To understand the direction of markets in the future, we need to look to the past. While this backward looking view is not advisable when driving an automobile, it offers surprising clues to the likely direction in the next few months and years.
Key to this understanding, is the acknowledgment of gold as a monetary phenomenon, not just a commodity and that markets move in a fractal-like pattern.
The following charts, accumulated from various sources, demonstrate these principals when we measure the stock market in gold.
Note how the creation of the Federal Reserve, followed by a Fiat Currency 20 years later has contributed to extreme volatility in the markets when measured by the Dow to Gold ratio, rather than the stability and flexibility promised with the introduction of an "elastic" currency.
A Dow to Gold Chart from 2009 shows the support and resistance channels.
The current view of the Dow to Gold ratio follows. Note that the current ratio have fallen to the 8 to 1 range.
In the longest term view, the Dow to Gold ratio corrects even further, as gold outperforms stocks during a deflationary collapse.
As we move down Exter's pyramid, in search of safety, we notice the trend that the most illiquid sectors lose value first. In the United States, we have seen the most illiquid sectors, Commercial & Residential Real Estate, suffer substantial losses. Since stocks are relatively liquid, they lose value toward the end of a deflationary scenario.
Ultimately we see a Dow to Gold ratio of 1:1 or 2:1 if history is our guide.
What this will translate into for Dow and Gold values is difficult to project with any accuracy.
My own projections indicate values of Dow 3440 by one calculation method, and Dow 4620 by a different method. If these projections are correct, it means we will break the March 2009 lows.
Gold then is headed to the $3000 to $4000 range.
Key to this understanding, is the acknowledgment of gold as a monetary phenomenon, not just a commodity and that markets move in a fractal-like pattern.
The following charts, accumulated from various sources, demonstrate these principals when we measure the stock market in gold.
Note how the creation of the Federal Reserve, followed by a Fiat Currency 20 years later has contributed to extreme volatility in the markets when measured by the Dow to Gold ratio, rather than the stability and flexibility promised with the introduction of an "elastic" currency.
A Dow to Gold Chart from 2009 shows the support and resistance channels.
The current view of the Dow to Gold ratio follows. Note that the current ratio have fallen to the 8 to 1 range.
In the longest term view, the Dow to Gold ratio corrects even further, as gold outperforms stocks during a deflationary collapse.
As we move down Exter's pyramid, in search of safety, we notice the trend that the most illiquid sectors lose value first. In the United States, we have seen the most illiquid sectors, Commercial & Residential Real Estate, suffer substantial losses. Since stocks are relatively liquid, they lose value toward the end of a deflationary scenario.
Ultimately we see a Dow to Gold ratio of 1:1 or 2:1 if history is our guide.
What this will translate into for Dow and Gold values is difficult to project with any accuracy.
My own projections indicate values of Dow 3440 by one calculation method, and Dow 4620 by a different method. If these projections are correct, it means we will break the March 2009 lows.
Gold then is headed to the $3000 to $4000 range.
bulls seem to be very confident today but 5 days SMA (1198) most likely is going to act as resistance. In my opinion this is going to be another good opportunity to go short since the intermediate time frame trend is bearish and once started can't be stopped so easily. Watch 1198 level! If it holds go short
ReplyDeletehttp://babaro22.blogspot.com/"
Short MCO Put...January 11.
ReplyDeleteSlight fat finger I see lol
http://www.marketwatch.com/investing/stock/mco
Please keep up the great work Mr. Bailey
PW,
ReplyDeleteGreat Research! Keep up the good work.
>>My own projections indicate values of Dow 3440 by one calculation method, and Dow 4620 by a different method
Wow! That would be something huh ? Let me go and quickly adjust my 401K :-)
Walter.
Thank you all for your comments.
ReplyDeleteI sincerely hope I am wrong about these Dow projections. As time goes on it seems that more of my concerns are coming closer to being realized.
Best wishes to everyone.
PW
PW,
ReplyDeleteYou have been crying wolf for some time now and the market keeps creeping up. How many weeks or months or years would your above projection hold before you change your opinion of the above estimates ?
Walter.
Walter, you call me out on all my erroneous forecasts.
ReplyDeleteWhile the markets have not behaved as I expected, the longer term fractal pattern remains unchanged. If the S&P breaks above the 1230 mark, I will become a temporary bull. To me the time frame is not particularly relevant. To convince me to be bullish in the longer term, I need to see the S&P break first the 1250 mark, and eventually the 1565 level.
Let's keep in mind that the Fed has held interest rates at effectively zero percent, and the market has responded by reaching the 61.8% Fibonacci level. When we were at the 2007 high of 1565 rates were at 4.75%. In a "real" recovery, I would expect much better performance with this amount of interest rate turbocharging.
To date I am convinced this is a deflationary event as gold hints at until proven otherwise.
PW,
ReplyDeleteYou want an honest answer on why I call out ?
Well there are tons of people yapping, blogging, selling calls et et about the market, I don't listen and I dont care but when it comes to you -I like your hard work/research.
Think of me as your critic and at the same time I like your efforts, I like your blog site :-)
Keep up the good work, thanks a lot for doing this!
Walter.