Today's Market
by Dr Invest

Yesterday, my gold position in IAU hit my stop-sell and sold. Perhaps that was a bad decision on my part, but I didn't want to see my investment in IAU fall any further. There has been a big sell-off in gold and plummeting gold prices over the past six months. Before that, gold had been consolidating or moving sideways. When I purchased gold, there was the possibility that it would either climb or fall; I had expected gold prices to climb, but I could not have foreseen the level of exuberance in the market. The promise of unlimited easing made desperate some investors bid the market even higher. Stocks have become overbought and overpriced, yet there seems to be an unlimited appetite to purchase even more stocks at higher prices.

The talking-heads of CNBC admonish that stock prices haven't kept up with the normal growth of the money supply; thus, prices should even be higher for stocks and stocks are undervalued. All this yada, yada, simply doesn't take into account that we have been in an economic contraction. You will not have a "normal growth of the money supply" when growth is not "normal".

Even the Federal Reserve admitted that the economy had contracted in the 1st quarter. So, while the elections were under way here in the U.S., this contraction was hidden from us. If you could think back for a moment, just before the election there was an uproar over a remarkable decline in unemployment,  creating a shining star for the president's economic savvy. ECRI reported that all their economic indicators showed that we entered a recession in October of 2012 and that recession is continuing into 2013. Still, a den of voices urge investors forward, telling them to ignore the temporary slow-down and buy stocks while they are cheap.

KEEPING TO YOUR SYSTEM OF INVESTING

What is important is to have a "trading system". I listen to news and to the talking heads, but their voices are of less importance than the trading system. So if the market is declining, I don't buy. If the market is rising, I do buy. If there are indicators that the market is OVERBOUGHT, I wait until the market is OVERSOLD and then buy. These are called, trends.

Here is the S&P 500 from a few days ago.

 Here is the S&P 500 today.

The past three days has seen the market decline, the trend, it seems, is turning downward. No one can predict where the market may go from here, but the investor needs to remain alert a longer term downward trend. Should this trend develop more fully over the next two weeks, the market may quickly sour. One look at the VIX shows me how nervous investors are.  If you are buy & hold, then keep dollar cost averaging but expect to lose 10% or 20% of your portfolio.

GOLD, WHERE DOES IT GO FROM HERE

Gold has become very unpopular. The Federal Reserve did their job well, making stocks preferable over the defensive position of gold. The investor, feeling confident that the Fed will meet all future market declines with more stimulus, is now shunning gold. So gold becomes like any commodity. Should the market slip into a recession, gold prices will fall as the entire economy is deflated or contracts. So gold could fall in price rather dramatically. It is then, that people will begin buying gold as a safe haven. The price of gold will soar as more and more people expect a deepening decline in the market. The other scenario is that an over stimulus of the market will create hyper-inflation. The value of Money will become worth less and less against the price of gold... so it will take more money to purchase all commodities including gold.

(note: the above information is for entertainment purposes only and not to be used for investment purposes.)
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