Gann Global Financial

The markets have progressed according to plan in one sense. In terms of the trend, we turned bullish approximately four months ago.  As commodities were putting in their lows, the stock market (S&P 500) pushed up through the 800 level. So the expectation had been that in the aftermath of this historic bust cycle that stocks and commodities would bottom at approximately the same time because that is what occurred in 1920, 1932, and 1948, and 1974.

We knew from history with bust cycles that there is wide-spread sell-off deflation in both equities and in commodities and that is indeed what took place this time, so the lows having been established, the commodity lows in February and the stock lows as of March 6th, the markets are progressing in what had been expected which is bull markets.

In looking at the S&P 500, this covers the bear market from 2007 to March 6th low. The overall decline was 58% which ranked as the second greatest bear market in history after the Great Depression decline, but there were many, many markets that have declined approximately 50% so essentially we’re in the category of those markets.

The violence of the decline that we had experienced on the way down was more akin to some of the legs down during the Great Depression, but we also experienced great panics during other historic precedents in history as well.

Depressions or Dislocations are Part of U.S. Financial History

Panicky conditions banked dislocations are part and parcel of financial history.

What we have on this chart in the aftermath of the low, we had made projections as to what the combined first and second leg up would look like if we replicated the great bear markets in history.

You can see that based upon the first and second legs up the 1908 market, which was in the aftermath of the 1907 panic, the first two legs up carried prices towards what would be, in our market, over the 1300 level and does so approximately December 1st. You can see it down here.

We can look at each of the other bull markets, 1938, which followed the panic of 1937 which was a post-depression depression is what they called it.

You can see that the first and second legs up combined would carry prices up to approximately the 1150 level and do so towards the second week of October. That is the first of the precedents to top, so you can see that our advance, and having experienced a swing high on June 5th, a corrective low on July 8th, we are in the second leg up in this bull market.

Based upon these historic precedents we would expect that the market has a very good chance of at least hitting what would be the minimum objective based upon these historic precedents, but you can see in the aftermath of the 1903/1904 bull market that it was the most aggressive of the bull markets.

In 1974, these were the first two legs up after the descent decline into October/December of ‘74. In 1921, a very interesting precedent in that that was the bull market that took place in the stock market in the aftermath of a very similar bust cycle to ours in both stocks and commodities.

The 2003 market, we’ve lived through that, the first two legs up after the 2002 low in October, you can see that the angle of ascent was more muted than these five instances; and in 1933, that was in a category of its own.

What we have is what we would expect, that this market is going to move higher from here. What I had hoped is that this correction is going to be more severe than what we had experienced, and in light of what had taken place as the market experienced a very abbreviated correction pushing to new highs, we turned bullish.

Bullish Stock Market Forecast From July

Let me read our comments from back in July. This was a little bit over a month ago. This would have been as of July 20th, so just coming off of this low on July 8th. I said, “At the completion of this projected correction, given the price patterns at 952.5 and 928.20, the odds would have favored the market moving up and through these highs with momentum, so I don’t rule out this market being in a strong position.

“I had hoped that this correction would be more severe but as the market pushed up through these highs, pushing through this first this high at approximately 928.20 and then basis the nearest futures 957.20, basis 952.5, I believe that that was the spot contract or the cash.

“At any rate, the expectation that once these highs were broken that should provide additional momentum to the upside and that has been borne out by the trade. This past week we exceeded the highs.”

This was written on July 25th so as we were pushing through these highs. “This past week we exceeded the highs of the first leg up in our projected bull market. This is the next confirmation that the bull market is in force. On this basis I recommend you enter long investment positions given the relative strength in the tech sector, NASDAQ 100. Your portfolio should be weighted significantly in favor of this sector. Note: S&P 500 trading at 979.”

Stock Market Investment Positions

Essentially, with the S&P 500 trading at 979, that’s when we issued this buy signal in the NASDAQ. For investment purposes we had recommended subscribers to exit all investment positions when the market broke the first leg down in the bear market. That was at this point that you’re seeing in this broken line here.

We side-stepped the entire financial crisis. The market has been quite impressive to the upside, but again, it is doing what bull markets do in the aftermath of the largest declines in history, bear markets.

So, repositioning our buy orders here we essentially exited investment, re-entered investments at 22% below where we had exited. Since then, as of Friday at 10:27, we have pushed and we’re up about 4800 points from where we entered, about 5%.

My expectation, and what we’ve been telling subscribers, is that there is going to be a major correction in this market at some point in time; but based upon the history of these precedents, if we follow them we still should be in a pretty strong position at this point in time. That would be the expectation and the probabilities.

Looking at the cash S&P 500, a number of comments that we made “Having just bottomed on July 8th, we are in what would historically be the early stages of this leg up.” This was written on July 25th. Given our projection for this being a second leg up in a bull market, the odds favor the time period of the advance being at least two months in duration.

Stock Market Video and Charts

That’s a low-ball number, two months. That would carry us to September 8th as a minimum to the upside. You can see that our high thus far has been August 28th so the market has progressed. I’m reviewing comments that we made to subscribers so that you can follow along on what our rationale was in the going.

The green arrows on the charts (see video) indicate a major buy signal being given on the rally over the January 6th and June 11th highs, so when we exceeded this high in June we experienced a pull-back correction. The push to new highs issued a major buy signal for ourselves.

The last observation here as we are approaching the violent short covering rally on October 14, 2008, you can see we hit 1039.44; the October 14th high, 1044.31. A hop and a skip to exceeding what had been that violent two day rally.

