Our Man Chuck Turns Bullish as All Get-Out

Turns out we weren’t the only ones who must have been doubting every uptick of last week’s phony, witless rally. How could one not distrust a stock market that has been surging higher solely because of short-covering and the manipulation of index futures each and every night during the wee hours on razor-thin volume?  Now, however, we learn that bullish sentiment is at an extreme low of 21%, according to the latest numbers from AAII. What this implies is that there are simply too many bears for stocks to collapse at this moment, notwithstanding the fact that the economy’s statistical slide into Depression appears to have resumed in earnest.

Is the 16-month-old bear raly about to embark on a major new leg?

The last time there were so few bulls was in March 2009, when this Mother of All Bear Rallies commenced. Although we strongly doubt that the current dearth of bulls portends the start of a major new up-cycle, we’re willing to go with the flow for perhaps another week or two before we start resisting the tape once again with some speculative put-buying. Technically speaking, according to the Hidden Pivot Method, the Dow Industrials, which are currently trading near 10200, would need to hit 10921 this month to earn even the slightest benefit of the doubt. At any rate, we expect the market to be in feel-good mode as the new week begins, assuming the mildly encouraging news that has been emanating from the Gulf of Mexico continues to wax. Under the circumstances, bears will be especially vulnerable on Monday to yet another short-covering panic.

Very Bullish on Gold

As counterpoint to our own, fervently bearish, bias, we offer below the unmitigated optimism of our friend Chuck Cohen, a NYC-based consultant who designs gold investment strategies for clients both big and small. (Click here if you’d like a free consultation.)  Chuck sent us the following note recently beneath the subject header “A major, major bottom…”  Although, to put it mildly, we do not share his rosy view, we are presenting it nonetheless because our own perspective had grown so very negative in recent weeks. Please note that his outlook for gold and gold shares is, like ours, quite bullish.

Chuck writes as follows:

“Hello out there. I think that this week will mark a major change in the financial markets. I know it is really difficult to explain why the perception in the market can be very bullish at the end of April, and with a 12% drop, turn palpably bearish. The negativity is so bearish that the NY Times finally caught onto it and did their first-ever in-depth interview with Bob Prechter [last] weekend. It immediately became the overwhelmingly most e-mailed article. Now, why would this take place? My thought is that what Prechter was saying resonated with Ma and Pa Main Street, who see and feel nothing but pain in our country and in their lives.

Markets Don’t Care

“But as you know, the markets don’t care about the past or the media’s analysis. They look at the future, and in so doing remain the single best financial predictor ever devised. And right now some of the technical stuff that I look at is the worst that has been seen in many years. To me, that means we have likely seen the worst of the markets and most probably are ready to announce that the next move in the markets will not be the feared “Death Cross” [of 50- and 200-day moving averages], but a renewed climb most likely caused by the immense liquidity that is sitting on the sidelines in banks, IPO, buyout companies and hedge funds.

“The key point to the gold community is that this will now fuel the long, long awaited spectacular rally in gold, and, more importantly to many, the gold shares. Don’t worry that the shares have acted crappy for years. They will respond, and in a fantastic way.

“I still believe that the listed shares will be the first movers in this next phase. They have completed inverted head-and-shoulders formation that extend over the decade. Because we are so conditioned to disappointment, many will sell prematurely into the breakout that is coming.”

(If you’d like to have Rick’s Picks commentary delivered free each day to your e-mail box, click here.)

  • flash August 7, 2010, 10:22 am

    Without a major economic stimulus, it seems likely that the marekt will tumber 800 points from here- i am talking about stimulus here and in europe and in china. one has to ask themselves why does felix zulaf se the market going to 500. at that point you have capitulation. the Democrats better surpirsie everyone and win the House. If you see a 500 market in thenext 2 years, romney the hedge fund guy the Mormon will be President. and i am sure we can accept a Mormon since gay marriages will be legalized- count on Kennedy to come through like he did on sodomy- if gays and lesbians flock to the polls to vote DEmocratic-the Gop dream will never come to frution. the problem is they only have 3 months to organize [email protected]

  • ricecake July 12, 2010, 10:50 pm

    After the New York Time’s Prechter interview, it’s expected much easier for the Congress pass another Stimulus act. lol

    Don’t you know people like Prechter or Mac Fabre can be used as the tool for political policy change manipulating? Since no one want to hear Krugman, there are many krugman variation out there can sing the same swan song in different tones.

