Fortunately, my team was able to work through a few technical kinks, and get the recording posted.

You can watch the webinar replay here

It’s gratifying to host a live webinar, and feature a market educator who is at the top of his field. I have found personally if I take away one or two nuggets of truth or insight which help me continue to grow in my knowledge and understanding of the markets, it is time well invested.

I didn’t ask Jeffrey any questions during the webinar because I did not want to take any time away from his presentation. However, I can say that I paid close attention to what he presented.

The webinar presentation was delivered in 2 segments.

Segment 1: Practical Education: Since the Elliott Wave principle provides a context for market analysis, and is NOT a trading system, many people have trouble using it successfully in their trading. In this first segment, Jeffrey presents compelling and concise guidelines for incorporating the Wave Principle in a trading methodology.

Segment 2: Real-Time Trading Examples Using the Wave Principle: Jeffrey segues into real time analysis of a select group of stocks including ALCOA, Akamai, Applied Materials Inc, Ford Motor Co and Sandisk Corp. Then he jumps to the commodities and gives his current analysis on Coffee, Cocoa, Sugar, Corn, Wheat and Live Cattle.

One thing I think you will find in Jeffrey’s polished approach is how concise he is.  What is ideal about viewing a video recording is the ability to rewind the presentation when something compelling is said. My guess is you will likely do this a number of times during this webinar.  And my hope is you will take away from it something valuable which can help you achieve your financial goals.

Watch: Jeffrey Kennedy’s webinar replay

NOTE: Jeffrey will be recording a series of market sensitive videos starting Saturday, May 12. This series of videos will be recorded exclusively for friends and subscribers of Gann Global Financial. I recommend watching this webinar replay prior the first video installment on Saturday.

Though the above could just as easily describe this year’s “Occupy Wall Street” protests and President Obama, it applies equally well to the short-lived People’s Party (widely known as the “Populists”) and Democrat William Jennings Bryan, whom the Populists endorsed for president in 1896.

Back then, small farmers dismayed by rock-bottom cotton and grain prices helped form an actual new political party that declared an explicit set of objectives (the Omaha Platform) calling for, among other things, a graduated income tax and the abolition of national banks.  Occupy Wall Streeters may share the Populists’ disdain for large banks, but their goals are far more nebulous.  Most simply denounce uncontrolled “corporate greed” and the rapidly growing income inequality and wealth gap between the rich and poor.

If this is the fat cats’ idea of greed, you can’t help but notice they’re doing an awfully poor job of it.  Blue-chip stock market indices have gone essentially nowhere in the past dozen or so years.  The tech-heavy NASDAQ Composite trades at barely over half its March 2000 record high.  Financial firms have been especially hard hit: Citigroup this decade fell from 570 to under 10; B of A from 55 to 2 ½.  Government-sponsored enterprises Fannie Mae and Freddie Mac were placed in conservatorship.  Lehman Brothers filed bankruptcy.  Oft-vilified investment banking giant Goldman Sachs reported a sizable third-quarter loss this year.  Average compensation on Wall Street is expected to drop between 15% and 30% in 2011.  Where were all the complainers in the 1990s, when the greatest secular bull market in history combined with the dot-com craze to make paper billionaires out of seemingly every freshly-minted Internet entrepreneur and hedge fund manager?

The Occupy Wall Street demonstrations began in lower Manhattan’s Zuccotti Park on September 17 and soon spread to hundreds of cities around the globe.  Police have evicted the malcontents from their original encampments in New York and plenty of other locales, but some of the dissidents still resurface on occasion to support various issues.

Implications for Investors

So as investors what, if anything, can we learn from this episode before winter’s cold blast drives the remaining unemployed 20-somethings to take their overpriced liberal arts degrees and go back to occupying their parents’ basements?

First, by the time a sweeping economic or social trend advances far enough to capture the intense interest of politicians and protestors it’s probably very late in the game.  The 1896 election came at the tail end of a period of prolonged deflation and slow growth sometimes referred to as the “Long Depression,” which started with the Panic of 1873.  In the summer, when it appeared that Bryan might win, an index of stock prices designed as an extension of today’s benchmark S&P and calculated backwards as a series of monthly averages by the Cowles Commission plunged to the lowest point of a marathon 15-year bear market that commenced in 1881.  Instead, William McKinley took the White House, and the Dow Jones Railroad Average, then still known as the 20-stock Average and reflective of the most important industry of the era, more than tripled within six years of an August 8, 1896 bottom while the newly-created Dow Industrials performed even better into 1906.

Rising prosperity dealt a death blow to the People’s Party, but former president Theodore Roosevelt revived many Populist tenets in his unsuccessful attempt to regain the office in 1912.  By then the country had survived a severe recession in 1908, and the Industrials and Rails were each mired in grinding five-year bear markets after having failed to recoup steep losses suffered in the Panic of 1907.

