Ever since the March 2009 crash low in the U.S. equity markets, I’ve maintained my view that the Dow Industrials and other broad market indices were entering a new bull market. That forecast has been spot on.

One of the tools I used to come to that conclusion in 2009 was the ratio of the Dow Industrials to the price of gold.

I wrote extensively about it in several issues of my Real Wealth Report. I also reported on it several times in other pieces I wrote. Today I want to update the analysis for you.

First, a refresher. At the peak of the Dow/gold ratio in 1999, the Dow Industrials would have purchased just over 50 ounces of gold. That’s because the Dow was at a high in real, inflation-adjusted terms, while gold was at its bottom at the $255 to $275 level.

During the financial crisis of 2007-09, as equities plunged and gold rallied (since its bottom in 1999), the ratio collapsed all the way down to the 6 to 7 level.

In other words, in terms of gold — what I like to call “honest money” — at its March 9 low the Dow Industrials had lost more than 87 percent of the entire equity bull market from 1980 to 1999.

Since then, stocks have vastly outperformed gold, as stocks have moved higher, and gold lower.

As a result, the ratio of the Dow Industrials to gold has widened back out, to about a level of 15 today.

Put another way, had you bought the Dow Industrials in 2009 at the bottom and sold gold, you would have made 300 percent on your money as the Dow soared and gold plunged (after 2011).

So what does this all mean? And what does it hold for the future for the Dow?

I’ll answer those questions now. But I urge you to put your thinking cap on, because the analysis of the Dow/gold ratio is not easy to grasp, yet it’s critically important to understanding the future.

FIRST, the collapse in the Dow-to-gold ratio was not caused simply by a crash in equity prices. It was also due to a crash in the value of the dollar, as reflected in the soaring value of gold from the year 2000 to 2011.

SECOND, the Dow is now beginning to adjust — to reflect how much value the dollar lost between 2000 and 2011.

This adjusting of equities is perfectly normal. All asset classes eventually recalibrate their price levels to the new reality of the purchasing power of the underlying currency, which in this case, is the dollar, which in turn, is nowhere near what it was worth back in the year 2000.

A simple theoretical exercise here will show you how the Dow will adjust.

For the Dow/gold ratio to climb back to the 50 level — where it was when stocks peaked in 2000 and gold bottomed …

The Dow would have to explode higher to the 59,350 level, assuming gold’s current price of roughly $1,187.

Naturally, the price of gold is not going to remain at $1,187. It will probably fall back to as low as $900 before it bottoms, one of my targets for the end of gold’s bear market.

So let’s say gold does indeed fall to $900. Then a 50-to-1 ratio for Dow/gold, with gold at $900, would still imply the Dow eventually hitting the 45,000 level.

Naturally, projections like that assume all else remains equal. In other words, the underlying economy, unemployment, international relations, the global economy and a host of other variables.

So those projections are not realistic.

But what is realistic is this: It would not be unusual at all, in fact, it would be perfectly normal if the Dow/gold ratio were to regain half of what it lost since the year 2000 …

And move back to the 25 level.

Then, all we need to do is pop in various prices for gold to get various measurement of how high the Dow can go. Assuming gold does bottom at $900 and then begins its next bull market, we can then come up with a grid that looks something like this:

Put any number in the first column for gold, and you can come up with any slew of other numbers for the Dow.

And on the flip side, at a Dow/gold ratio of 25 — a perfectly real world and normal retracement of 50 percent of what it lost since 2000 …

• The Dow could only fall back to 12,500 if gold were to fall back to $500.
• The Dow could only fall back to 10,000 if gold were to fall back to $400.
• The Dow could only fall back to the March 2009 low of roughly 6,500 if gold fell to $260!

And given the high probability that gold won’t move any lower than $900 and will then enter a new bull market …

It’s certainly not hard to see why the Dow also has huge upside potential going forward, and that its downside is limited to mere technical corrections!

