On the heels of the U.S. Dollar Index rallying more than a point off the lows, today one of the great short sellers in the business warned that the bear market rally in stocks is over and when gold breaks $1,300 we may see a serious upside acceleration.
By Bill Fleckenstein President Of Fleckenstein Capital
May 3 (King World News) – There’s no need to review what happened while I was away because that is all old news. It would now appear that yesterday’s rally in the stock market was simply a function of mechanical buying at the beginning of the new month. I say that because it took all of about an hour this morning to see the stock market lose roughly 1%. I think a pretty decent case can be made that the rally from the February lows is now over, and I would point out that despite the best attempts of all the bulls to jam the market to new highs, they were unable to get it there…
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Let’s Twist Again, Like We Did That Summer
To me the rally reminded me a lot of the big rally during the summer of 2000, as well as the one we saw in the spring of 2008, and by that I mean a bear market had started, but the first big rally convinced people that the decline was just another correction and we were headed back to new highs. Obviously, that was not the case. The stock market seems to be in a more precarious position than it has been in a while, given the fact that we experienced the rally that we did and the earnings reports were so crummy. In this quarter we are liable to see the seasonal adjustments work against the macro data, just as they aided them last quarter.
I think the second half of the year is liable to be particularly weak for stocks. We may have to do some more hand-to-hand combat before we get to a point where it is possible for a trapdoor to open. I still believe that the market is entirely unstable and crash-prone (though so far I have been wrong thinking that). When we take out the February lows we could see some acceleration, but I don’t have a strong opinion as to what the path is that leads us to that point.
After the morning decline, in the afternoon the market trimmed its losses to about 0.75%, though the Nasdaq was weaker. Away from stocks, green paper was stronger after getting thoroughly roughed up last week, oil lost 3%, and fixed income was higher. The metals saw a small decline, with silver losing 0.75% to gold’s 0.5%, while the miners were a fair bit weaker than gold today just as they were yesterday.
Not So Past
Some people have made a lot out of that factoid, and perhaps it is a sign that a correction is due, but I feel that we are early in the bull market even though the mining index is up a ton. And unlike so many rallies in the past where the mining stocks didn’t really participate, and then rolled over first (which always indicated big trouble), this time they have dramatically outperformed gold. Thus, the fact that they have underperformed a bit in the last couple of days may not mean all that much.
Having said that, gold is still gold, i.e., it is incredibly volatile, and the miners are a derivative of that, so a nasty correction is always possible. But at some point $1,300 will be taken out on the upside and we could see some serious acceleration. That said, I don’t want to get too far ahead of myself, nor make this too complicated. As I have stated many times, particularly in Ask Fleck, sitting tight in a bull market sounds easy, but as everyone who has gold stocks can attest it is nowhere near as simple as it sounds, even if it is the right strategy.
Included below are two questions and answers from the Q&A’s with Bill Fleckenstein.
Bonus Q&A
Question: Fleck, I feel like the stars are finally aligning and the trend is now in favor of a weaker Dollar which should push commodities higher. Let’s say this reversal is legitimate and we are finally seeing the shift take place. …what is your opinion on how long the new trend of a weaker Dollar and higher Gold/Silver prices will last? Thanks!
Answer from Fleck: “Impossible to say, but at least a couple years anyway.”
Question: Hi Bill, are gold miners due for a correction?
Answer from Fleck: “They often seem to be ready for one, but thinking like that will get you into trouble. Do not try to catch every peak and valley, as it is a good way to get chased out of a bull market, unless and until sentiment has gotten very frothy. Trying to trade the wild swings will likely not work well. I would wager that many people have already done some of that already. I know one gold fund manager who decided to hedge his portfolio in early February and has not been able to mentally shift gears, and now he has been left behind.”
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