Once again commerce served as a convenient scapegoat.  Though hardly a precise timing indicator – equities continued to slide through July 30, 1914, after which the NYSE was shut down for a few months in response to the outbreak of World War I – all the business bashing signaled a relatively good investment opportunity.  When the old 12-stock Dow Jones Industrial Average was tabulated for the last time on September 30, 1916 it had eclipsed its January 1906 peak by over 50% and more than doubled its WWI low.  Once replaced by the modern Dow, it pushed yet higher.

Conclusion

Whenever public opinion or government action is suddenly directed at a trend that’s supposedly allowed a societal segment or individual company to amass too much power, that trend is likely all but finished.

As for the Occupy Wall Street contingent, one gets the feeling that 12 years ago much of this crowd would have been sitting at home day-trading.

We’ll likely see some form of legislation or increased taxes on the “wealthy,” but I suspect the massive income inequality that President Obama recently termed “the defining issue of our time” in a speech at Osawatomie, Kansas would have probably diminished on its own.

Anti-Wall Street sentiment invariably tends to arise in the midst of persistent economic or stock market malaise.  History has shown that such conditions don’t last forever.  While prices could consolidate further or retrace more of their considerable rally from the March 2009 lows, stocks figure to provide attractive returns over the next several years.

Obviously the intent was to prod listeners who’d missed out into buying.  But the message may have unwittingly provided the best argument for staying on the sidelines or even selling or selling short.

The last time gold powered substantially higher over the course of a decade or so was in the 1970s, when it surged from $35 an ounce to $850.  As in 2008, the yellow metal endured a jarring cyclical bear market during its long rise, getting nearly cut in half in a span of 20 months after temporarily peaking at the end of 1974, on the eve of Americans regaining the legal right to own gold bullion for the first time since 1933.

By January 1980, when prices finally topped, a plethora of theories abounded purporting to not only justify gold’s previous steep climb, but explaining why it was sure to hit $3,000 an ounce or above.  The investment offered a crisis hedge, a reliable store of value, and a growing crowd of hard-money adherents vociferously maintained that spendthrift governments would never summon the political will necessary to rein in spiraling inflation.  Yet gold began a long slide, eventually sinking to the $250 range within a couple of decades.

Silver, traditionally the more volatile precious metal, had surged even more than its pricier cousin, rocketing from less than $1.30 to over $50 an ounce beginning in October 1971.  It subsequently collapsed to lose 93% of its value and has never again matched its 1980 record.  In fact, commodities in general defied bullish expectations by following their splendid 1971-80 performance with a bear market lasting almost 19 years (Figure 1).

The latest example of a commodity to draw widespread public attention (and consternation) as a result of a stunning price jump was crude oil.  Crude had run into stiff overhead resistance around the $40-per-barrel mark in both 1980 and 1990, and by 1998 had slumped back to $10-and-change.  Then the fuel launched a spectacular advance that catapulted it toward the $150-a-barrel level by July 2008.  As with gold, a brief cyclical bear market interrupted the party into early 2007, but couldn’t prevent prices from roughly tripling across the next year-and-a-half.  Not surprisingly to students of market history, oil then promptly plunged some 78% amid the global financial panic.  To the dismay of motorists, crude has bounced back considerably from its late-2008 lows, but has been unable to approach its former top, lagging behind other raw materials like cotton, corn and various metals that successfully attained new all-time highs.

While oil prices floundered through the late 1990s, the longest-ever bull market in U.S. equities was in full swing, led by an assortment of large-capitalization technology stocks like Microsoft, Intel, Dell Computer and Cisco Systems.  The tech-heavy NASDAQ 100, an index of 100 of the largest non-financial companies listed on NASDAQ, exploded to an incredible 28-fold gain in 9 ½ years between October 1990 and March 2000.  After the dot-com disaster it fell 83% and now, almost a dozen years later, still trades at less than half its high-water mark.

The NASDAQ’s woes remarkably parallel the famous boom and bust in Japan’s Nikkei Dow that began a decade sooner (Figure 2).  Of course, there’s nothing magical about the 10-year figure.  The historic 1920s bull market, which led to the 1929 crash that ushered in the Great Depression, lasted little more than eight years.

Conclusion

Legendary market historian and trader W.D. Gann, who was fond of saying that “Time is more important than price,” carefully defined the respective intervals, or “time periods,” characteristic between major turning points in a multitude of individual commodities and stock indices.

The important thing is to be strongly skeptical of any sustained move up that persists for several years or more and carries prices far above the long-term trend, regardless of any information cited by pundits to rationalize its continuance.

If so, maybe you shouldn’t feel so bad. Because despite the Harvard MBAs and fancy suits, you may have noticed that these guys don’t always show the best judgment when it comes to making funds available for profitable use.

Everyone of course knows about the housing bust. Reckless mortgage lenders, arguably under pressure from a politically-motivated Congress and federal government, completely abandoned sound underwriting standards to generate millions of risky subprime loans, many of which were securitized or sold to government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. Home prices boomed with help from the Federal Reserve’s easy monetary policy of 2002-04 and then cratered, leading to a rise in defaults that threatened the global financial system and largely left taxpayers on the hook.