Factor in the war cycles and other geo-political forces that are driving capital to the U.S. stock markets …

And you can easily see why I remain very bullish long term on the U.S. stock markets and why my long-term target of Dow 31,000 may actually end up conservative.

Lastly, an important point: As you can tell from this exercise, the monetary system has changed dramatically.

So much so that it’s also inevitable that at some point in the not-too-distant future, the dollar reserve based system will have to change.

Even as the dollar now rallies, the system is so broken and so out of date with the rest of the world and emerging economies and Asia, we will eventually need a new reserve system with a globally neutral reserve currency.

Best wishes,

Larry

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The golden rule of trading is just this –

What goes sideways when it should move up or down, moves in the opposite direction even stronger.

Where we achieved the temp low in gold on the target week of 11/03, the Dow has moved sideways and is crawling along resistance. Given the G20 position of walking away from bank bailouts, leaving the Cyprus bail-in solution still open, smart money is starting to move off the grid in a very big way. We are tracking capital flows very closely right now. It appears this target on the Cycle of War has an impact.

Of course, then we have the really brain-dead behavior of world leaders acting as if this is high school – Don’t talk to Putin or shake his hand because he didn’t do what I told him to do! With such immature behavior on the part of this Gang of 20 pretending to be world leaders, I have never seen such stupidity. I was just asked are there any world leaders with whom I could have a serious discussion? My reply – no! I have yet to meet anyone since Maggie Thatcher who was smart enough to talk about real strategy without a teleprompter or aids explaining in an ear piece. This seems to be what the bureaucracy wants. While the cat is suffering from dementia, the mice can play.

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The Dow is crawling along daily resistance. Timing should have worked normally. A high in November should have been followed by a drop back into the week of 12/15. What will not go down, only goes up. If we close higher this week and see new highs next week, it looks like we are headed into the low 18,000 level on the Dow by mid December.

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We have the seasonal turning point of January. The key resistance is at the 18133 to 18200 level as the weeks move forward. This has been the top of the Primary Breakout Channel from the ECM turn back in 2011. This channel has performed perfectly containing everything up and down. If we start to break out above this channel and close above it on a weekly basis, this is the warning that we may see the Dow at the 23000-26000 by next September. Exceeding that area will warn of a possible real blast in a Phase Transition that can take the Dow up to 40,000-43,000.

Fundamentally, who knows. There are too many variables to nail it down to just even a few reasons. We have the Sovereign Debt Crisis, the potential for international war, and major civil unrest. YET this is just the beginning. Add in pensions, bank failures, G20, and a host of other reasons, and some people will respond to one type of event while others will select a different fundamental. This is what is wrong with those who try to predict the trend with fundamentals. They reduce it to one reason and it never can be just one. We are not robots. Everyone will respond appropriately based upon their view.

So pay attention. What will not go down when the cycles shift, inverts and rises even further. There is always a reason for what markets do – you just have to pay very close attention. This is why I have been warning a cycle inversion is coming. We may be in that process now starting from November 19th/20th.

We’ve been here before. Prices hanging up near highs, approaching a key reversal date and expiration week is upon us. The barometer is reflecting the markets action:

As I like to say, the market makes about 7 mid term moves a year. So the barometer is simply a guide to what’s going on in the markets, regardless of the news (which creates a bias). So when the barometer turns lower, but prices remain high, that creates buy trend mode. The potential for the markets to trend is significant. That’s when stock trading becomes key, as index trading should produce minimal gains in this mode, stocks become the focus of traders and move more significantly.

That being said, one of our new traders has put together an educational email series on trading price gaps. You can click the following link to check it out. Note the emails are handled by Aweber, so you’ll have to find the confirmation email after you sign up to actually start getting the emails: http://forms.aweber.com/form/33/1216030333.htm

On the markets, one key indicator we’ve been watching:

The trending lower is bearish and note that the next bearish thing that we’ll watch for is a cross below the 34 day moving average. Sorry, I’m a Fibonacci guy…

Another basic indicator:

This is just a gage on the overall positioning of the market. It doesn’t mean the market will top, it just means that the potential exists.

