Eight months into the rally, what is next for the market and gold?

David A. Banister, Chief Investment Officer

We have come a long way since early March of this year.  After bottoming at 666, the SP 500 Index has rallied as high as 1101 at its recent peak pricing.  I wrote about the market bottoming and my outline for a bull rally prediction back in late February.  My targets at the time were 10,400 on the Dow and 1140 on the SP 500 index.  Since we came within 3% of those targets, I believe the next leg for the market is a corrective movement to the downside.  The bounce up that we are getting now is likely temporary, and will be followed by another bout of selling.  My methodology uses a confluence of factors to determine direction and price targets.  A combination of Elliott Wave Theory, sentiment indicators, technical analysis patterns, and cyclical movements.  We are looking for the SP 500 to pullback into the 840-880 ranges before a significant pivot bottom, and are moving our trading positions from very bullish and aggressive to defensive.  I continue to favor the gold stocks on a strong pullback to accumulate for a five year bull market that began in early August of this year.

To wit, the SP 500 has retraced a normal A B C pattern to the upside following a cataclysmic 5 wave pattern from October 2007 to March of 2009.  The 8 month rally is roughly 50% of the 17 months of decline that preceded it into early March.  With the sentiment readings back at very high bullish levels, many small cap stocks rolling over, and leadership spread amongst fewer and fewer equities, it is time for a corrective decline.  We see this bounce ending shortly to the upside, followed by another bout of selling.

Our advice is to maintain higher than normal cash positions at this time, accumulate Gold on large dips, and wade into Gold Stocks on a big drop as well.  We also plan to recommend the occasional use of Bear ETF’s for defense and insurance on our portfolios.