The episode was eerily reminiscent of an 1830s real estate boom that also ended in disaster. Back then, leveraged speculators found bankers all too willing to accommodate them as they eagerly snapped up (mostly Western) land sold by the government. Banks accepted overpriced land as collateral, issuing paper money based on the inflated values, which was in turn used to buy more land. The result was possibly the worst depression in U.S. history until the Great Depression.

Not surprisingly, unwise borrowing played a major role in that calamity as well, with total call-money or brokers’ loans ballooning from about a billion dollars in the early 1920s to over seven billion dollars worth in the fateful summer of 1929. Big companies like Chrysler, Bethlehem Steel and Anaconda Copper scrambled to get in on the fun, for a while enjoying the best of both worlds as they raked in interest income from eager margin buyers who used the funds to push stocks higher before the crash.

Half a century later, the Federal Farm Credit System, amid the roaring commodity bull markets of the 1970s was happy to add to its outstanding loans that totaled less than $20 billion as late as 1972, but by the middle of the disinflationary 1980s was seeking a federal bailout for a $74 billion portfolio that went bad after the price of farmland plummeted nearly 50% in some states in the first half of the decade. Around that time the joke in Texas was, “Buy a toaster and get an S&L (savings and loan) free,” following crude oil’s wild roller-coaster ride from $3 to $40 and then back down to $10 a barrel that decimated the value of energy and real estate loans in the oil patch.

A Bubble in Treasury Debt

Invariably, the now familiar pattern involves a flood of wide-eyed speculators drawn to a particular asset class by skyrocketing prices and enabled by imprudent lenders, often as politicians and regulators look the other way or actively encourage the process.

But what if the bubble is not in some underlying asset but in the debt instrument itself?

That could well describe the present situation in the Treasury market, where yields almost across the board have plumbed fresh historic depths and where the 30-year T-bond recently surpassed an epic December 2008 nearest-futures high (bond prices move inversely to yields) by more than four points in a frenzy of safe-haven buying (Figure 1). Interestingly, however, despite the 30-year yield plunging to as little as 2.75% on September 23, it has so far failed to match a December 18, 2008 low of 2.52%.

Figure 1: Long Term Interest Rates
* * *

September 23 came two days after the Fed officially announced its well-advertised “Operation Twist,” designed to flatten the yield curve (the spread between long- and short-term rates) by selling shorter-term paper to finance the purchase of $400 billion of longer-term Treasurys. On the surface, this would appear unequivocally bullish for the long bond. Yet in 2008 the yield on 30-year T-bonds somehow managed to bottom just a couple of days after the central bank reduced its Fed Funds target rate from 1% to a range between zero and 0.25%.

In the next classic case of “Buy on the rumor; sell on the news,” T-bonds established an important lower top on August 25, 2010, a mere two days before Fed Chairman Ben Bernanke telegraphed a second round of aggressive quantitative easing (“QE2″) in his annual Jackson Hole, Wyoming speech. Once the Federal Reserve finally confirmed its plans to launch QE2 on November 3, long-term Treasurys acted very poorly for over three months.

Bond bulls like to point to today’s staggering debt load as an impediment to future economic growth that promises to keep interest rates in check for a long time to come. But the last time the deficit got nearly as high relative to GDP (Gross Domestic Product) was in 1946, when long-term interest rates fell to historic lows at the climax of a 26-year bull market in bonds. Anyone who loaned money to the U.S. government back then regretted it later, as rates skyrocketed to unimaginable heights over the next 35 years (Figure 2).

Figure 2: Bonds Nearest Futures
* * *

The 1940s also marked the last instance before the current era when the U.S. government pushed short rates to artificially low levels and kept them there. Then too, many expected the economy to lapse back into recession or depression with the end of the war. A flattening of the yield curve – as the Fed is now attempting to bring about – preceded the concluding depths in long-term rates.

With stock and commodity markets on the ropes, Treasurys could continue to benefit for a good while. The financial landscape is littered with the bodies of fund managers and pundits who prematurely tried to call an end to the secular bull market. But the downtrend in rates was over a quarter-century old in 1946 as well.

Investors in September 1981, when interest rates on long-term bonds subsequently peaked in the mid-teens during a third straight year of double-digit inflation, would have been incredulous at the thought that people would rush to loan money to the federal government at less than 2% for 10 years or 3% for 30 years. Anyone doing so now has had 30 years to lock in a better return while still looking forward to rising bond prices.

Nevertheless, the VIX on August 8 rose almost as high as it did during July 2002, on the way to that year’s climactic October bear market low; in September 2001, in the wake of the destructive terrorist attacks of 9/11; or amid the Asian Crisis of 1997 or the Russian debt default and subsequent collapse of the Long Term Capital Management hedge fund in 1998.

