Market Outlook

With a currently bullish outlook on precious metals and the mining sector, we're particularly eager to hear from subscribers with fresh ideas. Here's one from subscriber Tim Huizenga that came my way during yesterday's real-time Q&A session: 'ASA is a closed end fund that invests in gold mining companies. At present, most of the positions are South African mines, which is a negative. However, shareholders are currently voting on a proxy to allow the fund to invest in more of a diversified manner (currently the fund cannot invest any more than 20% of the portfolio in gold mining companies outside of S. Africa). I bring this fund up for the simple reason it has had a history of trading at a significant discount. It currently is trading at more than a 13% discount from it's published NAV, which is in the bottom half of its discount range this year (-6.9% to -18%). 'I believe we should keep an eye on this one if the gold stocks are about to stage a robust rally. If we can pick-up these shares at a discount, it is like having leverage without having to pay for it or without having to worry about time decay. In its history, it has traded at a premium relative to its NAV - the last being in early 2003. If shareholders approve the proxy (a decision was expected on July 7), this could become even more attractive, although the discount could shrink as well. Let me know what you think.' ASA hit bottom in 1998 but its rally has been stalled for three years. The somewhat discouraging fact is that the peak of the stall -- $48 in November 2003 ' occurred just a tad shy of a 50.50 high made back in early 1996 whose breach would

I've reproduced two charts below, one suggesting that the euro is about to rise, the other that the dollar will fall. My conclusions are based on the dramatic way in which stochastic indicators for each have diverged relative to price. In the top chart, notice how the September euro's five-day decline failed to get very oversold before the futures reversed and shot higher. Granted, a single day does not a trend make. But the impression nonetheless is that buyers were so eager to get their hands on euro futures when they broke beneath June 14's lows that they acted as though the weakness were opportunity, buying with little apparent concern that tomorrow might bring even lower prices. (Click on images to enlarge) The opposite picture, one of imminent weakness, emerges in the chart of the Dollar Index immediately below. It reveals that sellers were so eager to unload that they pummeled bids as the index was rising, presumably fearing the rally wouldn't last. If the analysis above is correct, we could expect a fairly strong rally in the dollar price of gold to begin at any time. A hidden pivot at 447.60 has served until now as our minimum upside objective, but a dramatic change in the dollar/euro relationship would suggest that significantly higher bullion prices are possible. If so, the most logical target for the next 5-7 weeks would be 477.60, the first major hidden pivot above 447.60. If and when the rally begins, it will signaled by a two-day close above 447.60, or a breach of that number intraday by at least 0.70 points.

We had bids in below the market Friday for some QQQ calls, but perhaps we shouldn't be too disappointed about not getting filled. The July 37s were trading for 2.00 apiece earlier this month and for 1.40 as recently as Thursday, but as the index tumbled yesterday toward an abysmal close, the July 37s came within 0.05 of our stingy 45-cent bid. When stocks are falling hard on a Friday, call premium can evaporate with frightening speed, especially for those who own them. And yes, you're right, it can be a helluva a lot easier to make money being short options than trying to scoop them up at bargain prices in hopes they'll double before time decay wins the game, as it very often does. However, because of the punitive margin requirements governing naked-short positions held by retail customers, I never, ever recommend option strategies that would leave subscribers net-short contracts. Instead, we look for our edge at swing points, attempting to buy puts at rally tops, calls at swing lows. Ideally, those who hold puts and calls will be at the point of despair when the stock is topping or bottoming, and they will sell us options not at fair value, but at distress prices. (Click to enlarge) A Winner in Gold Speaking of swing points, we had a fine winner in Comex August gold, which danced on our hidden pivots Friday (see chart above) with the precision of an Astaire soft-shoe. Here are the instructions I put out the night before, for those of you would like to retrace the steps for practice: 'August Comex Gold is accelerating toward a 447.70 rally target first broached here more than a week ago, when the futures were trading below 437. The target has a 60 percent chance of being reached

