Special SKI Report #19
Introduction (repeated from prior Reports):
I have been using my unique SKI indices to predict price changes in the precious metals' market for more than two decades. And my indices continue to mark the critical points. I have initiated a subscription website since 1/13/06 (yes, Friday the 13th) after having posted free updates for years at the most informative gold site, 321gold, since its inception approximately six years ago. SKI is a timing service; although almost everyone seems to believe that market timing is impossible, that IS what the SKI indices have done for 32 years.
The SKI indices contain short-term (16-20 trading days), intermediate-term (35-39 trading days), and long-term (92-96 trading days) indices. A more comprehensive description of these mathematical indices and their history is found here. Basically, the indices compare today's price to prices from a specified prior time period. The name of the index specifies the time period (e.g., 92-96 index = compare today's price to prices from 96, 95, 94, 93, and 92 trading days earlier). Although I use the oldest gold mutual fund, USERX, for analyses, the predictions are applicable to the broad precious metals' market. I do not recommend or analyze specific stocks, but my subscribers from around the world regularly discuss individual issues on our Forum. In addition to the truly unique SKI indices, I also use "run patterns" to guesstimate turning points in the precious metals' market. A "run" refers to a pattern of daily up and down market closing prices. If the market has 3 consecutive days of higher closing prices, the run is "3 up". If prices then decline for 2 consecutive days, the run becomes "3 up and 2 down". If prices then close higher the next day, the run changes to "2 down and 1 up". Some people have referred to run patterns as "worms". A run pattern is only completed after the direction of closing prices has changed. I have compiled a listing of every run pattern that has ever occurred and generated probabilities that the end of the run marks a high or a low, moderated by the indices themselves.
Everything seems to be rising. The general stock market is at or approaching new all-time nominal highs. Gold bullion is at multi-month highs and threatening to exceed the $700 level. Most of the articles that I read are bullish on gold and the gold stocks while being rather skeptical of the general stock market. My readings, however, may be biased because they focus on the only thing that I focus upon: the precious metals. Yet, since the last 321gold Update three weeks ago, the gold stocks have basically gone nowhere (up about 1%) despite a rising bullion price and a rising stock market. Such a situation is not particularly encouraging for the precious metals shares. I wrote a somewhat bearish gold stocks Special Report 3 weeks ago for 321gold http://www.321gold.com/editorials/kern040207.html and want to thank 321 gold again for being one of the few gold-related websites that allows the minority (bearish) position to be published without prejudice. I don't enjoy or gather readership with a flat to bearish outlook on the gold stocks, but where have they gone for the past year?
One year ago, on 4/19/07, I was selling my gold futures and some of the gold stocks. Gold was around $630 and USERX (the gold stock mutual fund) was at 16.36. The precious metals plunged the next day, but I did buy that mutual fund back a week later, ride it up for two weeks, and then suffer some loss as the market plunged subsequent to the important high on May 11th 2006. But the point is that we are one year older and gold bullion is approaching $700. Most broad measures of the gold stocks, however, have gone nowhere. USERX is currently at 16.15 (down 1% from 4/19/07) while gold has risen 10+%.
Certain sectors of the gold stocks have performed relatively well over the past 6 months. Such sectors have included the South African gold stocks and the small or junior precious metals stocks. And it is possible for all of the gold stocks to continue to rise with the general stock market. The gold stocks continue to be "tied to the hip" with the general market and SKI still does not have "death run" high for the general stock market that would indicate that the final top has been reached. But the point is that the SKI indices continue to indicate that we remain in the corrective period since May 2006. And the gold stocks continue to perform in a poor manner relative to their underlying fundamental (gold).
I've reprinted below the rather historic SKI Update sent to subscribers 5 trading days after the top in May 2006. "Historic" refers to a call that is supposed to effect the goldies for a long time. We are approaching a year. Even if the gold stocks continue to rise now, this message remains in effect. I've reread it and I hope that it makes for some interesting reading and thought:
5/16/06 9 A.M PST
Since it usually takes 5-6 hours to write a complete an Update, that is not possible during this weekday morning. There is a lot of information contained herein and you will probably not be able to intellectually or emotionally process all of it accurately.
We now have a historic topping pattern IF the gold stocks (USERX) close down today (as they appear likely to do) at 1 Down, 2 Up, and 5 or more down averaging more than 2% a day. Today will be day 5 down. I therefore had to wait to inform all subscribers until there was something definitive. Historically, this is THE pattern that I wait for for years if not decades. A down close today in USERX will set the pattern in motion. A DOWN CLOSE TODAY IS REQUIRED FOR EVERYTHING BELOW TO BE ACTIVATED. I HAVE WASTED MY TIME IF PRICES (USERX) CLOSE UP TODAY. I am writing to try and get this information to you as soon as possible even though no immediate action is required yet on your part. You can imagine how many email questions I've been getting and have been unable to answer (because I didn't know) until today.
