Irrational Exuberance Part III ?

Federal Reserve Chairman Alan Greenspan used the words "irrational exuberance" in a speech to the American Enterprise Institute on December 5th, December 1996:

"Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?"

Robert Shiller, the latest winner of the Nobel Prize in Economics, then used the same words as the title of his well timed book as published in 2000 following one of the all-time greatest stock market tops in U.S. history.

In early 2000 when the "Dot Com" bubble started to burst, the Nasdaq Composite peaked in March at 5132 and then proceeded to fall nearly 80% to its final low at 1108 in October 2002. Over the same time period the S&P 500 Index plunged 50% from 1553 to 769.

In valuation terms, how does today's U.S. stock market compare to the market in March 2000? Always tough to make these kind of comparisons, but the Shiller 10-year Cyclically Adjusted Price Earnings (CAPE) ratio might be a useful tool here. The mean value for this ratio over the last 150 years has been 16.50. Let's call this "fair value" for the S&P 500 Index. The record low was posted in December 1920 at 4.78, while the record high was set in December 1999 at 44.20. The current CAPE ratio is 26.30, which means that the S&P 500 Index is about 59% overvalued right now. For historical reference, the Shiller CAPE ratio traded near 30.00 in late October 1929 just before that market crashed.

Attached is the latest Investors Intelligence sentiment survey which shows 59.6% bulls and 14.1% bears. The ratio of bulls to bears at 4.23 : 1 may not be the highest in history, but it's the highest I've ever seen. The latest AAII sentiment survey shows 55.1% bulls and 18.5% bears. I've seen a greater spread here a few times, but not many. Of course, if you believe in "contrary indicators", then these two surveys alone will have you more than a bit nervous with any long stock positions.

Like many stock market technicians, I love the abundance of free stock screening software now available. My favorite is located on www.finviz.com where I have developed two simple screens to find potentially "undervalued" and "overvalued" stocks. Both screens were designed to reduce the set of 6,500 listed stocks to less than 50 that meet certain criteria. From there I could then research each individual stock to see if an investment is warranted. While each of my two screens has at least six criteria, the backbone of my overvalued screen is the simple test that the "Forward Price / Earnings Ratio be greater than 25". For the undervalued screen, the Forward P/E must be less than 15. All the other criteria are important, of course, but the "Forward P/E" variable is the over-riding consideration in both my screens.

Last year at this time, my undervalued screen produced 17 stocks. Now there are just 2 names on this list. For the overvalued screen, last year at this time there were 39 stocks on this list. Now there are 165 names, a record high number of overvalued stocks from my simple overvalued stock screen. Of these 165 names, 24 are currently trading at more than 100 times 12-month forward earnings estimates. And 33 of these 165 stocks are actually trading at greater than 10 times trailing twelve month sales! These are incredible numbers!!

After my simple screens generate their overvalued and undervalued stock lists, I then perform a second level of algorithms to further dissect and rank the stocks on each list. For those that are curious, here is my current list of "The 25 Most Overvalued U.S. Stocks" as of Friday's close, December 27th:

Bottom Line: The U.S. Stock Market is now in the final days of a "record setting bubble" that is about to burst. There are too many bulls among often-wrong trading groups. Dangerous leverage, as measured by investor margin debt, is now at a record high. Valuation measures like the Shiller Cyclically Adjusted Price/Earnings Ratio (10-year at 26.30) are now screaming "sell everything". The Federal Reserve has already announced its intention to scale back monthly purchases of Treasury securities and Mortgage-back Obligations. The 10-year Treasury yield is now above 3.00%, having risen from 1.61% in May 2013 and a low at 1.39% in July 2012. While monetary policy must still be considered "accommodating", it is clearly less so now than a year ago. It seems to me that all the best possible news on corporate earnings, fiscal and monetary policy, and even prospects for the global economy are all fully factored into current stock prices. In the interest of full disclosure, I am long Gold/Silver mining shares and short the S&P 500 in the accounts that I manage. Is that a Black Swan I see on the horizon?

Courtesy: Yardeni Research, Inc. (www.yardeni.com)

U.S. T-Bond Prices - Weekly Chart Buy Signal ?

A weekly chart buy signal was triggered in my computer-based trading system at Friday's close in the U.S. T-Bond ETF (symbol TLT, please see chart below).