Investors supposedly were spooked by rising oil prices yesterday, but a glance at the chart below could make one wonder why they weren't just as spooked last Friday and on Monday, when crude quotes first brushed against the $60 threshold. Wall Street denizens must have missed the previous day's interview of Andrea Mitchell, aka Mrs. Alan Greenspan, on Imus in the Morning. 'No one expected $60 oil to have no impact on the economy,' the NBC reporter told Gotham's number one shock jock, presumably voicing sentiments shared by her husband. 'It's a demand shock and not a supply shock, and people are happy to pay and keep going.' Reading between the lines, one could plausibly infer that the Fed is not as worried about rising gas prices as the average motorist. Not that the prospect of paying $2.50 for a gallon of regular this summer has kept me awake. The effect on my household has been muted so far and comes down to this: 'Honey, why don't you take the little car?' But I have to admit, if gas prices in the U.S. were to rise to levels comparable to Germany's ' about $6 a gallon now, I am told ' I might not be so blas�. 'Honey, if you're only going to Safeway, could you please take the Schwinn?' Even in Boulder... No way to preserve peace in the household for sure -- even here in Boulder, where those who ride bikes to work are viewed as local heroes. Some serious biking goes on hereabouts, for sure, and if you drive anything bigger than a Subaru Outback you're considered a fat cat. Fortunately, for trips into town, I've got an eight-year-old Nissan compact that puts out about as much torque as an arthritic hamster's treadmill. Just the car for

I majored in English literature, one reason why my trading system is light on such quantitative tools as regression analysis and chaos theory. Even so, I'm unaware of any other system that consistently yields swing points more precise than the hidden pivots I serve up here each day. The propietary method I use is idiosyncratic to the extent it employs mainly pattern-recognition skills and other right-brain tricks to interpret stock charts. I've considered automating my forecasts and trading by way of a rules-based system but have been told by my friend Mike Barna that the end result would probably not improve on the laboriously achieved results I'm already getting. Mike is arguably one of the world's most skillful and successful trading-system developers. He and his partner John Ehlers have developed and marketed numerous commercial systems that continue to dominate FuturesTruth magazine's 'Top 40' rankings. One of those systems, R-Mesa, is an index futures-killer whose capabilities have evolved to the point where Mike and John no longer sell it but instead partner with institutional clients for a percentage of trading profits. No Holy Grail Mike has been hard at work lately developing a very powerful system that he says will encompass and supersede thousands of other trading systems he has developed over the years. Still, he does not claim to have found the Holy Grail, for even the most profitable systems need to evolve as market conditions change, as do the hand-wrought strategies that I bring to you each day in Rick's Picks. At some point, I hope to be able to offer you algorithmically generated trades. Their main advantage would be to greatly expand the number of issues I can track and trade. For now, though, other format changes are in store that will emphasize detailed and specific trading advice over

Gold quotes rose sharply yesterday, supported by heavy fund buying that included a million-ounce purchase by one player. I'd told you to expect a rally to at least 436.80, which is precisely where the August Comex contract topped before taking a 90-minute breather. A subsequent two-dollar retracement left the futures sufficiently recharged for a further push to 438.50, portending still higher prices over the next 5-7 days. If so, you can use the 447.80 target disseminated via bulletin as your minimum upside objective. I also provided a 'Hallelujah, brother!' target well above this objective if it is breached decisively. The exact number, a hidden pivot, is given in the Intraday Notes section of Friday's edition, so check it out if you want something to feel good about. There are other reasons as well why gold bugs should take encouragement from yesterday's surge. For one, the rally dramatically exceeded a hidden pivot that had been two weeks in coming. Although it was not a major pivot, neither was it an insignificant one, and the fact that it gave way in a mere two hours came as a bit of a surprise. What this suggests is that buying interest is unlikely to peter out soon, even at moderately higher prices. No less bullish was the speed with which the 436.80 target was achieved. I had expected the ascent to take from four to six days, but it took only one. And here's one more thing to consider, perhaps the most bullish factor of all: June's rally from lows near $416 has occurred at a time when news concerning inflation has been relatively benign. All of which gives us good reason to be optimistic. But I would caution against getting too revved up, since we've been disappointed more than a few times before.

