In the middle of crisis are the seeds of both danger and opportunity; think precious metals.

Unlike U.S. stocks, Canadian equity markets have already been badly damaged by: 1) unusual seasonal weakness in Oil and Energy stocks (portending global weakness?), 2) a sympathetic (to the U.S.) pullback in Canadian financial stocks, and 3) a massive drop in the Canadian Materials sectors – especially gold and silver stocks. The TSX is now negative Year-to-Date, and flat over the last three years.

As most investors are aware, the Precious Metals sector has been simply awful Year to Date. Gold is down > 16%, Silver is down > 23%, and Canadian Gold-producer stocks are down > 36%.

What a gift this Precious Metals sell-off has been, because a falling market is only bad if you are in it all the way down.

We never, ever like any losses or declines in portfolios but realize that avoiding all losses is not realistic. Risk management is always #1 and we constantly strive to improve it. Taking a few steps back, the massive sell-off in Precious Metals is a tremendous gift to our clients. Once we hit bottom there will emerge an exceptional longer-term buying opportunity – one whose profits should easily fill in the recent small declines and help generate very solid overall portfolio returns through the end of 2013.

There is no shortage of opinions, but the best informed, historically accurate and objective analysts we can find are advising that $1,158 for gold (with a similar or greater % decline for silver) is not only possible, but quite likely. If the $1,158 support level does not hold, then $907 comes into play. Yes, $907 per ounce is possible when looking objectively at market cycles, though hopefully not likely. The volatility is expected to last as long as 6 to 8 weeks.

Many gold propagandists have been denying the possibility of gold and silver dropping, citing the fundamentals of money printing, government indebtedness, massive physical buying, and the rising costs of new supply coming on stream, etc. Declines are blamed on other things, but never do they admit they are wrong. Gold propagandists have essentially turned Precious Metals into a quasi-religious community. Beware the Kool-Aid!

In my life experience, candidly admitting being wrong – when the evidence shows it – is incredibly liberating. Fighting the truth is a losing battle that consumes energy that could be re-directed to more positive and fruitful endeavours.

We’ve been very clear about our longer term belief in the upside of gold and silver, but have also emphasized the need to put “price” ahead of our hopes and opinions, because Precious Metals are a market just like all other markets – they go up and they go down. In investing “PRICE is the only Objective Truth; all else is opinion.”

I’ve written many times about the Mass Emotions of Fear and Greed. Financial risk is lowest when price is lowest, but price is lowest when Fear is at its highest. Whenever and at whatever price level the Precious Metals do finally make a major bottom, the Fear in markets will be palpable. Be on the look-out for some of the following factors:

1) Rhetoric related to the hatred of gold and silver will be extremely loud and PERVASIVE, including name calling such as “barbarous relic,” 2) Some high-cost mining operations may be threatened with closure resulting in supply destruction, 3) Very few quality analysts will have the courage to suggest buying, 4) Those who have held on all the way from much higher levels will look on like a “deer in the headlights”, 5) The TV ads offering to buy gold and silver jewelry will finally go silent, 6) The pain of being a buy and hold PM investor metals will literally make some people scream, and 7) The thought of buying gold could make you nauseous.

We are committed to patiently waiting for an extreme panic bottom – as described above – to form before committing significant capital for patient long-term gains. If the next 6 – 8 weeks show that a bottom is already in place, we’ll admit we missed the bottom and get on board the uptrend. What matters most is not whether or not we sold the top or bought the bottom – that’s ego-based nonsense. All that matters is that we make net gains.

What a gift this Precious Metals sell-off has been. There is a time to buy and a time to sell.

Patience and Discipline are accretive to your wealth, health and happiness; Fear and Greed are destructive.

Cheers,
Andrew H. Ruhland, CFP, CPCA
President, Integrated Wealth Management Inc.

“The market plunged this past week in its biggest correction of the year! Run away, flee, panic, the horror….oh…the horror of it all.”

That was the consensus of the headlines from this past week assuming you saw any others than of what was happening in Boston. I am exaggerating somewhat but the reality is that the media’s reaction to the selloff reached a near frantic peak.  However, if you have been reading our missives over the past couple of months you were already aware that such an event was coming.