Although the market has rallied significantly since early August in volatile trading, the jury is still out on whether we’ve yet seen a final bottom.  Drops to new lows in the stock averages after sudden deep selloffs or outright crashes are hardly unusual, with the most notable example being 1929-32.  A March 2009 trough that followed the 2008 panic was merely the latest:

Probably the best known and most dramatic instance of a crash that didn’t later result in lower lows took place in 1987.  If you were among the intrepid few who bought aggressively near the close on October 19, 1987 (“Black Monday”) or around the next day’s depths and held on afterwards while pundits waited for the other shoe to drop, congratulations; you looked as prescient as you were brave, after the Dow ran up eightfold in the next 20 years.  But you could have done even better by remembering one simple rule: spike lows rarely lead to sustainable V-shaped recoveries.

This means that if you’re fortunate enough to successfully pick a bottom, you likely have nothing more than a potentially lucrative short-term trade rather than an investment worth holding for a durable advance.  Accordingly, you should generally act quickly to take profits in such cases, and then await a better opportunity following a substantial retracement.

New Video: What Are the Implications of the Overbought Condition in Gold and Silver for Investors and Traders?

In this Exclusive new video, we analyze the historical position of Gold and Silver using price data back to 1968 and 1858, respectively. You will see how the 47% advance in Gold between January 28, 2011, and Sept 6, 2011 compares to every historical advance in Gold Prices.You’ll get to look over my shoulder as I conduct our proprietary forensic analysis of these markets, and provide you with our projections. WATCH THE NEW VIDEO NOW >>

Secondary Lows

In 1987, a two-day 17% post-crash jump in the blue-chip Dow Jones Industrial Average was all but dissipated by early December.  No sooner did the Dow fully erase that setback than it again gave back most of its aggregate gain in a couple of weeks in January 1988 (Figure 1).

The Dow this summer has already surrendered the bulk of its accumulated rebound on a pair of occasions since early August.  Yet it would not surprise us to see further serious backing-and-filling going forward.  Such behavior can continue for several weeks or months.  In 1998, a vicious 19% Dow correction concluded with a 512.61-point single-day rout at the end of August, but a modestly higher Dow bottom in early October coincided with a fresh intraday low in the benchmark S&P 500 (Figure 2).  In 1997, the NASDAQ Composite bottomed on Christmas Eve, two months after a culminating 554-point October 27 Dow plunge had triggered trading curbs put in place in response to the panic a decade before, shutting down the NYSE for the first time.  The 2002-03 bottoming formation featured an October nadir and a slightly higher March 2003 low.

This is why the great market historian and trader W.D. Gann steadfastly maintained that the lowest-risk point to enter a market for big gains on the long side is at or near a so-called “secondary,” or higher bottom.

Figure 1: Dow Jones Industrial Average 1987-88

Figure 2: 1998 S&P 500

Rallies Broaden Out

In virtually every precedent we’ve cited, the broad market, as measured by the NASDAQ or other indexes, hit its final low well after the large-cap Dow.  On the way down, people wishing to reduce their exposure must sell what they can.  Often, that leaves only the biggest and most liquid names.  On Black Monday, many market makers for OTC (over-the-counter) stocks wouldn’t even answer their phones.  That left no choice but to sell (and artificially depress) blue chips, which were subsequently the first equities investors felt comfortable tiptoeing back into.  So on “Terrible Tuesday,” as the Dow began to snap back from the prior session’s once-unimaginable 22.6% meltdown by surging a then-record 102 points (almost 6%), the NASDAQ Composite actually suffered its greatest-ever one-day absolute loss.

Once the smaller and more speculative issues bottom out, however, they typically offer the best returns.  We may be witnessing such a pattern here.  Since last month’s respective closing lows, the tech-heavy NASDAQ 100 had nearly doubled the Dow’s 6-½% gain through September 15 in a shorter period of time (Figures 3 & 4).

Figure 3: NASDAQ 100 Cash

Figure 4: Dow Jones Industrial Average Daily

* * *

Conclusion

If you must try to pick a bottom in the midst of a panic, focus on the biggest, most liquid stocks.  Be quick to take profits, and then wait for either new lows or a secondary low.  Once the secondary low is in, you can turn your attention to broader indices or individual issues offering the best growth prospects.

Also, beware of overextending yourself in excessively correlated positions because you may not be as diversified as you think.  For example, with Treasurys widely viewed as a safe haven, if you’re wrong on one half of a long-stock/short-T-bond position, you’re likely to be wrong on the other.

New Video: What Are the Implications of the Overbought Condition in Gold and Silver for Investors and Traders?

In this Exclusive new video, we analyze the historical position of Gold and Silver using price data back to 1968 and 1858, respectively. You will see how the 47% advance in Gold between January 28, 2011, and Sept 6, 2011 compares to every historical advance in Gold Prices.You’ll get to look over my shoulder as I conduct our proprietary forensic analysis of these markets, and provide you with our projections. WATCH THE NEW VIDEO NOW >>

• Stock Market Indices (Equities)
• Bonds/Treasury Notes (Debt Instruments)
• Overall Commodities (Tangible Assets)

What’s Next for the Stock Market?