How is this possible given the following:

1. The U.S. Census Bureau reported this past Friday morning that its third estimate of third-quarter U.S. gross domestic product (GDP) rose at an annual rate of +4.1%. That was sharply higher than the 2.5% growth rate for the second quarter and significantly better than the second estimate issued only two weeks ago calling for an increase of +3.6%. The Census Bureau said that the jump was due to larger personal consumption expenditures (PCE) and nonresidential fixed investment. (Normally considered bearish news for T-bond prices.)

2. The Federal Reserve announced last week that it will soon begin to scale back it's monthly purchases of Treasury securities and Mortgage-backed obligations (the infamous Taper). (Normally considered bearish news for T-Bond prices.)

3. There is a near-universal view right now that economic conditions in the U.S. and across the globe are continuing to improve, with expected lower unemployment rates, greater investment, and increased productivity. (Normally considered bearish news for T-Bond prices.)

Of course, in the world that I see, the buy signal in T-Bond prices makes perfect sense! And here's why:

1. I believe that U.S. economic growth is about to slow dramatically from the 3rd quarter pace of +4.1%.

2. The U.S. stock market is about to experience a violent correction.

3. The CBOE "Skew" Index rose above 140 for only the 4th time in history this past Friday. The Skew Index basically measures option premium levels within the S&P 500 Index for extreme out-of-the-money exercise prices. An average Skew reading is 115 according to the CBOE. Extreme readings (>140) suggest that "smart money" traders believe there may be an increased probability of a so-called "black swan" event.

4. JP Morgan is attempting to limit potential losses on its clearing of Target debit and credit cards following a major security data breach involving 40 million Target cards. JP Morgan is limiting cash withdrawals and also spending purchases. Not exactly the best timing for this sort of SNAFU.

5. For bullish stock investors, there is no "Wall of Worry" to climb now. However, this fact is NOT bullish! All the "Good" news is already priced into share prices. Any potential "Bad" news, like disappointing corporate earnings or a negative liquidity event (JP Morgan?), will be quickly met with an avalanche of selling and lower stock prices.

Bottom line: Coming into Friday, T-bond prices were oversold on a technical basis and sentiment indicators reflected too much bearishness among often-wrong trading groups. A rebound should not have been a surprise, but I was surprised none-the-less. It's not hard to imagine that T-Bond prices will continue to rebound as shorts cover and legitimate "flight-to-quality" issues present themselves over the near term. Gold/Silver mining shares continue to look extremely attractive to me, and the overall U.S. stock market (as measured by the S&P 500 Index) continues to look vulnerable to a major correction. In the interest of full disclosure, I am long Gold/Silver mining shares and short the S&P 500 in the accounts I manage.

U.S. T-Bond ETF (symbol TLT) Weekly Bar Chart with Computer-based Buy & Sell Signals

Is The "Book" Really Closed On Gold ?

Here is an interesting quote from this afternoon's Wall Street Journal "Online" Edition: 

"Gold prices slid to three-year lows [today], effectively closing the book on a historic rally that lured investors on both Wall Street and Main Street."

Almost every mainstream financial publication has a negative story this afternoon on Gold. Most point to the latest announcement by the U.S. Federal Reserve yesterday  that it will "taper" its purchases of Treasury securities and mortgage bonds from $85 billion/month to $75 billion/month.Others claim that selling pressure will persist in the Gold market because the global economic recovery is getting stronger and that 2014 will surprise on the upside in terms of global trade and related commercial growth. Still others point to several "masters of the universe" who have exited gold with heavy losses as a contributing factor to this year's slide.

The climate for gold and precious metals investment is so negative now that there is even talk of removing Eric Sprott as manager at Sprott Asset Management. Eric Sprott may be among the greatest portfolio managers of all time in the precious metals mining stocks arena, but some of his funds are down as much as 50% this year so far.

Is the "Book" really closed on Gold? As I write this column (9:30 PM CT), the near-term Gold futures contract is trading about $1193. Will it soon fall to $1100? Is $1000 the next real support in this market? Of course, gold prices could decline further to these key levels, but I just don't see this scenario unfolding anytime soon!

According to the U.S. Commodity Futures Trading Commission, the net-long position in Gold futures and options contracts is now at its lowest level since June 2007. And short positions (bearish bets) have very nearly risen to the levels witnessed in July 2013 when gold prices posted a significant short-term bottom. And global holdings of exchange-traded products backed by Gold have fallen to their lowest levels since March 2010.

