What's Ahead for Stocks

As I flew back home, I read a copy of Barrons. The issue, What's Ahead for Stocks, focused on forecasts for the rest of the year from their top Wall Street experts. I haven't been watching CNBC much lately so I thought this issue of Barrons would give me an idea of what the Wall Street consensus is for the market and the economy.

It was bullish, of course, because experts hired by Wall Street are always bullish. It's their job to sell you on buying into a mutual fund and holding on no matter what is coming. For the most part, these experts saw "muted gains for the rest of this year, along with a dip in inflation, setting the stage for a stronger run by the bull in 2007." As you know, I've been bearish on the market going forward so I find it helpful to sometimes examine the counter arguments in order to make sure I'm not missing anything.

According to Barrons, "the bullish case for the stock market is built on three arguments, that inflation has peaked, or soon will; that the economy, although softening, is still resilient, and that investors will warm to stock anew as concerns about both recede."
Wall Street and CNBC darling Abby Cohen of Goldman Sachs (the lady who said 'buy' all of the way down from 2000 to 2003) claims that the US is "entering a second, more comfortable phase of the bull market." She claims that stocks will rise as "incoming data points to strong economic growth and lower inflation."

Barron's sums up the views of its experts by saying, "Goldilocks is back, as evidenced by the Street's expectations of an economy that is neither too hot nor too cold, but just about right."

A slight dissension comes from Francious Trahan of Bear Steans who thinks the S&P 500 will rise 11.5% in 2007 after a quick dip into the end of this year as the economy has a temporary cooling period. But then, "when the market turns the corner, stocks come back with a vengeance."

Barron's acknowledges the fact that "from the last rate increase in a tightening cycle to the first rate cut in the next, easing stretch, the stock market has traditionally stumbled." But don't worry, Citigroup's Tobia Levkovich says this time is different because "stocks could rally once it's clear the Fed does not intend to raise interest rates."

Of course, I think most of this is wishful thinking. Well, it's more like propaganda. I'll go with historical trends of how the market moves during this phase of the interest rate cycle instead of the hope that this time it is different. It also seems likely that the economy will falter much more than these analysts expect it to due to the cooling housing market. I didn't find their arguments convincing. I see the current market environment very similar to the one we saw in the summer of 2000.

I think the May-July dip in the Nasdaq was an important turning point in the market just like the dip in April of 2000. The experts back then were also predicting a "soft landing" in the economy that would morph into a super-rally once everyone realized that the Fed had finished raising rates. Of course, in 2000 everything fell apart during the Fall.

The only sectors that bucked the bear market that Fall were drug stocks, health care, tobacco, and utilities. And right now, they are the most bullish sectors in the market. The same sector rotation pattern is repeating itself. Gold stocks made their bottom in October of 2000 and have been in a bull market ever since.

Of course, the big question right now is what happens with Gold and the Dollar. I see no fundamental reason why the Dollar should go into a new bull market, with the prospect of the Fed lowering interest rates next year and an overall stag-flationary environment.
In fact, I see all sort of reasons to expect the Dollar to continue to fall. And the intermediate-term Gold trend is still up despite last week's drop. Although I think it likely that drugs stocks will continue to go higher this year, Gold is the only sector I see that has the potential to make giant gains this year, with almost all other sectors set to fall.

However, gold stocks have to shake off last week's correction and go higher over the next few days to confirm this bullish view:

The XAU closed above its 150 resistance level last Tuesday and then fell right back down through it to create a false breakout. We've seen several false breakdowns since the XAU bottomed in June, so this seems like par for the course now. The XAU also closed below its lower support trendline, which is a negative.

However, the HUI and GDX both held these levels as the XAU is acting weaker due to the heavier weightings of Newmont and Goldcorp in it. The XAU/gld and HUI/gld ratios are both trending up as the gold stocks are still outperforming the metal, which is a positive.

Before last week, Ike Iossif told me that he thought we'd get a false breakout and then a drop in the XAU all of the way back down to the 136-140 area. I'm not sure what he thinks now, but back then he told me he thought it would then recover and give the real breakout and rally well into the end of the year. Frank Barbera on this weekend's Financial Sense News hour also laid out a similar scenario this weekend.

The intermediate-uptrend in gold stocks is still intact. Support on the XAU is at 140 and then 136. I'd expect a bounce on the XAU above 140 and gold above 600 at the beginning of this week. If the XAU though were to close below 136 then the intermediate-term uptrend would be in danger of being broken, especially if the XAU/gld and HUI/gld ratios uptrends break too.

Friday's drop in Gold followed a healthy bounce in the Dollar back up to just under 86. It seems that earlier in the week a lot of people rushed into the gold market as it appeared Gold was going to break out and the Dollar was headed below 84. Once it seemed that the Dollar wasn't going to break below 84 and bounced instead, a lot of people exited their gold positions, flushing out many of the breakout players.
BTW - there isn't a single mention of Gold or gold stocks in the Barron's article and the only mention of the Dollar is a short comment by one of the experts claiming that it will drop because the economy is going to grow faster than anyone expects. This, by the way, makes no logical sense...
Gold has dropped off most people's radar screens. There was some excitement earlier this year over Gold, but the correction and sideways action of the summer has flushed almost everyone out of it. If gold goes back up from here, this recent correction will have succeeded in shaking out anyone who was left over. Practically no one is positioned now to benefit from a Gold rally. That's for sure.

While I was gone, Blue Pearl Mining more than doubled on news that it purchased Thompson Creek Metals for $575 million. This deal will make Blue Pearl one of the biggest moly miners in the world. Before the acquisition, Blue Pearl only had 58 million shares outstanding. Thompson Creek had a net income of $286 million in the past nine months. That means Thompson Creek makes more money than the entire market cap of Blue Pearl before the deal was announced. That's why Blue Pearl's stock price went up so much. I think it's still worth holding.

Remember, Blue Pearl was founded by the same people who created Wheaton River. They love to make big deals to create mining companies with large cash flows so something like this was almost inevitable.

Monday Morning Pre-Market

As of 8:00 AM gold is currently trading down 13 dollars. The XAU is likely to gap down right on its 136 support level. The bottom is likely to come this morning.