We are regaining as we move higher, and in aggressive fashion we are regaining the dramatic losses that were experienced in the implosion in the preceding bear market.

NASDAQ Investment Positions

In looking at the NASDAQ, as noted, we recommended that subscribers weigh themselves heavily with the NASDAQ with the long side of the market. You can see that as of August 28th we’ve almost regained the bottom of the first leg down in the bear market.

The March 17th low, 1668.57, 1668.01, so this is the strong sister index, the tech sector. That shouldn’t surprise us. One of the things that we don’t know about the future is just how revolutionary technology is going to be, and that can drive stock prices higher.

What we do know is that we want, in entering the markets, to go with the strong sister, so to speak. Go with the indices that are showing the greatest strength, and the NASDAQ has been doing that. Therein lays our recommendations for subscribers to weigh their portfolios in favor of the tech sector.

The comment that we made this past Friday, August 28th, “The NASDAQ 100 continues to put on an impressive display. Notice the October 14th high at 1479.99 which was exceeded in early June. This is the high which we stand on the threshold of in the S&P 500.”

You can see that that violent two day short covering rally, dropping back to the S&P 500, which we are approaching as we speak, we actually exceeded that in the June run, and the correction we’ve left that far behind. This index is the strong sister.

Commodity Trading and Analysis

In looking at commodity prices, this is very interesting. What we have posted here are the advances which took place in commodity prices in the aftermath of the major bust cycles in 1920, 1949, 1974. We also had a bear market rally in the 1980s.

We’re not seeing as aggressive of an advance as we’re seeing in the stock market, that’s not surprising. We did push to a new high above the June 11th high, incrementally, without follow through to the upside.

A couple of observations I believe are in order. Basis the cash GSCI, Goldman-Sachs and the cash CRB, we fractionally exceeded the June 11th highs. The decline we’ve experienced, if followed by an advance to the new highs for the move, would be very healthy in correcting the overbought conditions in the markets.

If this occurs and the uptrend is resumed, it could result in my giving buy recommendations on the second breakout to new highs. We are watching these highs very carefully basis the Goldman-Sachs and the CRB index.

If this is a second leg up in an overall bull market, the one month advance does not conform to historic norms of what we would expect on either a percentage or time period basis. It is too abbreviated. That was as of August 18th.

Commodity Bull Market

This hardly qualifies as a completed leg up in a bull market, but if there’s backing and filling here, that would be healthy for the markets. Some of the markets are in an “overbought” condition having come a long way; the copper market, the crude oil, gasoline, and so on.

The final comment from last Friday, “Given the continued strength in the stock market and our forecasts for stocks and commodities moving in tandem, the probabilities favor a continuation of the uptrend in the Goldman-Sachs index.”

Obviously I expect that the probabilities favor that. In terms of long positions though, right now we’ve been on the sidelines in this market. We have a recommendation that did go off in the wheat market today, Monday, and there is a posted video that you can look at with regard to the background for the trade that we have provided for subscribers.

Choosing The Strongest Commodities to Trade

We are definitely looking at the different commodities, individual commodities, determining which ones are in the strongest position, which are in the weakest position, and the wheat market is in a fascinating position right now.

Looking at the crude oil, it has very much parroted the Goldman-Sachs index since the Goldman-Sachs is weighted by the energy complex.

Crude Oil Analysis

We did push to an incremental new high in the cash crude oil above the June 11th high. We sold off, and as I’m looking at the trade this morning we’re down about $3.00 a barrel. This was the close as of Friday so presumably if we close where we’re trading right now at approximately 10:30am California time on Monday, we would be down $3.00. The market is definitely doing some backing and filling.

Having moved from 30.81 to 72.68, you can see the markets rallied about 130%. That is a very, very sizable move, but not unlike what one would expect based upon history.

The law of action and reaction, the action being the 78% decline in crude oil prices so we are experiencing the reaction to that extreme oversold condition with, of course, the government greasing the wheels as far as the economy.

Moving on to our next chart, which is the gold, a fascinating market for us to be focusing on in that, historically, when we’ve seen bust cycles, the gold has had the potential to act like other commodities during the bust cycle.

However, the market has been holding its own in very impressive fashion so we have, on a technical condition, three lower tops; the March 17, 2008, high having been an all-time high above what had previously been the all-time high of $850 an ounce in 1980. Many of you will remember that.

We pushed to new highs in the market only by about $180. Then we did see the market move down in tandem with the extreme deflation in the stock market along with the energy complex, but this market has, in a sense, divorced itself in certain respects by virtue of not declining on a percentage basis to the degree that one “would expect” given the nature of the decline.

Certainly there was a fear factor that was factored in to the price of gold, but at this juncture if we have an inflationary policy by the government, and we do, then you can have a fundamental argument for this market moving higher.

More important to us is that if we do exceed those all-time highs that could put this market in a very bullish position. At this juncture I’m watching very closely, but this is one of the markets that is going to be weighed in the scales as far as what is to take place in overall commodity prices.

Another market which is very important that we’re watching right now is the US government bond market, the 30-year yields. It’s very important to watch. It’s the other side of the coin of the gold market, in my estimation, so there are many things, many dynamics at work here that could set us in motion for some major plays in the markets.

We’re keeping subscribers apprised of that, and so we invite you if you have not visited our Web site and spent time on with regard to our philosophy, we want you to do that, and we look forward to having some of you as subscribers. We would be privileged to help you navigate these markets.

We want it to flow to the bottom line. That’s what it’s all about.