And despite the fact that Gold is a "slam dunk" sell here according to analysts at Goldman Sachs, China keeps buying. China is buying gold at a rate of more than 100 metric tonnes every month now. This represents approximately half of the entire planet's annual mined output. Since gold jewelry sales account from more than 1,000 metric tonnes per year, China is effectively buying ALL the world's mined output every month.

In the interest of full disclosure, I now have about a 40% allocation to gold/silver mining shares in the portfolios that I manage. In one of them, I have hedged these long positions with short-sales in the S&P 500 Index. Yes, Long Gold Mining Shares, Short the S&P 500. Interesting position!

Bottom Line: One factor not talked about much with respect to the recent declines in gold, silver, and related precious metals mining shares is "tax loss" liquidations. Most of the shares in this unloved industry are down more than 50% this year so far, and some are down as much as 75%. Today is December 19th. The end of tax loss selling season is nearly done and conditions are ripe for a wicked short-covering rally which will then turn into a massive new bull trend. I strongly believe that Gold/Silver mining shares could easily rally 50% or more over the next 90 days. The upside spring is wound tight for Gold and Silver, and precious metals mining shares will be the star performers over the next several weeks AND for most of 2014.

The Message of Bitcoin Prices

Today, November 29th, is popularly known as Black Friday in the United States. However, people are doing more than shopping for the holiday season today. All over the world, individuals are sending a clear message to sovereign governments and their central bankers. GET YOUR FISCAL HOUSE IN ORDER AND STOP PRINTING MONEY!

This clear message is being translated through Bitcoin prices which have gone "parabolic" and are  actually now as high as the price of gold. Incredibly, the price of one Bitcoin traded at $1,250 this morning, the same market price as one ounce of gold.

While every veteran trader has heard about the Tulip Mania in the 1600's, today's action in Bitcoin prices spurred me to do a little research and pass along a few "bits" of information here. At its peak in 1637, a single tulip bulb was said to be sold for 10 times the annual income of a skilled craftsman. In the classic book titled "Extraordinary Popular Delusions and the Madness of Crowds" as published in 1841, author Charles Mackay claims that at one point in in the madness 12 acres of land in Holland were offered for a single Semper Augustus tulip bulb.

I am almost 60 years old now and I have witnessed dozens of speculative manias, but none even remotely approaching the mania currently unfolding in Bitcoin prices. The great Sir Richard Branson recently "blessed" the whole concept of Bitcoin prices with his heralded announcement that Bitcoins would now be accepted for advance payment on his planned future commercial space flight venture. And the financial media is loving every minute of this madness, as stories circulate of about millions won (and lost) in this fascinating arena.

So what does it all mean, and where do we go from here?

For the Bitcoin, I think it will end very badly for most investors in this market. I sincerely believe that Bitcoins will soon be compared to Tulips as the speculative bubble here collapses. Right now, as far as I know, the Bitcoin is NOT legal tender in any country in the world. Look-a-like virtual currencies are already proliferating and it's just a matter of time before "Regulators" from every major country rein in the excesses in this fringe market by outlawing these products, or regulate them to extinction, or introduce their own virtual currencies.

Of course, my view of the final chapter on Bitcoin prices is "just one man's opinion" and probably worth what you are paying for it (nothing!), but never-the-less I think it may be noteworthy.

So what about Gold? Can we learn anything from the dramatic rise in Bitcoin prices that may help us gain an edge in this oldest of (real) currencies? I think the answer is a resounding YES!

Right now, China appears to be buying the entire world's newly mined production of Gold every month. It's incredible to me that so much Gold is being bought by one single buyer apparently "under the radar" and without significant price distortion. What's the story here? It appears to me that China would like its currency, the Yuan, to be a major global reserve currency, just like the U.S. Dollar is now. The Chinese Government sees the massive global debasement of currencies now underway, and it naturally wants to protect itself from the obviously negative consequences of this debasement. To the Chinese, Gold may be THE answer, or at least their single best answer to this problem. I strongly believe that China will "soon" announce some sort of Gold backing to the Yuan. The timing is unclear, of course, but it's not hard to imagine that an announcement like this could happen anytime over the next two years. Of course, Gold prices would soar and every other major world economic power would have to consider Gold as a reserve to their own currency. Where could Gold prices be in five years under this scenario. I don't think it's a stretch to forecast a Gold price exceeding $10,000/oz, especially after witnessing the current speculative climate for Bitcoin prices. And for Silver, prices could easily jump to more than $200/oz over the same 5-year period.