Before I jump into this week’s missive I do want to suggest that you take a few minutes and review some of the blog posts from this past week. I covered the crash in gold and the economy in more detail which is highly worth your time to read. While some of the analysis that we will do today is bullish in the short term – there is clear evidence that the economy is slowing much more rapidly than the media would currently lead you to believe.

Also, earnings season has kicked off and it is very weak at the top line. While bottom line earnings are once again beating much lowered estimates – top line revenue growth is dismal. This is something that the market will eventually come to realize to the disappointment of investors. Caution is advised.

>> Read More. Download This Weeks Issue Here.

Daily S&P 500 June Futures Contract

We haven’t stepped into the Twilight Zone, but it certainly seems that way when stocks are hitting historic highs yet the economy is still so weak that the Federal Reserve is printing money like a Third World nation.

It has the makings of a great prize fight between the largest market in the world and the largest economy in the world.

Can we keep this up? Is this titanic battle going to last like the decades-long Japanese recovery? Will stocks punch themselves out? Can slowing earnings keep stocks soaring?

Here’s the blow by blow so far on what’s causing what I call the Great Discrepancy. Let me know who you think is going to overtake the other.

Below, I tell you what I think is underway.

Sound financial decisions are based on sound analysis.

People who only consider the short-term – or hold an overly narrow point of view – can benefit from the advice to “put things into perspective.” 

Because without perspective, we’re certain to repeat the same short-sighted decisions, one after another.

Editor: Robert Prechter
Published since: 1979
Frequency: Monthly
Pages/Format: 10/PDF
Markets: U.S. focus
Scope: Medium to long term
Subscription: $20/month

This perspective identifies and expresses more evidence that Standard & Poors 500 index is  trouble. This gentleman wrote about the market conditions two weeks that suggested to him that a correction was beginning. Now after the big drop on Monday April 13th, ONeil Trader isolates some more factors here:

I wrote about the market conditions two weeks ago, and said that we might be experiencing the beginning of a correction. The market largely ignored the current conditions and the S&P 500 (SPY) marched on to new highs. But the inter-market behavior is still not favoring risk on behavior, and the economic data coming out is weak and mostly below expectations.

Weak economic data

In the latest economic data reported, non-farm payrolls were very weak and below analyst consensus estimates, retail sales are down and below estimates, Empire State manufacturing index and Michigan consumer confidence were also lower. The NAHB housing market index is at its six-month low of 42, sliding two points in the latest report.

Gold (GLD) and silver (SLV) also broke down to their lowest levels in two years, as fear that Cyprus and possibly other European nations might sell their gold to finance their deficits. China’s first-quarter GDP also came in lower than expected, as the growth slowed down to 7.7%, and the consensus estimates called for an 8% rise. In addition to weaker GDP growth, industrial production grew 9.5%, down from 10% in Q1 2012. Retail sales rose 12.4%, also down from 14.3% a year ago. The news added to the overall negative sentiment in the markets, and especially in the precious metals.

Defensiveness in the market prevails

It is usually not good for the general market if the defensive parts outperform the broad indexes. And that is happening for some time now, although the S&P 500 managed to reach new highs recently. Bonds (TLT) and utilities (XLU) continue to go higher and outperform the S&P 500, while small caps (IWM) and homebuilders (XHB) faced a fierce sell-off. I wrote about the Homebuilders and their topping process two months ago, and they haven’t made much progress since, and have experienced distribution and little overall price progress.

On the charts below, you can see the price progress of defensive asset classes and their performance relative to the S&P 500 on the line chart below the price chart. The move of the line higher represents the outperformance of the chosen asset class relative to the S&P 500, and the reverse is true for the lower move of the line, and it means the asset class is underperforming the S&P 500. The utilities (XLU) are in a steep uptrend, and have outperformed the S&P 500 since early March. Bonds (TLT) are moving up for a month now, and started to outperform the S&P 500 again.

On the other hand, homebuilders have topped in mid-March and underperformed the broad market since. The index sliced the 50-day moving average line for the second time in above-average volume, and did not manage to reach new highs although the S&P 500 did. The Russell 2000 also topped in mid-March, and did not manage to reach new highs since. It too dropped below the 50-day moving average line, and the volume was highest in three months.

Conclusion

Weak economic data and poor intermarket behavior point to the elevated risk of an intermediate correction. With the indexes near all-time highs, and an already mature uptrend in its sixth month, a correction would not be that surprising. Defensive attitude is advised until the conditions improve.

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