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.

U.S. Stock Market - Postponing The Inevitable

Given yesterday’s thrashing, today’s recovery was nothing short of miraculous. Bullish stock market investors just seemed to have unlimited firepower, and single-day sell-offs like Monday are easily shrugged off. Monday’s Boston bombings could easily have triggered a tsunami wave of selling among stock investors, but instead buyers prevailed and the 4-year bull market seems back on track.

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

                                                                                    Tuesday’s Closing Prices                   

Dow Jones Industrial Average                       14,756.78        +157.58           +1.08%

S&P 500 Index                                                  1,574.57        +  22.21           +1.43%

NASDAQ Composite Index                               3,264.63        +  48.14           +1.50%

Russell 2000 Index                                               923.30        +  16.12           +1.78%

Dow Jones Transportation Average                  6,041.34        +131.48           +2.22%

After record single-day absolute price declines on Monday, Gold and Silver attempted a form of “dead cat bounce” today; emphasis on “dead cat”. Many Gold/Silver mining shares actually finished down on the day despite decent rebounds in each of the underlying precious metals. It’s not hard to guess that there will be more than a few downgrades in this sector by many analysts who have perfect vision in their rear view mirrors. However, credit should be given to SoGen, Deutsche Bank, and Goldman Sachs who all made great calls early last week with their bearish turns on gold. While the only way to describe my view of this market is “long and wrong”, I remain convinced that the next 25% swing in precious metals prices will be to the upside. Computer-generated sell signals have now been triggered on the daily, weekly, and monthly charts in the U.S. Dollar Index. Can a sustained advance in precious metals price be far behind?

Bottom Line: In the U.S. stock market, I don’t see much upside follow-through potential to today’s recovery. The nightmare in Boston added just one more element of negativity to an already fragile marketplace. The collapse in Gold/Silver prices could easily be viewed as a bearish liquidity measure for stocks. The general plunge in commodity prices over the last couple of days has a distinct deflationary message behind it, and that message is not favorable to general equity prices. Three months from now, when the S&P 500 Index is 10% to 20% lower, many will look back at these mid-April highs and point to the “obvious” signals of an important turning point.

U.S. Stock Market - April 12th Week In Review

Lots of record highs were posted this past week among major U.S. stock market averages The S&P 500 Index posted a record intra-day high at 1.597.35 and a record closing high at 1,593.35 on Thursday, April 11^th. The Dow Jones Industrial Average posted a record intra-day high at 14,887.51 and a record closing high at 14,865.14 on the same day (4/11). The NASDAQ Composite Index posted a new “reaction” high at 3,306.95 on Thursday which is up 161% from its March 2009 low, but still 35% below its all-time high at 5,132.52 set in March 2000 in the “Dot Com” bubble. Other major indexes like the Russell 2000 and the Dow Jones Transportation Average failed to post record highs last week, but they are both very close and can not be considered so-called bearish non-confirmations.

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               14,865.06       -  0.08     -0.00%        +299.81           +2.06%

S&P 500 Index                           1,553.30       -  4.50      -0.28%        +  35.55           +2.29%

NASDAQ Comp.                        3,294.95       -  5.20      -0.16%        +  91.10           +2.84%

Russell 2000 Index                       942.85       -  4.20      -0.44%        +  19.55           +2.12%

DJ Trans. Average                     6,143.75       -21.11      - 0.34%       +106.39           +1.76%

The latest investor sentiment indicators are mixed. As reported in Barron’s this weekend, the Consensus and Market Vane weekly surveys show 77% and 65% bullish, respectively, on the U.S. stock market. The odd man out is the latest weekly AAII survey which shows only 19.3% of individual investors are bullish while an incredible 54.5% are outright bearish. This latest AAII survey is extremely puzzling to me, but probably shouldn’t be ignored in any market assessment.