U.S. Stock Market - The Perfect Storm !

Dow Jones Industrial Average     16,000

S&P 500 Index                                  1,800

Nasdaq Composite Index               4,000

With today's intra-day high in the Nasdaq Composite at 4,007, all three of the above major U.S. stock indexes have now experienced upside breakouts above key "psychological" round number resistance levels over the last three trading sessions. And many uninformed Wall Street pundits are now predicting that the logical next upside targets are 20,000 for the DJIA, 2,000 for the S&P 500, and 5,000 for the Nasdaq Composite before any meaningful correction. 

The bullish case is simple and compelling: DON'T FIGHT THE FED !

As the new Fed Chairman early next year, Janet Yellen is expected to continue on the path of easy monetary policy as so ably executed over the last five years by the current Fed Chairman Ben Bernanke. With short-term interest rates near zero and longer term interest rates still less than 4%, is the U.S. Stock Market THE ONLY GAME IN TOWN? The bulls say yes, of course, but I still believe that the "perfect bearish storm" is now on the immediate horizon.

When we are 25% lower on all the major U.S. stock market averages three months from now, many will look back at today's peaks (DJIA above 16,000, S&P 500 above 1,800, and Nasdaq Composite above 4,000) and wonder why they didn't see the inevitability of this correction. 

Valuation analysts could point to the fact that the Shiller Cyclically Adjusted P/E is now 25, which is more than 50% above its long-term average of 16.5 and now at its highest level since December 2007. Technical analysts could point to the plethora of worrisome overbought signals, contrary sentiment indicators, and negative investor cash reserve variables. Momentum traders could focus on the recent loss of leadership in high flyers like FaceBook, NetSuite, and Tesla Motors, among others.

And some of the braver Wall Street analysts are in fact sounding the alarms, but few are listening after five years of rising prices and no apparent threat to the one constant overriding support to this great bull market --- easy U.S. and Global Central Bank Monetary Policies. Most late-stage buyers mistakenly believe that they will surely know when the music is about to stop. Easier said than done! Unfortunately, no one rings a bell to signal the top in stock prices! And significant corrections can quickly unfold, without warning!!

In my computer trading system, daily chart sell signals were triggered at today's close in Colgate, Disney, GE, and UPS, all important bellwether stocks for the overall market. Intel has been especially weak over the last few sessions, and Cisco Systems has been crushed. 

In the interest of full disclosure, for my managed accounts I am currently long the double-short S&P 500 SDS ETF. And over the last three days I have re-entered the precious metals mining sector with fairly large purchases of the following Gold/Silver mining stocks: First Majestic (AG), Endeavour Silver (EXK), Primero Gold (PPP), and Goldcorp (GG). These stocks now represent 15% of total assets under management from 0% early last week. In my computer trading system, buy signals were triggered at today's close in the following Gold/Silver Mining Stocks: AG, AUY, CDE, EXK, FSM, GLD, and HL.

U.S. Stock Market - Daily Chart Computer Sell Signals Today !

Daily chart sell signals were triggered in several major stock indexes by my computer trading system at the close of trading today. Sell signals were triggered in the S&P 500 Index, Nasdaq Composite, Russell 2000, and the Dow Jones Transportation Average (IYT). Sell signals were also triggered in the following ETF's and sector indexes: NDX, QQQ, IWM, TXX, MSH, XAL, and BKX.

Among the more notable individual stock sell signals that were triggered today are as follows: AMZN, DOW, DD, IP, CRM, TOL, TRW, and NKE.

S&P 500 Daily Bar Chart with Computer Generated Buy & Sell Signals

U.S. Stock Market - Major Top!

Almost every major U.S. Stock Market Index posted an all-time intra-day high this morning, but late day selling was significant and overwhelming. To me, it really doesn't matter why today's downside reversal unfolded, but the financial media blamed normal profit-taking following a great recent advance. Trading pros may see today's late day weakness as a "sell on the news" type response to the Fed's decision to stand pat with its ultra-easy monetary policy. Again, it doesn't really matter; a major top has been posted and confirmed by my computer-based trading system. 