In this video we analyze the historical position of the Stock Market using data back to 1886. You will see how the recent decline in the S&P 500 compares to every historical correction in stock prices.You’ll get to look over my shoulder as I conduct our proprietary forensic analysis of these markets, and provide you with our projections for each.

You will see how the “Great Cycle” (discovered by WD Gann) has been dictating and dominating what has taken place over the past decade during one of the great wealth building periods of all time, as well as one of the greatest bust cycles in history.

A primary focus of this video is to show you our current projections for these 3 major asset classes (Stocks, Bonds, and Overall Commodities), as well as present the current high reward opportunities that exist right now.

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The above no doubt has a familiar ring to it, but actually refers to the state of the petroleum industry in 1885. Someone apparently believed it, though; author Daniel Yergin wrote in his riveting 1991 book, The Prize, that one high-ranking executive of John D. Rockefeller’s Standard Oil was so panicked by the dour assessment that he rushed to sell his shares in the fast-growing company at 75 to 80 cents on the dollar out of fear the business would soon be obsolete.

In the ensuing century and a quarter, the planet has supposedly been on the verge of running out of crude several more times. A few years ago, talk centered on “peak oil,” the point where global extraction reaches its maximum, after which it begins to fall off, never to revisit the highs. The International Energy Agency now says that conventional crude oil production likely peaked in 2006. Though not a new concept (geophysicist M. King Hubbert used the model in 1956 to correctly predict that U.S. oil production would peak in the late 1960s or early 1970s), the theory of peak oil was often cited during the last decade to justify a secular (long-term) bull market of unprecedented scope that lifted crude more than 13-fold in less than 10 years, from little above $10 a barrel in 1998 to over $145 in early July 2008 (Figure 1).

Figure 1: Monthly Crude Oil 1998-2008

Investors by then should have been more concerned with peak prices than peak oil. By late July 2008, despite widespread forecasts that $200 a barrel was a foregone conclusion, the September crude oil contract had already “overbalanced price” (significantly exceeded the extent of its greatest prior pullbacks during the uptrend), as shown in Figure 2. A price overbalancing, a favorite tool of legendary trader W.D. Gann, frequently offers the first reliable indication of an important change in trend.

Figure 2: September 2008 Crude Oil

Crude prices plummeted nearly 80% to the low $30s before the end of 2008, as demand slumped due to a severe worldwide recession. No one came out at the top to announce that the alleged supply shortage, exacerbated by rapidly rising consumption in developing countries like China and India, was about to be rectified. Although commodity markets boomed for over two years following an early-2009 bottom, crude oil has yet to approach its 2008 record.

Silver in the 1970s

Throughout a fantastic decade-long advance that saw the metal easily outperform gold’s almost 25-fold price increase into 1980, silver bulls loudly and repeatedly trumpeted the fact that consumption – for coinage and industrial use – annually outstripped total supply by a wide margin. After January 21, 1980 silver lost $10 in a day from a still-standing all-time high in excess of $50/oz. By late March the price had crashed to $10.80 on the way to a final low of $3.50 in the early 1990s. Only this year did silver again make a run at the $50 level.

If precious metals continue to add to lustrous gains racked up since 2001, expect to hear an intensifying chorus of pundits asserting that miners can’t possibly keep up with burgeoning demand from ETFs (exchange-traded funds) and various central banks seeking to diversify their reserve holdings into gold and out of a sliding dollar and other paper currencies.

Can There Ever Really be a Shortage of Stocks?

It can take years to bring a mine or an oil well online, but you’d think that with a ready supply of entrepreneurs waiting in the wings to go public and instantly fulfill lifelong dreams of vast riches it would be hard to ever witness a genuine shortage of stocks. Yet a common explanation invoked to rationalize the surging equity prices and stratospheric P/E ratios that prevailed for most of 1987 pointed to a prodigious flood of leveraged buyouts, corporate mergers and stock buybacks that far outran new stock issuance. Even some of the largest corporations were considered “in play” as the sheer amounts of money involved in many deals reached heights once unthinkable.

Economist Gary Shilling has said he first heard the idea of a stock shortage promoted in 1967, the year before the start of what then ranked as the worst postwar bear market. The result in 1987 proved similar. The blue-chip Dow Jones Industrial Average nosedived a single-day record 22.6% on October 19, 1987 (“Black Monday”), climaxing a cumulative eight-week, 36% swoon in the worst crash since 1929. The numerous “deal stocks” fared even worse, collapsing about 50% as a group as takeover premiums vaporized along with available financing. At the bottom, a bustling junk-bond market completely dried up and banks were too scared to lend.