Gold/Silver? Friday’s collapse in the precious metals futures, ETF’s, and related mining shares came as a complete surprise to me. The U.S. Dollar Index was mixed against most major currencies on Friday, so we can’t blame the plunge in gold/silver prices on strength in the Dollar. Sure, Cyprus is expected to be a seller of a relatively minor amount of gold from its reserves to fund its recent bailout agreement with the EU/IMF. And yes, India has imposed stiff import tariffs on the yellow metal which has curtailed demand there. However, the long lists of positives for Gold/Silver (central bank purchases by China & Russia, among others, and record “debasement” of currencies through debt monetization programs in Japan and the U.S., among others) clearly support precious metals prices. To explain Friday’s panic selling in Gold/Silver (GLD and SLV down about 5% on the day), we can probably look at hedge fund [forced] liquidations, margin calls, and a major breakdown in all technical chart support. While I view Friday’s collapse as “climactic” and part of a terminal “washout” of weak longs which will inevitably be followed by a V-shaped rally, no one can say for sure when that rebound will begin in earnest. For my managed accounts, I bought Gold/Silver mining stocks on Thursday and then added to these positions on Friday. Needless to say probably, my timing was less than ideal, but I still believe there is a major advance coming in this market.

Bottom Line: In recent columns here, I have been looking forward to a potential peak in the S&P 500 Index on Monday, April 15^th. While I remain convinced that a major correction in the U.S. stock market is imminent, the timing of this actual peak remains illusive. I would like to see early strength this coming week (and maybe even new record highs in both the SPX and the DJIA) followed by a key intra-day reversal to the downside before sinking my teeth into any meaningful short positions.

U.S. Stock Market - Record Highs Today, But Correction Imminent !

The Dow Jones Industrial Average and the S&P 500 Index both posted solid gains and record closing highs today, but the NASDAQ Composite and the Russell 2000 Index were both flat, and the Dow Jones Transportation Average was actually down on the day (-0.27%). NYSE breadth was nicely positive (+3:2), but on the NASDAQ there were actually more stocks down than up today (1,188 issues up vs 1,236 down). Since last Friday’s intra-day upside reversal, I have been suggesting in this column that the U.S. stock market would rally all this week and peak on Monday, April 15^th. However, I now think the peak was either made today or will be made by mid-day tomorrow.

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

                                                                                    Thursday’s Closing Prices                 

Dow Jones Industrial Average                        14,865.14        +62.90             +0.42%

S&P 500 Index                                                  1,593.37        +  5.64             +0.36%

NASDAQ Composite Index                               3,300.16        +  2.90             +0.09%

Russell 2000 Index                                              947.05        +  0.96             +0.10%

Dow Jones Transportation Average                 6,164.86         - 16.47             - 0.27%

And what about Gold? SoGen made headlines last week with a negative report on the yellow metal, and both Goldman Sachs and Deutsche Bank weighed in this week with negative outlooks of their own. Goldman slashed its target to $1,545 per ounce for 2013, down from its previous estimate of $1,610. It also lowered its outlook for 2014 to $1,350 an ounce, down from an earlier forecast of $1,490. And Deutsche Bank reduced its year-end forecast to $1,637 an ounce. While that's still higher than gold's current price, it's almost 12% below Deutsche Bank's previous forecast of $1,856 per ounce. In support of their newfound bearish views on Gold, analysts for both banks cited an improving U.S. economy, a stronger U.S. Dollar, and a rotation by investors away from “safe haven” assets in preference for “risk assets”. Cyprus has announced that it will now sell 400 million euros worth of its gold reserves as part of the latest “bail out” agreement between Cyprus and the EU/IMF.

The price of gold has dropped more than 10% during the past six months and is now nearly 20% below its all-time high above $1,900, reached in September 2011. Can SoGen, Goldman, and Deutsche Bank all be correct now with their bearish calls on gold? Should we even listen to these well paid analysts? To answer this question, I am reminded of a period in mid-2008 when crude oil prices were skyrocketing every day. $150/barrel was just hit and a major investment bank came out with a report which suggested that $200/barrel was the next stop and that this lofty level would be breached very soon. $150/barrel was the top, of course, and six months later, crude oil prices had plummeted to $35/barrel. At $35/barrel, this same investment bank was out again with another report which suggested that $30barrel was the next stop and support there was questionable. Of course, crude oil prices promptly rose to near $100/barrel. The lesson is simple: The folks at Goldman, SoGen, and Deutsche Bank are all smart people, but they don’t know where gold prices are headed tomorrow, next week, next month, or next year. These guys probably work very hard and have exceptional resources, but they just don’t know!

However, given the fact that my computer system just triggered daily and weekly chart sell signals in the U.S. Dollar Index, I believe that Gold (and Silver) prices are headed higher (much higher) very soon, and over the next several quarters, and maybe even over the next several years. The Canadian Dollar made a 7-week high against the U.S. Dollar today, and Gold/Silver prices are clearly finding decent support here despite a deluge of “bad” news recently.