Daily chart sell signals were triggered by my computer system at today's close in the Dow Jones Utility Average, the Nasdaq Composite Index, and the Russell 2000 Index (see Daily and Monthly Charts below). Two sector indices within the banking industry (BKX and XBD) also experienced daily chart sell signals. And several bond market trading vehicles saw sell signals (HYG, IEF, and TLT). 

My strong view is that tomorrow, Thursday, October 31st, will be a fairly significant down day for the U.S. Stock Market, and that this bearish action will then trigger computer-generated weekly chart sell signals in most major indices. This combination of daily and weekly chart sell signals would represent an ominous picture for the U.S. stock market immediately ahead and over the next several months, at least.

In the interest of full disclosure, I am long the S&P 500 "Double Short" ETF (symbol SDS) within my more aggressive managed accounts.

Russell 2000 Daily Bar Chart with Computer-generated Buy & Sell Signals

 

Russell 2000 Monthly Bar Chart with Computer-generated Buy & Sell Signals

Is Gold Really a "Slam Dunk Sell"?

Jeffrey Currie, the head of Goldman Sachs’ commodities research division, says gold is a “slam dunk sell”. Speaking at a panel in London on Tuesday (October 8th), Currie said that once the U.S. budget battle comes to a conclusion, the American economy will improve. So, that would make gold what he termed a “slam dunk sell” towards Goldman’s price target of $1,050 per ounce (a 24% decline from today's price).

Should you follow the advice of this experienced veteran who hangs his hat at the greatest trading firm on the planet?

This week's "tape" action in gold actually looks bullish to me. And if you consider that the director of commodities research at the greatest trading firm in the world actually announced yesterday that gold is a "slam dunk sell", then this week's relatively positive price action suggests the very real possibility that gold is NOT a sell, but is in fact a SCREAMING BUY!

Gold futures bottomed out in late July just below $1,200/oz. Gold then rallied in July and August to trade briefly above $1,400/oz. And today the October 2013 Gold future is trading near $1,300/oz. Could the decline in Gold prices over the last six weeks be just a simple 50% retracement consolidation before another spectacular bull run? I think so!

In my computer trading system, daily chart buy signals were triggered at today's close in the Gold Miners ETF (symbol GDX), Goldcorp (symbol GG), and Yamaha Gold (AUY). GDX and GG are down about 26% since their late August peaks on only a 10% decline in the underlying gold futures price. Other gold/silver mining stocks have been equally punished over the last six weeks.

Bottom line: Is anything a "slam dunk" in the securities/commodities business? I am not sure why Mr. Currie from Goldman Sachs would hang his neck out so far on this call, but I am sure that his prediction is certainly NOT a "slam dunk". My own view is that gold/silver mining stocks are now favorably priced again and will be among the biggest winners immediately ahead and into early 2014. In the interest of full disclosure, I have now accumulated a modest 10% portfolio allocation in the following gold/silver mining shares near current levels: Goldcorp (GG), Primero Gold (PPP), Endeavour Silver (EXK), and First Majestic Silver (AG). My intention is to add to these positions over the very near term.

U.S. Stock Market - Extraordinary Short-Sale Opportunity

The S&P 500 (SPY) ETF posted an all-time intra-day high today along with the Russell 2000 Index. The Nasdaq Composite Index saw its highest level since September 2000 at one point early this morning, but this closely watched stock market barometer actually ended today in negative territory. To begin the day today, traders and investors were surprised (and apparently pleased) by former Treasury Secretary Lawrence Summers’ sudden withdrawal of his name from consideration for the next Chairman of the Federal Reserve. Stocks, bonds, gold, and silver were all up sharply in overnight dealings ahead of Wall Street’s NYSE opening, but the mood began to change throughout the day. Most major stock indices gave up half their gains, and some actually finished lower on the day. Bonds, Gold, and Silver all ended today in negative territory as measured by TLT, GLD, and SLV (popular ETFs).

The latest issue of Time Magazine shows a Wall Street bull on its cover. While Time Magazine isn’t what it used to be, this latest cover could be seen as an interesting “contrary indicator” where U.S. stocks are concerned. This weekend’s Barron’s Magazine had a nice review of the forecasting record of key magazine covers when bulls or bears were featured. Some older traders and investors may remember the legendary “Death of Equities” cover of Business Week in August 1979. The Dow Jones Industrial Average was just below 900 at that time. As I recall, the final bottom was just below 800 in August 1982 after which an 18-year monumental bull market began.

