Wednesday, May 16, 2012

"Bonds promoted as offering risk-free returns are now priced to deliver return-free risk." --Shelby Cullom Davis

EVERYTHING YOU KNOW IS WRONG (May 16, 2012): After months of confusion, the global financial markets seem to be finally achieving clarity. The euro appears to be set for a continued sharp pullback. Gold and silver behave as though they have finally made decisive downside breakouts, with the shares of their producers especially underperforming. The U.S. dollar index seems to be on its way to continuing a powerful rally along with U.S. Treasuries set to reach new all-time highs. Stock markets around the world have been declining, and appear to be on the verge of accelerating their respective downtrends. Crude oil acts as though it's finally responding to multi-decade inventory supplies and dwindling demand, and seems to be set for a continued retreat in the foreseeable future.

However, all of the above is an illusion. Everything you know is wrong. The euro is not going to collapse--in fact, it will stage a strong rally toward 1.40 U.S. dollars during the next several months. Gold, silver, crude oil, and nearly all other commodities are completing important intermediate-term bottoming patterns in preparation for strong upward surges. The U.S. dollar and U.S. Treasuries have become dangerously overbought--and, more importantly, far too many traders have jumped aboard the safe-haven bandwagon. This ensures that as sentiment toward these assets is close to an all-time high, they are set for a decisive decline. For example, the U.S. dollar index which is currently near 81.4 is likely to plummet toward 76.4 or even 75.4, rather than climbing higher as almost everyone is currently anticipating. Stock markets worldwide are close to completing important bottoming patterns; many equity indices will achieve new all-time highs during the upcoming summer.

In recent months, the shares of commodity producers have consistently been among the worst underperformers, especially in recent weeks. Some funds including GDXJ have lost more than half their value, while many others have dropped over 40% and seem to have no bottom in sight. Whenever the greatest number of analysts and advisors are talking about "catching falling knives", that's almost always the best time to step in and buy when almost no one else wants to take action. Amateurs are too emotional to be able to purchase anything which has been in an extended downtrend. Chartists and momentum players and many institutional traders may recognize fundamental undervaluations, but are not permitted to jump aboard until after there has already been a rebound of 20% or 30%. By acting before they do, you will enjoy much better bargains which will thereby yield far superior profits.

The traders' commitments are released each Friday at 3:30 p.m. Eastern Time. This data shows what commercials are doing versus speculators. Commercials are those who are most closely connected with any given industry--they are the equivalent of top corporate insiders. Commercials are near a multi-year high in being long the euro, with a sharp shift toward multi-year bullish extremes in both gold and silver. Commercials recently turned sharply bearish toward the 30-year U.S. Treasury bond. Just as you should do as top corporate insiders do when deciding which stocks to buy and sell, you should follow the commercials whenever you are trading commodities or currencies or assets which are closely correlated with them.

Disclosure: I am currently long GDXJ, KOL, and XME, with my greatest concentration in GDXJ. I recently sold all of my HDGE for an average profit of 16.1%.