As usual, the bloodletting began with an overbalancing, this time in the benchmark S&P 500 index, which in September 1987 took its biggest tumble since the start of the recently completed five-year bull market. A sharp but brief secondary, or snapback rally that followed provided the last good opportunity for traders to get out relatively unscathed.

Conclusion

There’s a saying on Wall Street that “News follows price.” Too often, information of a purported shortage emerges belatedly in an obligatory effort to explain a previous runup in prices that has already fully discounted any legitimate supply shortfall. While frothy markets destined for blow-off tops have a way of confounding skeptics, speculators are advised to play such moves with one foot out the exit, if at all.

Instead of buying into the hype, investors should wait for the unavoidable steep break in prices before buying.

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Alfred Winslow Jones is widely credited with launching the first “hedged fund” back in 1949.  Unlike many of today’s massive, highly-speculative vehicles targeted toward wealthy investors, Jones’ fund really did hedge.  For instance, he might buy Ford while selling short General Motors.  Because the aggressiveness and leverage employed by modern hedge funds can make them vulnerable to forced-liquidation orders, the holdings of large traders (funds and CTAs), as reported weekly in Commitments of Traders data from the CFTC, are typically regarded as a useful contrary indicator.  Once the biggest speculators have already bought, who is then left to buy?

Hedge Funds, Silver and Other Commodities

A Bloomberg article published at the end of July noted that “Hedge funds and other money managers” increased their net-long position in 18 commodities to a six-week high.  That perhaps should come as no surprise, given that a sharp stock rally late in the month that briefly brought the Dow to within less than one percent of a new bull market peak also helped lift commodity prices.  The article specifically mentioned that “Silver holdings rose for a fourth straight week, and bullish sugar bets climbed to the highest since February 2010.”

October sugar plunged 16% from its contract high in two weeks after July 25.  September silver pushed higher to August 4, but slipped to a nearly four-week low just five days later.

Interestingly, a Bloomberg survey at the end of June disclosed that most analysts and traders expected silver to make a full recovery and trade back near $50/oz. before the year is over.  In 160 years, there has never been a bull market correction in silver as severe as the 35% decline from April 28 to a May 12 bottom (Figure 1).  Declines of this magnitude have always indicated a bear market.

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Figure 1 Silver Nearest Futures

Mutual Funds and T-Bonds

Back in May 1975 when he oversaw only $20 million, a flattering Wall Street Journal feature story on now legendary hedge-fund titan George Soros and erstwhile partner Jim Rogers said of the pair, “They generally ignore stocks widely held by the major mutual funds, bank  trust departments and other institutions – except as short-sale opportunities.”

As recently as 40 years ago, a national survey revealed that two-thirds of Americans had never even heard of mutual funds.  That figure changed dramatically when the fund count exploded tenfold during the historic secular bull market in securities between 1982 and 2000.  By the end of that period the quantity of mutual funds, at more than 8,300, exceeded the total number of stocks listed on the three major U.S. stock exchanges.  Naturally, the funds drawing the greatest buzz (and cash inflows) focused on red-hot technology issues, particularly the once high-flying dot-com sector.  The category predictably imploded, and over a decade later the tech-heavy NASDAQ Composite Index trades at roughly half its March 2000 record.

So What Area Are Fund Investors Piling into These Days?

Continuing a four-year trend, individual investors in the week ended August 10 pulled money from stock mutual funds at the fastest pace since 2008.  Since the financial crisis, individuals have generally avoided stock funds like the plague and instead poured unprecedented amounts into bond funds in a supposed flight to safety.

Figure 2: Bonds Nearest Futures

As equities tanked in early August, the yield on the benchmark 10-year Treasury note hit all-time lows, approaching 2%.  Yields on shorter-term Treasurys also touched record lows as the Federal Reserve pledged to keep interest rates near zero through at least mid-2013.  And prices for 30-year T-bond neared a monumental top logged amid the darkest days of the 2008 panic (bond prices move inversely to yields), as shown in Figure 2.  It’s a far cry from the double-digit yields of 1981, when rampant inflation and an unaccommodating Fed sent rates soaring well into the teens.

The current extreme volatility in stocks presents significant risks as well as opportunities.  But it’s arguably more dangerous to jump on a 30-year-old bandwagon in a misguided escape effort, especially if few well-heeled prospective ticket buyers remain to join in on the ride.

The Big Picture Delivered Once-a-Month

Every month, James Flanagan gives you a unique view of the markets through the lens of history. The repeating trends, patterns and cycles throughout history are evident in every area of life and you see where these are playing out in the financial markets in our Flagship monthly publication. ORDER NOW AND SAVE 25%

Certainly the results looked impressive going as far back as the 1970s.  The era since 1973, which marked the ascendancy of OPEC, has featured a number of oil shocks, starting with that year’s Arab oil embargo that quadrupled the cost of crude oil in a few months, leading to a brutal second leg down in the worst bear market in stocks up to that point since World War II.  In 1979-80, the Iranian Revolution and Iran-Iraq War spurred oil’s first flirtation with the $40-a-barrel level and helped plunge the U.S. economy into recession.  The Dow Jones Industrial Average was unable to hold above 1,000 until the end of 1982, with commodities by then in the initial stages of what would prove to be a nearly 20-year bear market.  Crude Oil Prices pushed to $40 again in October 1990 following Iraq’s invasion of Kuwait, topping on the same day the Dow bottomed.  Most of Wall Street’s spectacular bull market advance of the 1990s, including a 1,451% explosion in the tech-heavy NASDAQ Composite Index, unfolded as crude oil prices suffered a long slide to $10.80 per barrel in December 1998.