 

Daily chart sell signals were triggered today by my computer trading system in the Nasdaq 100 (QQQ) and several dozen key stocks (ALTR, AMZN, CVX, EBAY, DISH, INTC, INTU, LNKD, LSI, NWX, SBUX, SNPS, USG), and a buy signal was triggered in the VIX (which indicates that a significant increase in stock market volatility may be imminent!).

Bottom Line: Only sophisticated traders and investors should consider short-selling as a serious portfolio strategy. With certain short selling tactics, it is actually possible to lose more than 100% of your initial investment. Poorly timed short sales have been known to completely wipe out many experienced, veteran traders. And some of these wipeouts are legendary. However, with this disclaimer loud and clear, I believe there is justification for a meaningful short position in the U.S. stock market right now. Single-short and double-short ETF’s are readily available and fairly liquid in most major U.S. stock indices where downside risks can be defined. In the interest of full disclosure, I currently have a position in the S&P 500 double short ETF (symbol SDS) in my managed accounts. 

Nasdaq 100 Weekly Bar Chart with Computer-generated Buy & Sell Signals

Nasdaq 100 Daily Bar Chart with Computer-generated Buy & Sell Signals

U.S. Stock Market - Monthly Chart Sell Signals !

Effective at Friday’s close, August 30^th, monthly chart sell signals were triggered by my computer-based trading system in both the Dow Jones Industrial Average and the Dow Jones Transportation Average. Please see charts below. Weekly chart sell signals were also triggered in the S&P 500 Index, the Nasdaq Composite Index, and the Russell 2000 Index effective on the same date.

Despite the fact that the Dow Jones Industrial Average was down 4.4% in August, the cover of this weekend’s Barron’s Magazine says “THE BULL’S IN CHARGE” and that Wall Street’s top strategists see the market headed higher, with stocks rising 20% or more over the next 18 months. It may be an understatement for me to write that I don’t think this optimism is justified! In fact, based upon my computer-based trading program, I actually think a 20% decline is much more probable, and I would not be surprised to see a 40% decline in several major stock market indices, top to bottom, at one point along the way over the next 18 months.

Bottom Line: In my view, cash is king right now! A major stock market correction has begun, and we may even be in the early stages of a fairly significant bear market. Because I believe there will be at least one major liquidity scare at one point over the next several months, there are very few places to hide for most conservative investors right now. I don’t even want to own Gold/Silver mining shares at current valuations, even though this sector was my favorite over the last four months. Longer-term Treasury Bonds will probably offer positive investment returns over the next year, but the volatility and potential downside risks in this sector may not justify the modest investment returns expected here. Sometimes, a sideline stance is the best stance! Preservation of capital should be the driving force of all investment decisions right now, which means CASH IS KING !

Dow Jones Industrial Average with Computer-generated Buy and Sell Signals

 

Dow Jones Transportation Average with Computer-generated Buy and Sell Signals

Last Regular Update

When I wrote the Sutton Daily Advisory Letter from 1988 through 1998, it was my full time job. To all my subscribers I guaranteed delivery of each day’s edition by 6:00 AM CT. Since the latest available “overnight” market information was always included, this meant that I was often at my desk by 3:00 AM CT. And believe it or not, I loved every minute of that experience.

On February 1^st of this year, I began the process of trying to recreate the Sutton Daily Advisory Letter in the modern day blog format. I realize now that circumstances have dramatically changed for me over the last 15 years and it’s no longer possible for me to devote the time and effort needed to produce the level of quality that must be demanded in any finished investment research product. Even though I believe that my computer “grey box” trading systems are better than ever, my proprietary research databases are nowhere close to where they were in the late 1990’s when I wrote my last Sutton Advisory Letter. And most important, I can no longer observe the daily tick-by-tick price action and news releases that are so important in any successful forecasting effort.

Bottom Line: While I may pen an occasional update to this blog, regular updates will no longer be made. I want to thank everyone who took the time to read my updates over the last three months. I am hopeful that you found this column interesting and thought provoking. And most of all, I am hopeful that you found at least a few pearls of wisdom that may have helped you in your own trading or investment management.

U.S. Stock Market - April 19th Week In Review

Given the exceptional gains posted this year so far, last week’s losses in the U.S. stock market must be considered relatively modest. However, major asset allocation decisions probably need to be made now given the negative seasonal bias immediately ahead for equities. In 2010, 2011, and 2012, there were significant corrections that began in the first week of May. Except in 2011 where the correction was -21.58% in the SPX, the May highs were eventually exceeded by year-end. The current bull market, which began in March 2009, is now about 50 months old. It’s been a great run, of course, but I think it’s done now. While the topping process, which began last week, may take another week or two, I think the record intra-day highs set two weeks ago at SPX 1,597.35 and Dow 14,887.51 now represent significant intermediate-term tops.