    • SDavid July 12, 2010, 11:51 pm

      Both Faber and Prechter seem to get too much credit. A lot of people praise Faber for calling a bottom last March, when in fact many analysts did. Faber also called a top back in October which didn’t work out quite so well. As for Prechter, I am sure he will be right eventually, but when? Prechter has been calling for a 40% decline in the price of gold …. I don’t like his odds of being right on that one, but strange things happen nowadays when “big brother” and the stock market/financial system are synonomous.

    • ricecake July 13, 2010, 12:59 am

      SDavid, When the WWIII is for sure coming, Prechter will be right then. lol

      But again one will never know. Never say never when things get really ugly, it becomes a beast.

  • Rich July 12, 2010, 5:09 pm

    From ZH:
    analysts are once again at near all time record bullishness on stocks.As a reminder, the consensus view is for a 2010 absolute EPS of 82, and for a simply ridiculous all time record 96 in 2011, higher than the 88 seen at the all-time high three years ago, when the economy had the benefit of a multi-trillion shadow credit system.

  • Rich July 12, 2010, 3:53 pm

    Wylie Coyote market with SPY trading on air up to 3 day BB upper band. Smelling a giant methane bubble in this market…

  • Jeff Kahn July 12, 2010, 1:13 pm

    Sentiment is relevant when you have the public at large in the market. When the market is dominated – as it is now – by sovereign wealth funds and hedge funds and the casino departments of international banks – sentiment is less than irrelevant.

  • Gary Paul July 12, 2010, 1:10 pm

    O.K. it looks like I owe someone an apology. I am just now learning that this BP oil leak could indeed be as catastrophic as suggested on this blog. I had no idea there was that much methane under the earth. And since the origin of all this methane is unknown, I’ll have to keep my mind open to all possible theories.

    • Mike July 17, 2010, 7:16 pm

      I don’t understand what you mean when you say that “the origin of all this methane is unknown”. It comes from the same place the oil comes from.
      The US Geological Survey should have a lot of info on gas reserves. At least in the US, we have a lot more natural gas than oil.

  • crash and burn July 12, 2010, 11:14 am

    I read a lot from the newsletter community. I can’t recall ever seeing more bearishness than I have in the past few weeks. It kept me from shorting last week and it turned out to be a good move. I think mostly likely this rally is for shorting like everyone says.

  • DWB July 12, 2010, 8:59 am

    Shouldn’t we expect to see heavy corporate insider buying at a major bottom? It just hasn’t been there. Even as recently as last Thursday, Google saw serious insider selling. j3sg.com

  • Pat July 12, 2010, 3:50 am

    I wouldn’t read too much into the “bearish sentiment” numbers. If you look at the chart from AAII for 2008-2010, you see that from Jan 2008 to Jan 2009 there were 6 spikes up in bearish sentiment between 55%-60% (right where it is now), yet the SPX lost 500 points. Only the final plunge to the March 2009 lows sent the index up to 70.27% bears. During the 2008 crash, there were 3 major rallys of ~75-100 SPX points, but all rolled over and died.

    In 2009 we saw 2 spikes in bearish sentiment to the mid 50’s even as the market was marching higher. Those selloffs turned out to be just mild corrections and the rally soon continued.

    The next sharp correction didn’t happen till early 2010. It was about a 10% correction and yet the bearish sentiment index only spiked to about 43% bears.

    So while we may get an extended rally from here, it is entirely possible that we could just chop around for a while and then continue down.

    If you had gone long in 2008 every time the sentiment index hit the mid 50’s, you would have had to have been very nimble to get in, make a few bucks, and then bail out before the next plunge.

    Actually, when you consider what shape this country is in, I’m surprised the index isn’t at 99% bears !

    &&&&&&

    Good point. It wouldn’t surprise me if AAII “bulls” climbed to 40% if and when the S&Ps poke above their 200 dma. RA

  • Other Paul July 12, 2010, 1:04 am

    Has the IIAA’s sentiment index been a reliable contra indicator?

    Rick, great articles, as usual.

  • Edward0 July 12, 2010, 12:10 am

    Mr. Cohen’s track record has not been impressive from where I sit, and while past performance is no guarantee, as they say, of future performance, I would just like to point out that the weekly SPX PMO at Decisionpoint has not budged one jot from its decidedly southward tilt. In short, there’s a lot of resistance not far overhead, and this rally is for shorting. Sorry, Charley.

    &&&&&&

    I agree about the rally being for shorting, but your claim about Chuck’s track record is, to the best of my recollection, flat-out wrong. You obviously didn’t buy, for one, Detour Gold (DRGDF) on his say-so. Several other of his winning picks have been mentioned in the chat room by subscribers who evidently jumped on them at the time they were recommended.

    Which specific “buys” touted by Chuck were losers — or even non-performers? RA