April 2006

I've been looking for an excuse to visit the Big Apple when Central Park is in full bloom this May, and here it is: If June Gold doesn't surge to at least 665.50 by mid-May, look for me in Times Square dancing the hula in a grass skirt. Since a run-up to the target looks like as close to a sure thing as anything I've ever beheld on a 15-minute chart, I may have to come up with another reason to make the trip to Gotham. The tip-off that new highs are imminent can be found in the cluster of intraday peaks near 638.00, the hidden-pivot soul-mate of the one I've identified at 665.50. The fact that the futures struggled at precisely 638.00 implies that once above it, they'll make a beeline for the higher number. Yesterday was the first time the June contract closed above 638.00, and that's what clinched the projection of a rally to new all-time highs in the weeks ahead.

I ended yesterday's commentary with a trick question: What is the easiest way to make real returns of nearly 10 percent on one's money? The answer is, there is no easy way ' unless, of course, you're in the mortgage lending business, where deflation-adjusted returns approaching 10 percent may soon be possible. How so? Well, if you live in Colorado, the answer may be a little more obvious, since mortgage foreclosures in the Rocky Mountain State are now the highest in the nation. It was recently reported that one out of every 338 Colorado homes was in foreclosure in March, versus one out of 1,138 nationwide. As one might expect, home prices in Colorado have been softening as a result. I live twenty minutes from Denver and can attest to it. Some of my friends in the real estate business have corroborated it as well. They say the regional market is weakening and that property values have actually begun to slip in some of the pricier neighborhoods. Foreclosure Nation Against this backdrop, consider that interest rates on some popular consumer-credit products have recently been adjusted upward to 8.75. Imagine having to pay off an 8.75 percent home equity loan when the value of your property is falling, even if by just a percentage point or two. But that is exactly what is happening all over Colorado, and it threatens to become the norm in other regions of the country, so rapidly are foreclosures metastasizing across the U.S. What this implies is that millions of Americans may soon find themselves paying higher real interest rates on home equity loans than many savvy money managers have been able to earn for their clients in recent years. Clearly, this is a trend that could not go on for long without causing a significant

Not that we should care, but the so-called Hindenburg Omen has flashed red again ' for the fourth time since early April. To the weary pessimist this is supposed to be a bearish warning, akin to the groundhog emerging from his lair and getting his head sheared off by a lawnmower. But let's not get our hopes up, my fellow realists. Indeed, anyone who would short aggressively these days just because 'Hindenburg' is getting a little air play should think back to October 2005, when those who bet on the last spate of Hindenburg signals got drilled. Hindenburg, schmindenburg: If a supposedly important bearish technical indicator fails to deliver the first time it is hauled out for mass consumption, we should toss it in the dumper and move on to the next. But to the next what? Good question, since these last five years have been mighty tough on whatever technical indicators permabears briefly invested with hope and hard logic. Grasping at straws is more like it. But it should be clear to everyone by now that no guru's proprietary indicator is going to tell us exactly when to get short up the wazoo. Now, don't get me wrong. I am as bearish as any pundit out there, Jas Jain included, and if the Dow Industrials were to fall 4000 points next week I would regard it as nothing more or less than an outbreak of sanity. But mortgage the ranch to speculate on such an outcome? 'No way!' That's exactly what I told a loyal subscriber yesterday after receiving a Hindenburg bulletin from him in my e-mail. 'From what I read,' he wrote, 'the market is set to come down HARD. Any great puts to buy?' Easy 10% Returns Not really. One thing that very few put options have

The most powerful bull markets are invariably punctuated from beginning to end by wrenching spasms. Were it otherwise, we could all simply load up on bullion assets, quit our day jobs and go fishing as we watch our net wealth grow, day by day, along with soaring mining-share valuations. Would that it were so easy. More typical is that we will get on board at just the wrong time, as prices go into a steep corrective dive; we'll take profits nowhere near the top, but rather in the midst of a horrific selloff; and we will retire at 70, not 50, like so many other erstwhile investment geniuses. So why have I continually referred to the ongoing bull market in precious metals as the no-brainer investment of our lifetime? Simply because the power of this bull market seems unmistakable to me, just as the forces that are driving it appear to be many orders of magnitude greater than those that cause ordinary business cycles. (Click on chart to enlarge) But no matter how confident we might be about this, it cannot make us impervious to the pain we feel whenever gold and silver fall as sharply as they did last week. The June Comex contract collapsed $40 in a single day, shedding more than six percent of its value in mere hours. But even the most steadfast of bulls could not have predicted what happened next, when gold recouped fully two-thirds of the loss almost as quickly. Get used to it, because this is the way all great bull markets act, rising relentlessly for weeks or even months without pause, then diving with such violence as to make even die-hards wonder whether they've made a disastrous mistake. Whether the price of an ounce of gold is on its way to

Gold quotes plunged yesterday without having quite reached the $657 rally target I'd projected for the Comex June contract. The actual high was $649, representing an $8 shortfall. Usually, when a trend fails by this big a margin my outlook for the intermediate term (i.e., three to five weeks) will change to bearish. However, I have my doubts that so robust a bull as this one will abide such a lengthy correction. We'll be better able to judge on Friday if the June futures interact with a hidden-pivot support not far below Thursday's settlement price. The precise location of the pivot is given in the Touts section of Rick's Picks, but suffice it to say, an overshoot as small as 80 cents would imply additional slippage of nearly 3% in the gold price. The hidden-pivot support looks sufficiently reliable to warrant some very tightly stopped bottom-fishing, so gold traders looking to re-enter on the long side with minimal risk should pay close heed to my number. (Click on chart to enlarge) I should also update my analysis for the Dow Industrials, since the blue chip average yesterday easily surpassed a bullish threshold at 10350 that I first flagged here months ago. I'd said at the time that that would be a potentially very bullish sign -- and so it is, at least on a purely mechanical basis. But I do mean purely mechanical. In that respect, I am keeping company with Richard Russell, a permabear who constructed a Primary Trend Index to keep himself honest. Like Russell, although I think the stock market stinks worse than buzzard droppings at these levels, I'm willing to hold my nose and go with the trend ' or at least, not resist it -- so long as it remains bullish based on purely mechanical

