Over the past several weeks, oil and gas prices have fallen sharply, prompting many to conclude that the bull market has finally run its course. With oil prices back to $60 per barrel, most are now calling for prices to fall back below $50, and some see even lower prices dominating in the years to come. As there is no real evidence that suggests an abatement of those forces that pushed oil prices up from below $20 six years ago to near $80 dollars last month, such rosy forecasts really amount to wishful thinking. The recent sharp decline is likely technical in nature, providing long-term investors with an excellent opportunity to build on established positions, or create new ones.

The gold smashup - that's what gold bugs have faced over the past two weeks. Just two weeks ago gold appeared to be poised to breakout and begin another big bull run. Everything seemed to be lined up. The XAU and HUI had been consolidating for weeks, the dollar appeared to be weakening, the Fed reached the end of its cycle of interest rate hikes, gold stocks were outperforming the metal and we entered the historically bullish September gold season. I positioned myself accordingly, building a large position in gold stocks. The XAU broke through its 150 resistance point.

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To access today's WSW Power Investor comments click here: WSW Power Investor for 09/18/06

Chicken Soup for the Gold Bug’s Soul
 
The vicious correction in precious metals-related stocks has been especially disheartening for fundamentally minded gold bugs because it occurred concurrently with a rally in stocks. Not only was short term money lost by holding precious metals stocks, but short term opportunity was also lost by missing a rally in stocks. I’m figuring that about now, investor gold bugs need some chicken soup for their soul. (No such soothing is provided for short-term speculators – it is even rumored that they have no soul!) So look on the bright side because the reasons to hang in there and stay long precious metals are many.

Another billion dollar gold merger has just been announced. This time it is between Iamgold, which is buying Cambior for a 31% premium over its closing price from yesterday. The new Iamgold will be the tenth largest publicly traded gold producer with 1.1 million ounces of gold produced annually.

In August we saw the blockbuster purchase of Glamis by Goldcorp and now we are seeing another deal just a few weeks later. Expect to see even more mergers over the next year.

Gold is up $5 as I write this. It looks like we're going to get a bounce off of this recent low, but there is no sign that a real bottom has been put in. For that I neeed to see gold stocks outperform gold by holding up - or even going up - on a day in which gold is down. I think we'll see this happen towards the end of next week or the week after with gold retesting the lows of this week. I sold all of my gold positions, except the small cap gold stocks I own, so I'm sitting on a pile of cash now and am waiting for a real bottom. Will talk more in detail how I identify those this weekend.

Yesterday gold stocks tried to firm up, but once again faltered as the rest of the day went on. The XAU and HUI are now both below all fibanacci support levels. Their next support level is the June lows. As long as a bottom comes above those lows the long-term bullish uptrend will be intact. If we bottom above those lows I think we'll see a quick snap back up to 140-145 XAU area - and then a dip and consolidation to setup for a possible real breakout at the end of the year. However, if we end up seeing the XAU make a weekly close below the June lows then the bullish long-term technicals will be broken.

Steve Saville
email: sas888_hk@yahoo.com
Sep 12, 2006

Below is an extract from a commentary at www.speculative-investor.com on 7th September 2006.

During much of the period between August of 2001 and July of 2003 one of the major concerns in the financial world was that deflation had become a legitimate threat. In fact, the fear of deflation became so pronounced during 2002 that Greenspan felt the need to wheel-out Ben Bernanke to discuss, in very blunt terms, the Fed's ability to devalue the currency by creating unlimited amounts of the stuff. Furthermore, the Fed, which has often attempted to paint itself as an inflation-fighter, began publicly worrying about an unwelcome FALL in inflation. Interestingly, however, and as reflected by the following chart of year-over-year M2 growth, the TROUGH in inflation fears coincided with the PEAK in actual inflation (money supply growth).

As I flew back home from a recent business trip last week, 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.

A scan of the various US market, international, and sector exchange traded funds (ETFs) indicate that practically all of them are in bullish patterns. However, there are some notable exceptions and these may be suggesting that what appears to be an overwhelmingly bullish stock market is not so bullish after all. Consider the following ETFs that are showing sell signals and bearish price objectives according to one percent, three box reversal point-and-figure (PAF) charts:

Dow Transports (IYT)

Industrial Select (XLI)

Timeliness Select Portfolio (PIV)

(In addition, several energy-related ETFs are now in PAF “sell� signals.)

Institutional Sentiment & Analysis Weekly 09/03/06
Published Sunday 9/03/2006
By Mark Young of Equity Guardian Group

Short-Term Sentiment:
Mixed-to-positive.

Overall Intermediate-Term Sentiment: Positive.

Individual Investor Sentiment: Positive

Small Speculator Sentiment: Positive

Hedge Fund/Small Manager Sentiment: Positive

Longer-term Trend:
Positive.

Intermediate-term Trend:
Positive.

Short-term (one-day) Signal:
None. We'll look long, but with care.

We are trading these signals intra-day with KTT subscribers on Yahoo IM--contact us for details.

Ideal ETF Portfolio (tracking portfolio):

THE DOW REPORT
Dow Theory and Cycles

Recently I have received e-mails asking about cycles and Dow theory. I have addressed this before, but it seems that it’s now time to look at this topic again. I have virtually every scrap of material written by Charles H. Dow, William Peter Hamilton and Robert Rhea and I want to confirm that cycles are definitely not a part of the Dow theory. I’ll also add that head and shoulder formations, rising wedges, symmetric triangles and other technical patterns are not a part of the Dow theory. The McClellan oscillator, stochastics, RSI nor any other oscillator for that matter, is a part of the Dow theory. Gold, the dollar, bonds or individual stock analysis is not a part of the Dow theory.