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“Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, ‘I can calculate the movement of the stars, but not the madness of men.’ If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.”

The best trades since 2009 have been in sitting tight. Holding positions for the big trends. On a longer term basis, one of the trends looks as if it could potentially be preparing to roll-over and reverse. There is a fundamental basis underlying this potential change, which is the change from Bernanke to Yellen.

The COT index numbers from last week and this current week are +12.8% and +8%. So while the index numbers are weakening, they are still bullish, and dips should be bought.

Technical

On the 15day chart, which has correlated most closely to last week’s price action, the resistance is currently at $182.50 with support at $180.50. Thus early in the week I would expect a bullish early part of the week.

This bullishness correlates well with the longer term charts, specifically the 6mth chart in which the recent weakness constituted support.

The area of the market that could potentially push the market higher are the financials which have technically moved higher, and in fact broken through a resistance point in price, but have underperformed the broad market.

Gold

Has made a double bottom on the 4yr chart. This looks as if a year+ of frustration is ready to reignite higher. There could definitely be a trade available [long] for gold. Silver, which more or less echoes gold is also on for a potential long trade.

Federal Reserve and Employment

The employment numbers came out last week. They were not great. Of note is the increase in the non-participation rate, or, those just giving up looking for work. The result? QE operations will continue for at least the first 6 months of next year. Certainly Bernanke will not alter anything until he leaves next year. Yellen will hold the line I’m guessing most likely until 2015. The thing is that she is a vocal dove. She may well think and act on the belief that more inflation is what is required…and now she has the power to act. The ‘taper’ may be further postponed under Yellen, or, QE interventions increased.

The economy is not going to improve. The reason that it is not going to improve really comes down to the natural rate of interest as against the rate imposed by the Federal Reserve. If the natural rate was high, at least higher than the Fed Funds rate, Corporations would be borrowing and investing. They are not. They have not been, save the odd exception, for a number of years. They have predominantly been cutting costs. This is not a growth economy.

Stocks and markets are rising due to the offsetting inflationary effects of stocks. Gold and silver have been involved in a serious correction, which was possibly a wait and see approach, made stocks [i] the only game in town and [ii] lent credence to the “there is no inflation” brigade, looks as if the markets are ready to change once again.

If gold and silver once again enter bull markets, what happens to stocks? I have no idea at the moment, but it is something worth watching going into next year.

Trade of the Week

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