Dear Daily Pfennig Readers…
It’s our pleasure to be here, filling in for our dear friend Chuck Butler while he’s on vacation.
To introduce ourselves, we’re Mary Anne and Pamela Aden. We write The Aden Forecast letter, and we’ve been happily doing this for 36 years. We cover the major markets, and we’ll be posting some of our articles here.
We also publish Dow Theory Letters. It was founded by the late great Richard Russell and, along with a team of top notch writers, we’ve carried on with his work. Some of these articles will also be posted during Chuck’s R&R.
And finally, you’ll also be receiving articles from GoldChartsRUs, our weekly trading service. Here our top trader covers what to buy, what to avoid, what to do about it and much more.
We hope you enjoy our articles while Chuck’s away.
Chuck’s transition is complete and we’re proud to have him as part of our Aden Group.
Best regards and here’s to good markets,
Mary Anne & Pamela Aden
We’re starting off with some of the most asked questions from our subscribers…
Q: Could the Russian investigation and Trump’s political concerns affect the markets?
A: So far, they haven’t. The stock market has basically ignored what’s happening in Washington and it’s still focusing on other things, like good earnings, the economy and so on.
But a couple of months ago, we got a taste of how this could indeed affect the market. The stock market fell sharply in its worst one day drop in months. The growing concerns in Washington were the main reason why and this is something we’ll definitely want to keep an eye on.
We’ll see… but if so, it’s important to remember that Watergate coincided with a big bear market in stocks in 1974 and a recession. That doesn’t mean this has to fall out the same way but, again, it does warrant caution.
Q: When you refer to a “normal downward correction,” what do you mean? The technical definition of a correction is after a market declines 10% from its high. Less than 10% is an adjustment.
A: These definitions are just something someone made up one day, and in the past decade or so many traders have taken these rules as gospel…
Another one is the definition for a bear market, which is a decline of 20% or more.
This doesn’t really mean anything. A bear market, for instance, could be a decline of 10%, 20%, 50% or more. There are other indicators and tools to use that’ll determine if a market is bearish or not, and not just a 20% decline.
The same is true of downward corrections…they might decline 4%, 8%, 15%… It just depends on if it’s a steep correction or a moderate one. Here too, other indicators will assist in identifying when a correction is over.
Our indicators, for example, are designed to aid in identifying major and intermediate trends, and major changes.
But the numbers should not be ignored. Since so many traders follow this rule, you have to keep this in mind because it will affect sentiment.
Overall, however, all factors need to be taken together in an effort to reach an educated conclusion… at least that’s what we strive to do.
Q: When the VIX is high, the adage is to buy. When the VIX is low, it’s time to go. Does that still apply?
A: Like most stock market rules, this one is not ironclad…
As you know, the VIX index is the fear index. And the general rule is this… when investors are scared and fear is high, it usually coincides with a stock market bottom and you’d want to buy.
On the other hand, when fear is low, it usually means stocks have been doing well and the market’s near a top, so you’d want to sell.
This is not a timing tool and the rule doesn’t always work. This year, for instance, the VIX has generally been low this year, meaning investors have not been fearful, yet stocks have surged upward. So this rule, like many others, can go off the bandwagon for a while.
Q: Many experts are warning of a steep crash. Are you concerned?
A: We’re always concerned when we hear these forecasts. But we also know that many of these experts have been saying the same thing for decades. Yes, 2008 was scary but a total collapse just hasn’t happened.
We know that debt, derivatives, delinquencies, credit growth and several other factors are at worrisome levels, and some are in worst shape that in 2008. Like the subprime problem then, any of these factors could evolve into a wild card, triggering a crisis.
At this point, there’s no way of knowing when this might happen or how deep it could be, but here too we’ll be staying cautious and on the alert.
Q: What was the date of gold’s last C rise top?
A: The last C rise in gold started at the bear market low in December, 2015, and the top was reached in August, 2016. During that rise, gold gained about 30%. It was also the rise that turned gold’s bear market into a bull market.
This year gold has moved up too in a smaller rise we call “A.” But with the U.S. dollar now on the decline, it’s likely going to keep upward pressure on gold and it’s set to head higher.
Most interesting, even though the stock market has been getting all the publicity, most people don’t realize the gains in gold have actually been about the same this year. In fact, over the past 20 years gold has outperformed both stocks and bonds.
Q: Do you think there should be caution about stocks given the historical pattern in 1929? At that time, the Dow Industrials rose for 8 years, then corrected for 3 years.
This time, the Dow has been rising for 8 years. If we’re to see a similar pattern to 1929, then stocks could correct until 2020, which correlates to your time frame for a high in gold.
A: Well, anything is possible. We all know that. But looking at the price action, there is currently no sign of a stock market top, at least not yet.
On the contrary… stocks remain strong and bullish, and they’re poised to rise further.
One important reason why is because interest rates remain near historical lows, and the stock market loves low interest rates.
The real estate market has been thriving too in this low interest rate environment. Real estate prices recently hit new highs and they’ll likely continue to do well as long as interest rates stay near these low levels.
So all things considered, this alone could make today’s situation different than what played out in the 1920s. But again, it’s best to keep on open mind.
For more information about The Aden Forecast, click here.