Here are Friday’s closing marks, with changes from Thursday’s close, and also with changes on the week, respectively:

                                                              Friday’s Change                          Weekly Change

DJ Industrial Average               14,547.51       +10.37     +0.07%        -317.55            - 2.14%

S&P 500 Index                           1,555.25       +13.64     +0.88%        -  33.60            - 2.16%

NASDAQ Comp.                        3,206.06       +39.69     +1.25%        -  88.89            - 2.70%

Russell 2000 Index                        912.50       +10.99     +1.22%        -  30.35            - 3.22%

DJ Trans. Average                      6,034.14       +89.98     +1.51%       -109.61            - 1.78%

Gold ETF                                       135.47       +  1.17     +0.87%        -    8.48            - 5.89%

Silver ETF                                       22.40       +  0.00       unch           -    2.88            -11.39%

In the latest semi-annual Barron’s “Big Money” poll, a record 74% of money managers indicated they were bullish on stocks. Weekly sentiment gauges are also one-sided in the bullish camp, with the exception of the AAII survey. Maybe individual investors will get it right this time, as bears outnumber bulls for the latest two weeks running. If you view these latest sentiment results as contrary indicators, then on balance they must be viewed as bearish for U.S. stocks ahead.

Gold/Silver

As you can see by the results above, gold and silver prices dropped sharply last week. It seems to me that the precious metals arena is the most hated investment option right now and that Wall Street analysts are tripping over themselves to release bearish advisories on gold, silver, and any related investments. The Goldman Sachs commodities research team, led by Jeffrey Currie, has done a very good job at keeping its clients on the right side of this market this year so far. Goldman cut its outlook for gold prices in December 2012, and then cut again in February 2013. And on April 10^th, the Goldman team actually recommended a short position in Gold (perhaps one bridge too far for Goldman?). SoGen also got it right in this market (so far). Morgan Stanley and Bank America have recently jumped on the bearish bandwagon, albeit a bit late probably. Is it possible that all these recent Wall Street analyst downgrades to Gold are setting the stage for the next major up leg of this massive 13-year bull market?

As readers of this column know by now, I have a strong recent interest in the Gold/Silver market and related investments. Gold is down about 30% from its record high of $1,923.70 as posted in September 2011, and silver is down more than 50% over the same period. Despite negative views by Goldman Sachs and other Wall Street "giants", I am extremely bullish on this market. In fact, I think gold/silver mining stocks will more than double over the next 18 months. In the interest of full disclosure, I am long the following Gold/Silver stocks and ETFs: AG, EXK, GG, and GDXJ. Will the panic lows from last week (April 15^th) represent a launching point for the next bull market in this market? No one knows, of course, but I think so.

Bottom Line: Last Thursday, April 18^th, if someone told you that IBM would be down 8.28% the next day, what would be your view on the reaction in the broader market? The fact that the S&P 500 Index was actually UP 0.88% on Friday, April 19^th, is nothing short of incredible to me. Given Friday’s solid gains in the overall U.S. stock market, it’s probably not a stretch to expect some upside follow through early this week. However, I don’t anticipate a strong advance, and I definitely don’t see the April 11^th record highs broken anytime soon. By the end of this month (Tuesday, April 30^th), I expect to see the U.S. stock market in full retreat.

U.S. Stock Market - Topping Process Nearly Complete, But Not Quite Yet

“Preliminary” monthly chart sell-signals were triggered in my proprietary computer system at today’s close in the Nasdaq Composite Index, the Nasdaq-100 Index, and the NY Composite Index. By definition, monthly chart signals are extremely rare. How rare? Please review the two charts immediately below this column. The last monthly chart sell signals in the Nasdaq Composite Index and the NY Composite Index were triggered at the end of July 2007. The last monthly chart buy signals in both these indexes were triggered at the end of March 2009. Prior to today, there have been just two monthly chart signals (one buy and one sell) in each of these charts over the last 5 ½ years. The track record for the monthly chart signals in my computer system is nothing short of spectacular!