  

Bottom Line: In the interest of full disclosure, I started accumulating the S&P 500 Index double-short SDS ETF in last hour NYSE trade today. And I also started accumulating Gold/Silver mining shares late today. Unless there is new compelling evidence to suggest otherwise, I will probably add to both positions tomorrow in the accounts that I manage. By Monday’s close at the latest, I expect the U.S. stock market to be in full retreat. While there may be a few Fed Governors who “protest too much” in the media about Central Bank bond purchases (QE3), I don’t think the Fed will scale back its buying anytime soon. And U.S. stocks will go down anyway because corporate earnings estimates are too high and too many things can go wrong right now (black swan?). While no one can say what the catalyst for the imminent downturn will be, I feel confident that there is a negative catalyst for U.S. stocks on the very near-term horizon. Will gold/silver stocks benefit from a correction in the U.S. stock market? Since I don’t see a liquidity squeeze anytime soon (with central banks all over the world in print mode), I think Gold/Silver stocks will do very well from here.

U.S. Dollar Index (DXY) Weekly Bar Chart with Computer-generated Buy & Sell Signals

S&P 500 Index - New All-time Record Intra-day High (Finally)

The S&P 500 Index finally advanced today above its record intra-day high of 1,576.10 as set in October 2007. Today’s gains in the U.S. stock market were convincing and across-the-board. The Dow Jones Industrial Average also posted a record high today, and the NASDAQ Composite Index posted its best closing level since November 2000. The Dow Jones Transportation Average and the Russell 2000 Index posted big gains today, but are both still slightly below their all-time highs as established in mid-March.

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

                                                                                    Wednesday’s Closing Prices              

Dow Jones Industrial Average                        14,802.24        +128.78           +0.88%

S&P 500 Index                                                  1,587.73        +  19.12           +1.22%

NASDAQ Composite Index                               3,297.25        +  59.39           +1.83%

Russell 2000 Index                                               946.09        +  16.75           +1.80%

Dow Jones Transportation Average                  6,181.33        +108.47           +1.79%

From the minutes of the most recent Federal Open Market Committee Meeting, as released today, there was some discussion at the Fed about possibly scaling back the current $85 billion/month bond purchase program (aka QE3), but Fed Chairman Bernanke is clearly not onboard with this idea. In fact, as recently as Monday this week he said that economic conditions were far from where he would like them to be. The U.S. stock market is advancing on this monetary green light from Mr. Bernanke, dramatically easier monetary policy moves in Japan recently, friendly monetary rhetoric from Europe, and improving sentiment among investors regarding Q-1 U.S. corporate earnings reports expected immediately ahead.

Bottom Line: Today’s gains in the U.S. stock market were convincing and broadly based. The path of least resistance is clearly to the upside right now, and additional gains can be anticipated over the next two or three days. My target date for the next peak, as mentioned this past weekend, is still Monday, April 15^th. I don’t see any reason to step in front of this northbound train right now, but I also believe that the risk of a sudden downturn is too high to safely join in the rally.

U.S. Stock Market - Solid Bounce Today; New Record Highs Ahead

Solid across-the-board gains were posted in the U.S. stock market today as most investors shrugged off Friday’s surprisingly weak monthly employment report. Today’s rally came on the heels of a fairly dramatic upside reversal which began early Friday in the first hour of NYSE dealings after the employment-news-related gap-down opening. Earnings season is now officially underway, and it seems to me that analysts and corporations alike have both set expectations on the low side (which means actual results may surprise on the upside). There have been an unusually high number of negative warnings, with 107 negative revisions for companies in the S&P 500. Compared to positive revisions, this is the worst pace in 12 years. According to a survey by Bloomberg, analysts now project profits for S&P 500 companies actually fell 1.8 percent in the latest quarter, the first year-over-year drop since 2009. These same analysts had predicted a 1.2 percent increase when surveyed in January.