Another basic indicator that gives a key measure on the market’s sell pressure:

If you remember that the market is traded mostly by computers and buying and selling is hard to hide, this indicator is key.

Trin is less significant as an indicator, because it’s based on 4 measures and their interpretation can be skewed by light volume. That being said, it’s important to know where this indicator sits as it’s the original Trading Index…

And finally, the VIX Put Call Ratio. I remember when this first came out. The volume was so light. In it’s first month, there was a day when there were only 3 vix put contracts traded! Now, when the market is getting real scary, you’ll see 1.3M CALL contracts traded (bets or hedges that the volatility will go up!)

My theory on the market is that what moves it is the underlying pressures created by the vehicles that are traded – not the news, though the news can be a catalyst for the timing of a position, it’s the sum total aggregated or cumulative measure of actions taken that really drive the markets. The accumulation of all buying and selling of stocks, options, futures, on everything. So for example, if you look at the above and the amount that trading has grown on it since the 2/24/06 it started trading in the markets to where it is now – instant portfolio hedging protection.

So as I always say, when the crowd leans to the left, we need to lean to the right and that’s where profitability exists… I feel like we’re getting close to a catalyst that will move the markets. And also note the Wednesday before expiration can be a little crazy as that’s when larger institutions will start rolling positions – so stay tuned…

Regards,

This past week in the daily blog posts I did a good bit on macro analysis on the markets that I thought were worth repeating this weekend. I am only reprinting a portion of the work, but I have provided the links to the full pieces if you wish to read them in their entirety.

However, before I get into the macro analysis, let’s discuss the recently rebound surge in the markets over the last four weeks.

First, after breaking numerous technical supports the markets staged an immense short-covering rally that has taken markets back to new highs. While the move itself is not that abnormal, the extreme elevation of the move is. As you can see in the chart below, this is the sharpest move up in the markets since the turn of the century.

….for larger charts & more commentary go HERE

Briefly: In our opinion, speculative short positions are favored (with stop-loss at 2,085 and profit target at 1,950, S&P 500 index).

Our intraday outlook is bearish, and our short-term outlook is bearish:

Intraday (next 24 hours) outlook: bearish
Short-term (next 1-2 weeks) outlook: bearish
Medium-term (next 1-3 months) outlook: neutral
Long-term outlook (next year): bullish

The main U.S. stock market indexes were virtually flat on Friday, as investors continued to hesitate following October-November rally. The S&P 500 index remains close to its Thursday’s all-time high of 2,046.18. The nearest important level of resistance is at around 2,040-2,050, and the support level remains at 2,020-2,025, marked by previous local extreme levels. There have been no confirmed negative signals so far, however, we still can see some overbought conditions:

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Expectations before the opening of today’s trading session are slightly negative, with index futures currently down 0.2-0.3%. The European stock market indexes have lost 0.2-0.4% so far. Investors will now wait for some economic data announcements: Empire Manufacturing at 8:30 a.m., Industrial Production, Capacity Utilization at 9:15 a.m. The S&P 500 futures contract (CFD) extends its short-term consolidation, as it moves along the level of 2,030. The resistance level remains at around 2,040, and the nearest important level of support is at 2,025, as we can see on the 15-minute chart:

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The technology Nasdaq 100 futures contract (CFD) follows a similar path, as it fluctuates along the level of 4,200. The nearest important resistance level is at around 4,220-4,230, marked by recent highs. On the other hand, support level remains at around 4,190-4,200, as the 15-minute chart shows:

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Concluding, the broad stock market remains close to all-time highs, as it extends recent fluctuations. We expect a downward correction or an uptrend reversal. Therefore, we continue to maintain our speculative short position. Stop-loss is at 2,085 and potential profit target is at 1,950 (S&P 500 index). It is always important to set some exit price level in case some events cause the price to move in the unlikely direction. Having safety measures in place helps limit potential losses while letting the gains grow.

Thank you.