Unfortunately, there is a catch. Please note the word “preliminary” at the beginning of the first paragraph. Today is April 18^th, but the end of the month is April 30^th. If today was April 30^th, with no changes in either of these charts, then both monthly chart sell signals would become “Official”. However, as the programmer of this system, I happen to know that if stock prices recover from today’s NYSE close by the end of the month, then these sell signals would abort (which means no RED DOT). In other words, monthly chart signals can be triggered intra-month, but they only become official at the end of the month. Weekly chart signals can be triggered intra-week, but they only become official at the end of the week. Daily chart signals become official immediately at the end of any signal day. It’s not a perfect system, but it’s pretty damn good, and if used properly can be a wonderful trading resource.

Here are today’s closing marks, with changes from Wednesday’s close:

                                                                                    Thursday’s Closing Prices                 

Dow Jones Industrial Average                        14,537.14        -81.45              -0.56%

S&P 500 Index                                                  1,541.61        -10.40              -0.67%

NASDAQ Composite Index                               3,166.36        -38.31              -1.20%

Russell 2000 Index                                                 90.51        -  5.29              -0.58%

Dow Jones Transportation Average                  5,944.16        -  5.24              -0.09%

Bottom Line: In the U.S. stock market, futures are nicely higher at the time this column is being written (10:34 PM ET). Despite today’s broad based decline, computer-generated daily chart buy signals were triggered in ARO, AA, BHI, BP, CHK, GLW, GTI, and QCOR, so I am guessing that we will see a fairly strong rebound in the broad market averages tomorrow morning (at least). The Alcoa (AA) buy signal today is especially interesting to me right now because I think it’s the first clue that the long decline in the industrial commodity-related stocks might finally be over. While I am already long too many  precious metals mining shares, I am thinking about doing some bottom-fishing in the hardest hit stocks in the coal and iron-ore mining sectors. Natural gas exploration stocks are starting to see some decent bids, but I think there are better buy-side opportunities. And what about Apple? Despite my great respect for this company, I have been fortunate so far in NOT picking a bottom here, but I think we are very close to a major rebound in this one.

Gold/Silver Mining Shares - Value Stocks or Liquidation Candidates?

For anyone holding Gold/Silver mining shares, today was probably almost as painful as Monday (4/15). The following closing 4:00 PM ET NYSE prices tell the story:

Here are today’s closing marks in selected major Gold/Silver issues, with changes from Tuesday’s close:

                                                                                    Wednesday’s Closing Prices              

GLD ETF                                                          132.87            +0.07               +0.05%

SLV ETF                                                           22.44              -0.22                -0.50%

Newmont Mining (NEM)                                    32.36             -1.42                -4.20%

Barrick Gold (ABX)                                           17.65             -1.21                -6.42%

Coeur D’alene Mines Corp (CDE)                     13.52             -1.46                 -9.75%

First Majestic Silver Corp (AG)                          10.97             -0.93                -7.82%

And here are the latest available physical Gold/Silver coin sales data from the U.S. Mint, as updated today 4/17:

2013 April sales of Gold coins (Month-to-date thru April 17^th)                              147,000 oz.

2012 April sales of Gold coins (entire month of April 2012)                                    20,000 oz.

2013 April sales of Silver coins (Month-to-date thru April 17^th)                          2,387,000 oz

2012 April sales of Silver coins (entire month April 2012)                                  1,520,000 oz.

If this information doesn’t look right to you, please check it out for yourself at:

http://www.usmint.gov/mint_programs/american_eagles/?action=sales&year=2013

Connecting America through Coins

Bottom Line: Investor purchases of gold and silver coins from the U.S. Mint have skyrocketed. April 2013 sales of gold coins (in total ounces) so far in just ½ month have totaled more than all of 2013 February and March combined. April 2013 gold coin sales (in total ounces) in just ½ a month are more than 7 times the amount sold in all of April of last year. While silver coin sales comparisons are less spectacular than gold coin sales comparisons, they are still incredible none-the-less. However, despite this undeniable feeding frenzy in the physical precious metals, we are still witnessing a massive selling capitulation in precious metals mining shares that has to be at or near record proportions. Earlier tonight, Gold/Silver prices in Singapore were sharply lower again around 9:00 PM ET, but I would not be surprised to see a major V-shaped bottom in this market beginning tomorrow. In the interest of full disclosure, I am long the following stocks: AG, EXK, GG, and GDXJ.