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

                                                                                    Monday’s Closing Prices                   

Dow Jones Industrial Average                        14,613.48        +48.23             +0.33%

S&P 500 Index                                                  1,563.07        +  9.79             +0.63%

NASDAQ Composite Index                               3,222.25        +18.39             +0.57%

Russell 2000 Index                                               931.49        +  8.21             +0.89%

Dow Jones Transportation Average                  6,091.59        +54.23             +0.90%

Bottom Line: The bar has been set artificially low for upcoming corporate earnings reports, and “smart money” is already buying ahead of actual results, which may very well surprise on the upside. IRA retirement fund contributions ahead of the April 15th deadline may also provide a boost for U.S. stock prices this week. As mentioned over the weekend in this column,  it looks to me like the Dow Jones Industrial Average and the S&P 500 Index will both post new all-time record highs this week.

U.S. Stock Market - April 5th Week In Review

The Dow Jones Industrial Average and the S&P 500 Index posted their best intra-day levels of the week on Tuesday, April 2^nd at 14,684.49 and 1,573.66, respectively. For the DJIA, Tuesday’s intra-day high was an all-time record high, but for the S&P 500 Index the 1,576.10 record intra-day high from October 2007 still stands. In the table immediately below, dates for the intra-day highs on this advance are listed for all the major indexes.

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

                                    High                   Friday’s Change                             Weekly Change

DJ Industrial Average (4/2)      14,565.25        - 40.86     - 0.28%           -   13.29          - 0.09%

S&P 500 Index            (4/2)       1,553.30        -   6.70      -0.43%           -   15.90          - 1.01%

NASDAQ Comp.        (3/28)      3,203.85        - 21.12       -0.65%          -   63.67          - 1.96%

Russell 2000 Index       (3/15)       923.30       -   2.38       -0.26%          -   28.25          - 2.97%

DJ Trans. Average        (3/19)    6,037.36       + 27.70      +0.46%         - 217.97          - 3.48%

While there is almost always a broad spectrum of financial news that impacts stock prices week-to-week, I think the latest batch of comments from Fed officials, which were mostly unfriendly, and the news from Japan regarding the size of their own “quantitative easing” program were most noteworthy this past week. On Wednesday, April 3^rd, one day after record closing highs were posted in both the DJIA and S&P 500 Index, Fed Governor Williams from San Francisco and Fed Bank President Bullard from St. Louis, hinted that maybe the Fed will begin to reduce its monthly bond purchases as soon as this summer. And Williams actually said that if everything went right [with the economy], the Fed could actually end the purchase program completely sometime later this year. Even though there is NO chance that the Federal Reserve will end its bond purchase program this year (or even early next year), these relatively “unfriendly” comments from Williams and Bullard unsettled stock market investors and set the stage for fairly significant losses in most U.S. stocks on Wednesday, Thursday, and Friday.

Since comments from Williams and Bullard have almost no credibility to any rational stock market investor, it is easy to classify the impact of these comments as very short term oriented. However, on Thursday, April 4^th, much more important news broke that the Bank of Japan would be effectively doubling its monthly purchases of JGB’s (to $75 billion/month) and also expanding its purchases of real estate investment trusts (to about $6 billion/month). Since Japan’s GDP is about 38% the size of the U.S. GDP, this must be considered a staggering amount of central bank monetization (and would be equivalent to about $212 billion/month here in the U.S. as compared to actual U.S. QE3 purchases now of $85 billion/month).

What does it all mean? I probably wouldn’t be alone in thinking that the current pattern of global central bank monetization of debt, especially in the U.S. and Japan, will end badly for stock and bond investors. However, timing is everything, and the “collapse of the system” is not immediately upon us, and maybe we can even profit from the current state of affairs as we know it.

Gold and silver futures both rallied sharply this past Friday (+1.89% and +1.92%, respectively). Precious metals prices benefited from the QE news out of Japan and also the relatively weak U.S. monthly employment report. Since the U.S. Federal Reserve has made it clear that QE3 bond purchases will be tied to the U.S. employment situation, Friday’s weak employment report was quickly translated to mean that the Fed will be reticent to take away the “easy money punch bowl” anytime soon.

To me, the most interesting aspect of Friday’s trading here in the U.S. was the dramatic comeback of U.S. equity prices after a major gap-down NY opening. In the first half hour, the Dow-30 traded down 175 points (-1.20%) to 14,434, but then rallied back to end the day down only 41 points at 14,564 (-0.28%). Even more incredible was Friday's action in the Dow Transportation Average (DJ-20) which gapped down 134 points (-2.22%) and then rallied all the way back into plus territory, and actually ended the day up 28 points (+0.46%).

