolve, but Europe is closed for today, so it seems unlikely. That means the falling dollar is going to be continuing to buffer losses in gold and silver based on dumping of both because of lessened fear about the financial situation in Europe AND the US. But remember that so far, the organic selling is winning out over the fall in the US dollar in that equation. Set a stop on your trading positions. Where you set it depends on your trading/investing style, but do pay attention to the inherent volatile in the metals when choosing your stops. If you have any questions, you can ask them below and feel free to comment below. This blog will be far more effective if it is a two way discussion. Thanks for joining in.

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