Today I introduce you to the deflationist arguments of Whiskey and Gunpowder editor Mike 'Mish' Shedlock, whose logic is quite similar to my own ' perhaps even uniquely so, given its unmitigated vehemence. For one, we both agree that nothing short of outright deflation can cure the world of its debt disease. For two, we both see deflation as not merely likely, but inevitable; and for three, neither of us has met a counter-argument that couldn't be knocked down as easily as a shooting-gallery duck in the crosshairs of a .50-caliber machine gun. Not that that has stopped the ducks from quacking away, In the polemic below, Mish takes on Jim Puplava, whose observations about the economy and stock market at Financial Sense Online usually make good sense. This time, though, facing Mish's impressive firepower, Jim comes off as a sitting duck. You can judge for yourself: . 'Sometimes,' Mish writes, 'I wonder whether I am on the same planet as those who espouse hyperinflation. The debate among inflation, stagflation, deflation, hyperinflation and just plain "'flation" has been raging for years. Most sides do not even state the other side's viewpoint correctly. Now, perhaps I mean that most do not understand my viewpoint correctly, which is indeed a different thing altogether. Then again, there is so much general confusion that it is high time we get a decent dialog going so we can better understand the other points of view. In that regard, I have been following the "deflation debate" on the Financial Sense Newshour with Jim Puplava. Deflationists as Dummies 'Let's backtrack to May 7, 2005. In a one-hour commentary (in the segment entitled "The Big Picture") Jim Puplava attempted to explain "Why the Deflationists Simply Don't Get It." Here is a summary of what he said then, at

It's no secret: I'd rather be known as a child molester than keep company with CNBC's bull-pen regulars. Let me tick off some of the reasons why we should shun the mindless optimism that these days passes for hard analysis on the Street: 1) the economy is being propped up by record borrowing; 2) a monstrous housing bubble could pop at any time; 3) two of the country's largest manufacturers, GM and Ford, are seriously on the ropes; 4) the Fed has already tightened eight times; 5) Europe is increasingly becoming a drag on global GDP; 6) Japan is slipping yet again into deflationary coma; 7) energy quotes are once more on the rise, threatening to establish a floor at $50 a barrel; 7) the yield curve is flattening; 8) etcetera, etcetera. So why am I bullish at the moment? Because most of my stock charts are pointing higher, is why. Take the one of the Dow Industrials below, which updates a picture that appeared here on May 24 alongside a forecast for a tediously buoyant summer. The chart shows that higher price peaks have been matched by correspondingly higher stochastic peaks over the last several months. In technical parlance, this is a 'non-divergence,' and it suggests to me that the current, bullish trend is likely to continue, at least for a while. It also argues against the likelihood of an out-of-nowhere collapse in share prices, a possibility that has been bandied about by several quite respectable market technicians whose work has been brought to my attention recently by some of my own evidently anxious subscribers. Do I care what the other gurus are thinking? Not at all. In fact, I'm convinced that resolutely tuning out all such noise has boosted the accuracy and consistency of my forecasts greatly in

Below is another of the many letters I received in response to my recent commentary on the decline in mortgage-lending standards. It's impossible to know how many Americans fear that a housing bust is imminent, but judging from my mail such fears run deep. The letter is from a man in the lending business whom I quoted here earlier. In further recounting his apprenticeship in the mortgage business under Golden West Financial's Herb and Marion Sandler, he has provided us with a benchmark against which we can measure the egregious slippage in lending practices that has occurred since. I am eager to put it all on-the-record because I'm firmly convinced that a deflationary collapse in real estate lies ahead. Our correspondent writes as follows: 'I [have believed since around 1990] that the real estate market could not continue in its present course without a major meltdown. I developed analytical software and spreadsheets during my time at World Mortgage, and I saw the Meltdown of 1990 happen. We had 13 people in the Atlanta office, and one day a regional manager came in to let us all know that we were all laid off. I had just walked into the office with a new loan package when I was greeted at the door by my manager. Everyone in the office had that hung dog look on their faces. 'A.H. Ahmanson, one of our two portfolio competitors, had closed their office the month before, and that left only two portfolio lenders with offices in Atlanta -- Great Western and ourselves. World had an economist do a study on the Atlanta market to determine if it was wise to continue lending in that marketplace, and the conclusion was as follows: ** The second highest bad credit district in the nation. We were the