Bottom Line: In my computer system, daily chart buy signals were triggered at Friday’s close in 45 of the 500 U.S. stocks that I follow. And there were also daily chart buy signals triggered in 4 indexes (DJTA, HGX, XNG, and OSX). Despite my bearish inclinations, I simply can not ignore this positive tape action. While I continue to believe that the next 10% swing in the U.S. Stock Market will be to the downside, I have to concede the very strong possibility that there’s more upside immediately ahead. On my list of significant potential “turn” dates, April 15^th and April 29^th jump out at me (for the next major downturn to begin). However, given the extraordinary resilience of U.S. stocks to “bad” news this past Friday, I now believe this coming week will see positive price action, and it’s certainly not a stretch to think that both the DJIA and SPX could post another set of record all-time closing highs over the very near term.

U.S. Dollar Index Weekly Bar Chart with Computer-generated Buy & Sell Signals

U.S. Stock Market - Early In A New Bear Trend

To begin the day this morning, U.S. stock investors ignored lower European share prices and focused instead on sharply higher Japanese stocks. The Bank of Japan will be doubling its monthly purchases of JGB’s (to $75 billion/month) and also expanding its purchases of real estate investment trusts. It could be argued that the Bank of Japan is 24 years late with its attempt to end deflationary forces there, but “better late than never”, I guess.

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

                                                                                    Thursday’s Closing Prices                 

Dow Jones Industrial Average                        14,606.11        +55.76             +0.38%

S&P 500 Index                                                  1,559.98        +  6.29             +0.40%

NASDAQ Composite Index                               3,224.98        +  6.38             +0.20%

Russell 2000 Index                                               925.66        +  6.95             +0.76%

Dow Jones Transportation Average                  6,009.66        +  3.71             +0.06%

As I write this column (at 8:35 PM ET), the Nikkei 225 Index is up more than 4% to begin their day on top of a big gain of about 2% yesterday. Thursday evening U.S. stock futures are slightly lower despite big gains in Japan.

I normally try to avoid the tick-by-tick analysis and focus instead on the “bigger picture”, which to me is defined as attempting to forecast “the next 10%” swing. However, seeing the S&P 500 e-mini contract slightly negative right now despite a Herculean performance by the Nikkei (+4%) suggests to me that U.S. stock prices will move on their own tomorrow. Of course, this statement may not be all that earthshaking given the fact that the monthly U.S. employment report is due to be released tomorrow morning by the U.S. Labor Department.

Does tomorrow’s U.S. employment report really matter? If stock market bears like me are right, then a strong non-farm payrolls report will lead investors to react negatively to the increased probability of “unfriendly” rhetoric from Fed officials relating to the timing of the Fed’s exit strategy on QE3. If non-farm payrolls are weak, then investors will react negatively to the “obvious” deterioration in U.S. economic fundamentals which might lead to lower corporate earnings. Bear markets are all about "lose, lose" situations. Of course, if we’re still in a bull market (which I doubt), then appropriate rationalization will be applied to the latest employment numbers to support higher stock prices (i.e. "win, win"). 

In a side note, gold/silver mining stocks finally bounced today after two really nasty down days on Tuesday and Wednesday. The Philadelphia Gold/Silver Stock Index rose 2.65% today, with some silver stocks up more than 4%. What’s really incredible about this sector’s action today was that both Gold and Silver futures and related ETFs were down almost the entire day. I “get it” that the U.S. Dollar is strong relative to other major currencies (i.e. Yen & Euro). And yes, Gold is priced in Dollars here in the U.S., but does anyone have any doubt as to central bank intentions regarding monetary expansion immediately ahead and for the next several quarters at least? The QE path is clear at $85 billion/month here in the U.S. and $75 billion/month in Japan now. Will the European Central Bank be far behind with its own formal QE program? And how about the Bank of England? It’s a race to the bottom, and rhetoric suggesting otherwise is just uninformed, deceptive, or naïve. In my view, the only strong bet here is precious metals (and related mining stocks) as a store of value against ongoing debasement of global paper currencies.

Bottom Line: Despite today’s modest rebound in U.S. stock prices, the peak for this move has already been made (14,684 in the DJIA and 1,574 in the S&P 500 Index on April 2^nd). A major correction is now underway, and stock investors will have very few places to hide to avoid losses over the next 8 to 10 weeks. Cash is King !