The familiar pattern of stocks and commodities moving in opposite directions appeared intact as recently as mid-2008, when $147-a-barrel crude helped squeeze the last signs of life out of consumers already reeling from heavy debt loads, a weak jobs market and sagging home values.  By September of that year, the recession and housing collapse led to the worst financial crisis since the Great Depression.

Investors who thought they had diversified instead found there was nowhere to hide, as commodity prices not only racked up losses even greater than the eventual 57% in the benchmark S&P 500 in an even shorter timespan, but plummeted faster – 66% in little more than seven months, as measured by the energy-heavy Goldman Sachs Commodity Index – than at any time in their long trading history, which for some commodities dates back centuries.

While the extraordinary depth of that commodities crash was admittedly an aberration, a positive correlation between stock and commodity prices has been quite the norm for hundreds of years.  The same factors that impact the stock market (the economic outlook, interest rates) also drive demand for raw materials.  As shown in the figure, the stock/commodity ratio, based on the relationship of a couple of key indexes we’ve tracked back to 1790, confirms that stocks have indeed hit some important lows relative to commodities in the midst of depressions (1842, 1857, and 1932), but this was simply a result of securities prices falling more steeply.

The Big Picture Delivered Once-a-Month

Every month, James Flanagan gives you a unique view of the markets through the lens of history. The repeating trends, patterns and cycles throughout history are evident in every area of life and you see where these are playing out in the financial markets in our Flagship monthly publication. ORDER NOW AND SAVE 25%

In fact, whenever a climactic low appears in commodity prices, the stock market can’t be far behind.  The greatest buying opportunities of the 20th century in equities (1921, 1932/33, 1949 and 1982) invariably materialized within approximately two months or less of significant commodity lows.  It should therefore come as no surprise that most major stock and commodity indexes bottomed in the first quarter of 2009.

What’s Ahead for the Current Stock Market and Overall Commodity Prices?

The correlations observed between stocks and commodities during the recovery since 2009 represent some of the highest on record, with the two asset classes frequently trending in virtual lockstep.  Prices for both peaked in late April, but even some of the most economically-sensitive commodities have encouragingly avoided slipping to subsequent new lows in early August despite blue-chip stocks enduring their longest daily losing streak since the dark days of October 2008.  Does this signify the start of the long-awaited decoupling, or will breaking up again prove hard to do?

The only previous bull markets to immediately arise, like this one, from the ruins of a brief yet massive bust in commodity prices (1921 and 1949) each saw commodities fizzle after a few years while stocks continued to surge.

It’s not difficult to picture such a scenario unfolding here, as long as the stock market can escape with nothing worse than a mere correction.  If the hoped-for soft landing in China turns bumpy, commodity prices could suffer badly.  Meanwhile, Europe’s persistent sovereign-debt crisis and stubbornly high U.S. unemployment should keep the Fed printing money in quantities sufficient to fuel an equities boom.

Conclusion

So what conclusions can we draw based on patterns in stocks and commodities over the past few years?

1. This whole episode underscores the considerable advantage of painstakingly gathering and maintaining over 200 years of comprehensive market data, as we have.  Legendary trader W.D. Gann emphasized that you can never have too much information when it comes time to risk your hard-earned capital.  Unlike professors and pundits who relied solely on recent experience or ignored everything prior to the advent of widely-accessible computerized databases in the last 50 years, we knew that stocks and commodities often move together, sometimes dramatically so.
2. Investors counting on a commodities component to smooth out portfolio gyrations in periods of turmoil are probably far less diversified than they think, especially during severe recessions or depressions, and at least at the outset of the sharp recoveries that inevitably follow.
3. Although the Great Depression and World War II combined to wipe out more than a half-century’s worth of gains, equities still registered an 800-fold increase relative to commodities in the 200 years from 1796 to 1999, doubling roughly once per generation as illustrated by the accompanying chart.  In the extreme long term, commodities clearly can’t compete with the vastly superior real returns provided by the stock market.