Don't be fooled by the lack of follow-through yesterday, since it is exactly the kind of dullness we should expect from a stock market grown increasingly adroit over the last few years at goosing shorts. Realize that Tuesday's 192-point rally was not the kind of event that happens in a vacuum. Rather, it was a powerful impulse leg that practically guarantees a second surge once the miserably stupid excesses of the first have been corrected. Granted, we might have looked for more of a second-day rally than yesterday's soporific 10-pointer in the Dow. But anything more than that probably would have doomed a promising short-squeeze to a quick and unmemorable end. However, with new all-time highs just around the corner, we should be betting that their very allure will prove ruinous to the greatest possible number of investors. So take heart, those of you who were worried that the most pernicious bear rally in 75 years would simply peter out: Records will soon be broken ' and won't that be something for permabears to sing about? Here's your anthem, guys: (Click to greatly enlarge)

The canny investor had just one thing on his mind yesterday: how all of the other bozos would react to news that the Fed may soon stop tightening. The fact that Wall Street has been anticipating exactly this news for umpteen months did nothing to mitigate the irrationality of those who stampeded to discount it yet one more time. Stocks zoomed higher because loose money is like crack cocaine for the economy. The dollar fell because savers and foreign lenders neither share nor countenance America's addiction to crack. Bond prices rose because a mere whiff of crack is enough to make the yield curve turn lubricious. And of course precious metals soared knowingly, sensitive as always to the fact that we will ultimately pay a stiff price for getting high. (Click to enlarge) Seven years of mostly tedious markets might have induced a few cynical tape watchers to ho-hum yesterday's glimpse of light at the end of the tunnel. What light? Specifically, Helicopter Ben was reported to have said at last month's Fed meeting that 'the end of the tightening process was likely to be near.' But calm is the last thing in the world an investor should want to be when thousands of tape watchers are poised to hit the panic button whenever there's a hint of easing in the air. And there is ' more than a mere hint, actually ' although we remain skeptical that the end of tightening will prove to be a cure for $70+ oil and an already collapsing housing bubble. So how long will the celebration last? A day or two at most, is my guess. With gold and oil as a reality check, meaningful new highs in the stock market seem most unlikely. Notes from the Edge II I'll leave you today

I can see as high as $703, basis June, but we'll get to that in a minute. First let me mention that subscribers who followed my advice to-the-letter could have caught one heckuva ride in gold yesterday, having boarded the June Comex contract Sunday evening, just as it was lifting off the launcher. Here's the actual recommendation, exactly as it went out on Thursday at the start of the three-day weekend: +  $ June Gold (610.00) 04/13/2006 18:34:33 EST A 605.70 print would create a robust new impulse leg of minor degree. Although I don't usually advise buying breakouts, this one is subtle enough that we can try. Accordingly, I'll recommend buying a single contract using a 605.70 buy-stop with a 605.90 limit. Place a stop at 603.90 thereafter, and let it ride. My minimum rally projection for the near term (i.e., the next 4-6 days) is still 624.60. Long-time subscribers will know that we seldom buy stuff on-the-fly, preferring instead to initiate positions at trend swing-points. But, as noted in the instruction above, this particular entry strategy was based on a signal subtle enough that we went into the trade optimistic about avoiding the mooing herd. And so we did, evidently, for the futures never looked back after touching our buy-stop at 605.70; nor did we even once feel jostled by the kind of evasive maneuvers that trading vehicles take when too many traders with the same idea are on board. As bullion continued to move higher on Monday morning, I put out additional instructions that would have allowed longs to exit June Gold near the intraday high, as follows: (Click on text to enlarge) By entering the trade on a Sunday, we avoided a problem that has challenged us for some time as we've sought to stake out

I had flagged a hidden-pivot support at 117^19 as a potentially important turning point for the beleaguered June 30-Year Treasury Bond futures, but sellers demolished it on Thursday, telegraphing a strong likelihood of still higher yields in the weeks and perhaps months ahead. The June CBOT contract had already traded as low as 117^17, slightly beneath the advertised turnaround pivot, but the two-tick overshoot was not sufficient to seem threatening at the time.  On Thursday, however, just ahead of the three-day weekend, sellers pushed the futures contract decisively lower, to an intraday bottom of 106^30. A few ticks below 117^17 probably wouldn't have made much difference, but this breach was fully 18 ticks, or more than a half point. It is akin to the groundhog seeing his shadow, and we should therefore brace for higher yields well into May, at least. If this forecast proves correct, it implies that an already weak housing sector is likely to take a turn for the worse just as the real estate sector is entering its slow season. It also suggests that the precious-metals market could cool down some, since the dollar would presumably strengthen on higher yields for U.S. debt. (Click on chart to enlarge) Of course, it goes without saying that stock-market investors on Thursday acted blithely unconcerned about the renewed upward pressure on yields. The Dow finished up slightly on the day, oblivious to the real world as always. Perhaps Wall Street is counting on a last-ditch hidden-pivot support at 106^13, to save the day? That's a level that can be bottom-fished with a tight stop-loss, but I cannot guarantee that the anticipated bounce will be the one that sets America's housing-and-refi economy on yet another life-sustaining binge.