Weekly Update From Puru

We are going through a routine pullback within the ongoing cyclical bull-market in stocks. Prior to this correction, stock markets were strenuously overbought and due for a consolidation. Our expectation was that the correction would come in late spring, however it seems to be unfolding a few weeks earlier.

At this stage, the technical data suggests that this is not the start of a nasty bear-market. For instance, the advance/decline line is firm, the number of new lows on the NYSE is still depressed and the yield curve is very steep. All this data leads us to conclude that the majority of the stock markets are likely to find support on their 200-day moving averages. This means that if our cyclical bull-market assumption is correct, the Dow Jones will find a bottom around the 9,500 level. Accordingly, we suggest that you hold on to your long-term investment positions and consider adding more capital after some evidence of a bottom formation.

Over in the commodities complex, the price of crude is trading around the 74 level and it may continue to consolidate over the near-term. A rallying US Dollar is keeping a lid on the price of oil but the long-term trend in energy is up. We suggest that you keep your positions and allocate more capital to upstream energy companies, oil services stocks and alternative energy businesses.

In the metals arena, the prices of gold and silver are staying under pressure. This is largely due to the strengthening US Dollar. Now, if the trend consistency in precious metals is still intact, both gold and silver must rally soon. Otherwise, we may experience a lengthy consolidation and the highs recorded a few weeks ago may not be taken out before the end of the year. In any event, we suggest that you keep your positions in this sector as an insurance policy against the madness of currency debasement.

Elsewhere, the anticipated correction in copper has now commenced. If our assessment is correct, the price of copper is likely to decline by another 15-20%, so we suggest that you wait before buying back copper related plays. Aggressive traders should remain ‘short’ copper and consider covering their positions around the $2.60-$2.70 level.

Finally, in the world of currencies and debt, the American currency is rallying and the European currencies are struggling. As you may recall, we were expecting this outcome. Our view remains that the US Dollar is in a bull-market against the Euro and British Pound, however, it will probably decline to new lows against the Australian and Canadian Dollars. For now, it looks as though the rally in the greenback has legs and we want you to keep your cash in the US Dollar. Last but not least, the government bond market is benefiting from the ongoing risk aversion, but this should not last. In our view, once this phase of risk aversion in over, interest-rates will rise and government bonds will face intense selling pressure. Therefore, we suggest that you resist the urge of lending money to bankrupt governments.