The term "bull market" has different meanings to different people. SKI and Jeff's use of the term is reserved for 92-96 index buy signals on the Path. When I will now say that "the bull has ended", I do not mean that we cannot or will not get another SKI bull later (time unspecified). I believe that we will (as per the 218-222 index even longer-term buy signal), but the decline that will follow over the next few months or longer will be quite devastating and could extend for 6 months or longer. The current bull is 10 months old and is in the process of temporarily dying so as to give eventual birth to a new bull from lower prices. As you probably know, SKI and Jeff do not invest based upon desires or wishes or fundamentals. A great decline lies ahead. Apparently the current parabolic rise has ended in a long-term sense. Prepare for Jeff to be shorting this market via www.profunds.com SPPIX short precious metals fund and gold futures...
Three of the four all-time bull markets have ended with the current run pattern. The 2001-2002 bull did not. It ended with 2 down and 9 up, followed by 1 down, 2 up and ONLY 4 Down (leading me to conclude that the even longer-term bull was intact). The actual momentum bottom in the goldies was on 9/01/1998! On a 2 Up and 7 Down run. It takes a 2 Up and 5 or more run down to negate that long-term pattern. IT IS HERE TODAY! (And you will now hate me and SKI, but I am just the messenger).
Here is the history:
The great 1970s bull generated this run pattern in October 1980 (trading Day 1587 from the start of USERX), with a high of 104.4 (split-adjusted) followed by 6 days down averaging 1.67% a day. That 10.44 high was 1% lower than the all-time high that preceded it by a few weeks. The actual short-term low came 2 days after the run ended on a spike down day. The 16-20 index buy signal was executed one day after the run down ended and 2 days before a one-day spike short-term low of 7.11. Prices then flew up and down under extreme volatility for several months before forming the second historic run pattern, described next.
In December 1980 (trading Day 1624 since USERX started). A second 2 Up and 5 day down run involved a 26% drop in those 5 days into a 16-20 index buy signal. Prices rose for 9 days, did NOT generate a 16-20 index sell signal (missing by a day), and then collapsed 30% in a few days to yield the historic SKI 92-96 index sell signal.
The early 1980s bull market generated this 2 Up and 7 down run pattern (dropping 14%) in January 1983 (trading Day 2154 since USERX started). The run high was 90.10, the low was 77.30. The accompanying 16-20 index buy signal bought 3 days late near the low and prices rose for 8 days into an all-time high of 96.00 and a 16-20 index sell signal. Prices then collapsed 27% over 10 trading days into a new 16-20 index buy signal and a simultaneous 35-39 sell signal (the bottoming formation) and a multi-month bottoming process before generating a new 35-39 index buy signal and a rise to retest the all-time highs that failed.
The 1993-1996 bull market ended on 2/02/1996 exactly with a 1 Down and 2 Up and 6 Down run pattern dropping 12.6% over those 6 trading days. There was NO 16-20 index buy signal accompanying this run. Prices simply continued to decline for years.
The 2001-2002 bull ended on a different run: 2 Down and 9 Up followed by 1 Down and 2 Up and ONLY 4 Down. That failure to go for the fifth day saved the even longer-term bull market, but still yielded a 45% decline.
Prices should decline in a major way over the next few months if not longer. The longer-term will await new signals and patterns; don't get carried away into believing the SKI and Jeff will remain bears forever! Based upon the run and the 16-20 index buy signal, prices should rally soon on a short-term basis with a run of 4 or more days up marking the point to sell and go short, but to generate a 16-20 index sell signal, USERX will need to test the highs from last week. I do not know if that will happen. I will simply look for a run up or get stopped out of all long positions if the 16-20 index buy signal is broken to the downside (i.e., prices decline through the 16-20 index buy signal at the wrong time). The market has spoken; hence I can/have now written as fast as possible...
Don't shoot the unhappy messenger, Incredulous Jeff (even more incredulous that I wrote about this extremely rare possibility this past weekend and it actually appears to be occurring; unreal)."
If you are interested in following and learning more about the SKI indices, I'll write another Report for 321gold in a few weeks or you can shell out the big bucks for a SKI subscription. Weekly Updates are available by subscribing for a month (or longer if you're wise and cheap enough to want to save money) at my website www.skigoldstocks.com for the princely sum of $25 (for a one month subscription) or more ($200 for an annual subscription). I also provide more frequent intra-week messages/alerts at a slightly higher price. You can write to me at email@example.com. The precious metals are in a very long-term (decade+) up-trend but are the most precarious, volatile, and psychologically difficult market in the world (in my opinion). That's the way it's always been.
Best wishes, Jeff