THE NEW ELECTION RALLY?

The mother of all counter trend rallies hit the market this week; but the bigger question is whether or not we are seeing a slightly earlier repeat of the 2004 election rally. In that year the market rallied from August into the November elections and beyond pretty much without significant pause. There’s seemingly no reason why this cannot happen once again. Since “seasonality� is now one of the most accepted principles of stock market trading, a case can be made for a repeat of ’04. If enough traders believe it to be true, then it becomes true. So far, as illustrated below, the “verticality� of the rally looks about the same as that of 2004.

There are few sectors that remain in bullish uptrends. For the past two months the top performing sectors in order have been silver, copper, oil, shipping, and gold. These are not the type of sectors that create new bull markets for the DOW and Nasdaq.

They are the sectors though that can make you money and we've been participating in the metals sectors and its been a fun ride. It's one that I think will continue through the rest of the year. You can make money while everyone else holds sinking stocks and hopes.

But as I've written over the past few days to continue to make money in the stock market you have to look ahead to what sectors have the potential to start new bull markets. And there is one sector that I have my eye on: drug stocks. And when I say drug stocks I don't mean biotech stocks, but drug manufacturers.

The drug stock sector has been in a phase four bear decline since 2001. That decline came to a halt at the end of last year and drug stocks have been consolidating ever since. In the first half of this year the drug stock sector broke its 5 year resistance downtrend line and also broke its declining relative strength ratio downtrend - its trend of underperforming the stock market. Drug stocks have been one of the strongest sectors in the market all year.

They appear to have been in a stage one base for the past year, with resistance around current levels on the PPH drug stock ETF. If they pullback or consolidate at these levels and then breakout over the next couple of weeks they should start a stage one bull market. This is the only sector in the entire stock market in this position.

Sector leader Pfizer(NYSE: PFE) bears watching. Since 2005 it has been trading in a range of 22 and 28 to form a reverse head and shoulders pattern. If it pauses at this level and then breaks above 28 on high volume it should begin a year long rally that it will take it to the high 30's and possibly even beyond.

Merk(NYSE: MRK) is already charging higher. There are several dozen other stocks in this sector and I don't have time to go through all of them for you right now. But there is one other thing about this sector that you should know - historically it tends to go up when the rest of the market drops as investors park their money into it as a safe haven, because the profits in drug stocks aren't cyclical. Slow times don't stop people from buying medicine - and they don't stop smart investors from making money either.

For today's WSW
Power Investor update on gold stocks click here

Everyone talks about trends. The thing about trends in the stock market though is that you need to really know how to spot them in order to take advantage of them. Getting in when a trend is near an end isn’t how you take advantage of trends. But few people really get in a stock at the beginning of a trend. So how do you know when a sector or a stock is about to go into a new bull market?

That’s where charting comes in. You see a sector, a stock, a market, just about any financial asset that you can plot on a chart, has a distinctive pattern depending upon where it is in its trend. Stocks tend to act one way when they are in a bear market, bull market, or are in a state of transition. If you can understand the way they are acting than you’ll be able to see what type of trend they are in, and more importantly when that trend may be changing.

There is an opportunity lurking in the stock market right now. No one is talking about it. You see there is a sector that has been falling for years that hit a major bottom several months ago. It’s been basing and getting ready to turn up and start a new bull market. But no one thinks the stocks that make it up are a buy.

In fact odds are the analysts who do cover the sector are negative on it too. The news on it has been bad. Earnings probably have been in decline for years. The stocks are money losers. But they’ve bottomed. Insiders are buying because they know the news won’t get any worse. A year from now the stocks in the sector will be four times the price they are now and investors who take the opportunity to buy in now will be rich.

Welcome to the new website! There are some important new additions and features that you will want to familiarize yourself with. We are no longer going to send out emails when a new bulletin or article is posted. Why? Because we intend to post articles every single day. Each week I'll post a special weekly article in the WSW Power Investor section in which I give an overview of the state of the market, which sectors I am focused on, and what I am doing with my own portfolio. This article is going to take the place of the normal weekly 'Market Bulletin' on the old site. You'll just need to log in every Monday morning before the open to access it.

We got it! Yesterday the XAU closed above its downtrend resistance line. The next leg up is beginning. Just hold and enjoy the ride. I think we'll see the XAU go to 150-160 by the time of the August 8th Fed meeting. One real positive is the XAU/S&P 500 ratio also broke out to the upside. One thing that bothered me about the action in May and June is that gold stocks seemed to trade along with the broad market. That seems to be ending right now. Not only did this relative strength ratio turn up yesterday, but stocks had a strong day while the Nasdaq fell over 30 points.

The volatility continues to shrink out of gold and gold stocks, preparing the way for a key breakout at any moment. We could pause a few more days or it could happen today. Resistance on the XAU is now 144. A gap up above this level will likely spur a day long rally to create the key breakout that will launch the next run in gold stocks. A close above 144 would do the same thing. Hold on to your gold stocks and enjoy the ride.

I think we're likely to rally ahead of the next Fed meeting. Yesterday two Fed governors came out talking about a pause in interest rates at the August 8th meeting. We should rally into that meeting and then have a quick dip or pause just like we've seen the past few days. We could see XAU 155-160 by August 9th.

Something big has been happening in the world in recent decades. This isn’t something you’ll hear about in the news because it’s not just one event. It’s a series of events that are happening gradually and sporadically, but early signs point to a mega world power shift, which could end up being as important as the Industrial Revolution, increasingly affecting us all, in one way or another in the years ahead.

CHANGING GLOBAL BIG PICTURE

As we see it, this is the global big picture and it’s coinciding with the big pictures in various markets. It involves China’s growing power, the fall of communism, globalization, independence, the internet, emerging nations, lower poverty levels, debts for some and surpluses for others, a wealth shift, nationalization, geopolitical changes, the formation of new international strategic alliances, terrorism, holy war, the spread of Islam and the loss of U.S. dominance. These are some of the most important factors that have been, and are taking place, and they’re changing the world.

There is an unhealthy mix of technical factors that are speaking volumes about the long term bearish disposition of the stock market and economy. Ignore them at your own risk. You cannot pick your poison but if you could, would you want higher interest rates or higher commodity prices? Since late 2001, the market has offered us a consistent dose of one or the other (and sometimes both). As illustrated in the long term ratio chart of the CRB to 30-year bond price, if it hasn’t been higher interest rates (lower bond prices), it has been higher commodity prices. This is not a healthy situation for the stock market or the economy.

Gold stocks are starting to get bullish !!! And I'm starting to get really bullish but I'm still going to be patient. I have a good position but I don't want to chase anything here and will wait for a breakout now to add on. The breakout is going to be the upper trend line on the HUI (drawn below) and the same on the XAU. I feel the gold stocks will have resistance here and should pull back a little then trade sideways for a couple of weeks.

Something else that's really important is that the bollinger bands seem to always come together before a big move!! Well, if this trades out accordingly, we'll have the bollinger bands together which will give us a great place to play a breakout and get fully invested safely!!!!.