The Big Picture Delivered Once-a-Month

Every month, James Flanagan gives you a unique view of the markets through the lens of history. The repeating trends, patterns and cycles throughout history are evident in every area of life and you see where these are playing out in the financial markets in our Flagship monthly publication. ORDER NOW AND SAVE 25%

The meteoric rise attracted intense interest from short sellers, to whom Ryan had acted as principal lender, but in the end he controlled almost all the stock, and thus found himself in position to dictate terms.  Or so it seemed.  On March 31, 1920 the governors of the New York Stock Exchange suspended trading in Stutz and declared short contracts void – not surprisingly, since they comprised most of the shorts.  They soon relented on the contract voidance amid public pressure, leading to a $550-per-share settlement.  But the victory proved Pyrrhic.  Forced to cut product prices in the raging early ‘20s deflation, and with no ready market for his de-listed shares, Ryan had no choice but to file bankruptcy.

Silver prices also collapsed in 1920, after soaring as high as $1.375/oz. in the post-WWI inflation on November 25, 1919, before eventually hitting a critical low of 25 ¾ cents on February 16, 1931, on the way down to near 24 cents at their Great Depression trough on December 29, 1932.  Sixty years later, history repeated.  The metal sank to an important interim low of $3.50 on February 22, 1991, within six days of the February 16 anniversary date, only to finally bottom on February 22, 1993, less than two mere months after the 60th anniversary of the bear market’s end.

So when Nelson Bunker Hunt, son of Texas oil billionaire H.L. Hunt, tried with his brother Herbert to corner the silver market in early 1980, it was as though he reached back six decades to concoct the most suicidal mix of investment strategies possible.  On January 21, 1980, within two months after the 60th anniversary of its historic 1919 peak, silver topped $50 an ounce.  That day, the board of the New York Commodities Exchange (COMEX) announced trading would be limited to liquidation orders only, averting a delivery squeeze and effectively putting an end to speculative futures buying.  Prices fell $10 the next day.  On March 27, 1980, after the Hunts failed to meet a margin call, silver plunged 50%, to $10.80.  It was subsequently disclosed that COMEX board members held short contracts on 38 million ounces worth $1.88 billion at the top.  The Hunt brothers lost a couple billion dollars, and Nelson Bunker Hunt would ultimately declare bankruptcy.

The Big Picture Delivered Once-a-Month

Decennial Cycles

The concept of recurring decennial market patterns is not new.  English economist William Morton Halbert, in his 1878 publication, “An Exploration of Economic and Financial Science Based upon a Cycle of the Seasons in Each Decade,” stated that, “Each decade in its parallel years presents many commercial phases almost alike, if not indeed identical, this, too, even though commerce has made such gigantic strides and progress during the last 50 years, and financial science has grown up as a great and vital system.”

At the same time, in the United States, W. Stanley Jevons (one of the earliest cycle researchers) also observed that depressions occurred at regular intervals of about 10 years. It was his original work that prompted Edgar Lawrence Smith in the first half of the 20th century to cut a stock market chart in ten-year segments and place them one above the other to see if there was a recurrent sequence (The period 1911-1920 would be placed on top of 1901-1910, etc.). From this he developed the theory that a “decennial pattern” existed, with stock prices duplicating structures seen in previous decades.

The “Great Cycles” and Current Markets

Legendary market historian and trader W.D. Gann found that certain decennial time cycles, specifically the 60- and 90-year cycles, exert a more profound influence.  Accordingly, he designated these “Great Cycles.”

The price curve for general commodities over roughly the past 30 years forms a remarkably close fit to the 60-year cycle precedent. The 60-year Cycle pinpointed the 1980 derailment of commodity prices based on the 1920 bust, even as pundits trumpeted the inevitability of $1,000/oz. gold and $100-per-barrel crude oil a generation too soon, and also successfully forewarned of the epic 2008 disaster, as well as nailing historic lows in 1999 and 2009.

Both the 1949 and 2009 commodity index lows foretold climactic bear market bottoms in stocks that arrived within two months.  In each case the venerable Dow Jones Industrial Average then rallied sharply for 13 ½ months before staging a deep correction (-13.54% in 1950, and -13.55% in 2010) through mid-year almost identical in size to its counterpart from another era.

Experience has taught us to remain flexible rather than demand rigid adherence to precise anniversary dates, but sometimes the cycle dates prove exact.  Last year’s August 25 peak for long-term Treasurys perfectly matched a 1950 multi-year top.  T-bonds haven’t approached their summer 2010 highs since, despite the Fed’s intervening purchase of a massive $600 billion worth of government bonds (“QE2″).  It seems the impact of the 60-year Cycle can overwhelm even supposedly strong bullish fundamentals.

Right now, the 60-year Cycle remains extremely relevant to bonds and, with added reinforcement from the 90-year Cycle, points to a surprising course ahead for stock and commodity prices.

Given the established seasonal tendencies of many commodities and widespread attention paid in academia to the stock market’s so-called “January Effect” – both indisputably postulate a one-year Cycle – it’s perplexing why longer cycles don’t receive more credence.

As long as the markets persist in closely tracking the 60-year cycle “Great Cycle,” students of cycles will continue to enjoy the upper hand.

The Big Picture Delivered Once-a-Month