Gold surpasses $330, spells equity trouble
By: Thom Calandra
CBS.MarketWatch.com
SAN FRANCISCO (CBS.MW) -- It's high-alert time for investors, says a noted stock-
market researcher and strategist.
Paul F. Desmond, president of 64-year-old Lowry's Reports Inc., says investors may be losing their taste for expensive stocks in the U.S. rally that began in early October.
"Our basic position is the October bottom marked the start of a substantial rally but it is probably a rally within a bear market, rather than the start of a new bull market," says Desmond, whose research of bear-market bottoms and bull-market tops won the prestigious Charles Dow award this year for technical research.
Lowry's uses what it calls "buying power" and "selling pressure" gauges to measure stock market supply and demand. Desmond is among an elite group of technical analysts whose work is held in high regard even by critics of the craft. His research demonstrates the stock market must suffer a series of sharp sell-offs -- known as 90-90 downside days -- before buyers become eager enough to bid prices higher. See: Market destined for red-letter days.
Desmond contends the stock market's autumn rally appears to be fading. "Our 'buying power index,' which measures investor buying enthusiasm, was relatively sluggish right from the start of the
rally and has not made a new high since Nov. 6, indicating that investors have lost their appetite for stocks at recent price levels," Desmond tells me.
The researcher uses many tools to assess just how badly investors want to own -- or eject -- stocks. "Without strong demand, it will be difficult for the broad market to make any significant progress on the upside," says Desmond, whose research demonstrates the stock market hits bottom only after an extended period of feverish selling.
At the same time, Desmond acknowledges little urgency right now on the part of stock-market investors to dump shares wholesale. His most telling indicator is the 90-90 downside measure, which when set off points to investor panic.
When trading activity in stocks on the New York Stock Exchange (NYA: news, chart, profile) and Nasdaq (COMP: news, chart, profile) surpasses 90 percent of down volume on a given day, and points lost on those stocks surpass 90 percent of the total, investors are truly dumping their stocks, Desmond says. A series of such fire sales is necessary before investors are comfortable enough with the bargain-basement level of the market to search once again for new stocks.
Earlier this week, on Dec. 9, Nasdaq's losses came close to a 90-90 day. Downside Nasdaq volume reached 93.7 percent, says Desmond, who reserves real-time analysis and figures for paying subscribers to Lowry's Reports. Nasdaq's points lost reached only 86.6 percent of the total. That day on the NYSE, downside volume was 85.6 percent of the total, and points lost 86.5 percent.
Desmond says there has been almost no increase in the firm's "selling pressure index" in recent weeks, "suggesting that investors are not very interested in selling their stocks at current prices. As long as the selling pressure index does not begin to expand, the odds will favor relatively mild (reversals)."
All of this leads Desmond to conjecture stock-market prices "will probably remain in a relatively narrow trading range." He makes the point that narrow ranges for stock prices are extremely rare. "So we expect a breakout in the relatively near future," he says.
The critical question: Which way? "Although the bias is for a breakout to the downside, there just isn't enough tangible evidence, at this point, to justify decisive action for investors. This is a time for investors to be on high alert," he says.
See: Researcher on trail of bear-market bottom.
Gold casts shadow across stocks
Higher prices for gold mining stocks bode poorly for the overall stock market, says a technical analyst at Salomon Smith Barney. Louise Yamada, in her latest update, says rising gold equity prices as measured by the Philadelphia Gold and Silver Index (XAU: news, chart, profile) could be accompanied by a sharply falling stock-market. Gold mining stocks, and gold itself, are rising sharply this week.
Yamada says the so-called XAU index, with leading gold companies Newmont Mining (NEM: news, chart, profile) and Gold Fields Ltd. (GFI: news, chart, profile), could go another 30 percent higher, to 93, from its current 72. "But what does this imply for the equity market in the near term?" Yamada asks in her update, which offers several scenarios about the stock market and gold prices. In one of those scenarios, the overall stock market revisits its early October lows.
"Advancing gold stocks over the past year have been carrying a defensive equity market message," the analyst says. The spot gold price at midday Thursday in U.S. trading rose $6.45 to $331.10 an ounce, surpassing the critical $329 level set by gold analysts as a resistance level for the precious metal.
"Who wants to pass up a trade in which the downside risk is $15 and the upside is $500 to $1,000," said Bill Murphy, publisher of the pro-gold LeMetropole Café web site. Murphy is also chairman of the controversial Gold Antitrust Action Committee, which contends governments and commercial banks manipulate the price of gold to keep interest rates low.
"The hedge-fund guys are looking at the dollar," Frank Holmes, chief executive and chief investment officer of U.S. Global Investors, (UNWPX: news, chart, profile) told me Thursday. "The whole scenario of the falling dollar is bad." The euro at midday Thursday rose as high as $1.0201 against the dollar.
"The most important dynamic affecting the gold price is, and will be, the fate of the U.S. dollar," says Frank Giustra, a director of Endeavour Mining Capital Corp. (CA:EDV: news, chart, profile) in Toronto.
Giustra, in a piece that will be published next week in the 31-year-old Gold Newsletter, says the market likely will see a return of the gold-boom years of the late 1970s and early 1980s. At the heart of the gold rally will be a rejection of the dollar by global investors, he says.
"Why is the dollar's value being challenged today? Well, quite simply, its role has been abused," Giustra writes in his article. "Since the U.S. closed the gold window (in 1971), the only asset backing the dollar has been faith in the U.S. system, which was entrusted to it by the global community." See: Brien Lundin's Gold Newsletter.
Commodity prices of many stripes rose sharply Thursday. Natural gas prices, as measured by New York futures contracts, rose to a 20-month high. Crude oil prices also rose as tensions increased in the Middle East.
In the stock market at 12:30 ET Thursday, gold mining shares as measured by the XAU were rising 6 percent. The overall stock market, as measured by the S&P 500 Index, was down a half-percent.
See: Gold gains as dollar weakens.
See: Gold's supporters monitor $330 test.
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Thom Calandra's StockWatch is in its seventh year at CBS MarketWatch. Thom Calandra owns bullion.
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