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The Standard & Poor's 500 Index will probably "retest," or fall toward or below, the 11-year low of 752.44 it sank to in November, strategist David Kostin wrote in a report today. Still, the benchmark index for U.S. stocks will end this year at 1,100, a 30 percent surge from yesterday's close, he said.
While gold is traded in dollars, the price in euros is up 14 percent this month and 6 percent in U.K. pounds as central banks lower interest rates and governments spend trillions of dollars to revive economies. Investment in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, reached a record 843.6 metric tons yesterday.
The Federal Reserve kept its benchmark interest rate at as low as zero this week and said it was prepared to buy long-term Treasuries to revive credit markets. The Fed's assets have grown by $1 trillion over the past year under credit programs ranging from $416 billion in term loans to banks to purchases of $350 billion in commercial paper issued by U.S. corporations.
Gold will rise in the longer term, "based on a growing distrust of all paper currencies," said Adrian Day, president of Adrian Day Asset Management in Annapolis, Maryland. "People are turning to the one true money, which can't be created by governments and holds its value."
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Read This Before You Buy Gold
By Jeff Clark Tuesday, January 27, 2009 Read This Before You Buy Gold
You Made 647% If You Were Paying Attention on This Date
By Tom DysonMonday, February 2, 2009
If you'd been paying attention on this date, you might have avoided the 50% stock market decline last year... or made 647% gains by betting on a rise in volatility.
Before March 2006, this landmark event had only happened three times in the previous 110 years. Every time it occurred in the past, the stock market collapsed soon after.
I documented this pattern with the help of Jason Goepfert of SentimenTrader. The signal is a three-year episode of complacency. I define an episode of complacency as a period without a fall of 10% or more in the S&P 500, marked from the highest point of the previous six months.
Ten percent corrections are very common in the markets – even in bull markets – and you can expect to see one about every two years. To go three years without one of these corrections implies a market that's so calm, you have to check its pulse to make sure it's still alive.
Usually, such a long period of calm ends quickly and painfully. Take a look:
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Starting in March 2003, when the U.S. and its allies invaded Iraq, the market went almost five years (57 months) without a 10% correction – the longest stretch in stock market history.
"It is the complacency... that creates the trouble," Goepfert said at the time. I concluded this "fourth episode" would end in trouble because investors had never had become so lazy and complacent toward risk.
Complacency in the stock market is a bit like the weather at sea. You have long periods of blue skies and calm days interjected with fierce storms. The longer the calm weather lasts, the more cargo the shipping companies dare to load on their vessels. After five years of uninterrupted fine weather, some ships carry so much cargo, their railings barely rise above the water.
No one knows when the storm will hit, but after five years of calm weather, it's a certain bet many ships will sink when it comes.
This time, it took more than 18 months for the market to collapse after the signal flashed. But when the storm finally hit, there was a catastrophe at sea. The VIX volatility index rose 647% from 11.98 to 89.53 between March 2006 and October 2008. And the S&P 500 fell 53% between October 2007 and November 2008.
We just had the longest spell of stock market blue skies in 110 years... so it may be a long time before we see this signal flash again.
But the next time you notice a three-year period without a 10% correction in the stock market, you should bet there's trouble around the corner. Don't forget about it. It could save you from huge losses some day.
Good investing,
Tom
P.S. Jason Goepfert's website, www.sentimentrader.com, is a fantastic source for monitoring stock market sentiment. Steve Sjuggerud and I use it all the time. If you like to trade against the crowd, you should check it out.
Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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NEW HIGHS OF NOTE LAST WEEK
StemCells (STEM)... biotech
CV Therapeutics (CVTX)... biotech
Myriad Genetics (MYGN)... molecular diagnostics
Brink's Home Security (CFL)... security
Scopus Video Networks (SCOP)... video networks
NEW LOWS OF NOTE LAST WEEK
Fossil (FOSL)... watches
Aflac (AFL)... insurance
Novartis (NVS)... Big Pharma
FedEx (FDX)... freight delivery
Southwest Airlines (LUV)... airline
Capital One (COF)... credit cards
Steinway Musical (LVB)... pianos
Dow Chemical (DOW)... chemicals
San Juan Basin (SJT)... natural gas trust
Black & Decker (BDK)... tools
Boston Beer (SAM)... Sam Adams
optionsXpress (OXPS)... brokerage
Eastman Kodak (EK)... photography
Cash America (CSH)... pawn shops
Lindsay Corp (LNN)... irrigation equipment
Caterpillar (CAT)... construction equipment
CNH Global (CNH)... construction equipment
Thor Industries (THO)... recreational vehicles
International Paper (IP)... paper products
U.S. Lime & Materials (USLM)... lime & materials
Portfolio Recovery Associates (PRAA)... debt collection
Zions Bancorp (ZION)... bank
Porter Bancorp (PBIB)... bank
Privatebancorp (PVTB)... bank
Home Bancorp (HBCP)... bank
First South Banc (FSBK)... bank
Jacksonville Banc (JXSB)... bank
Wintrust Financial (WTFC)... bank
Capital City Bank (CCBG)... bank
Lean hogs, Natural gas, Lumber
New Market Notes trade of the week: stay long biotech, stay short banks.