Friday, March 11, 2011

Bubbles & Collapses Make The World Go Around

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

Over the past few months, I have written about securities that were very extended on the upside as well as the downside, bubbles versus collapses. Before I get into a new security, which is actually an old one discussed last year, let's take a quick peak and see where they stand today.

The series began with Gold Nearing A Rally, where I showed examples of how gold behaves during a bull market with strong rallies followed by long trading ranges and more upside. We left off with the chart below that offered a likely path.

And today, you can see below that gold behaved as it was supposed to, by rallying smartly to the old and now new highs. As I tweeted and posted on Facebook, I do not believe now is the time to throw caution to the wind and buy gold. The “easy” was made off that low. This textbook behavior is good to see, but far from guaranteed each time. Every once in a while, the market will throw your forecast for a loop, just to keep you honest.

The gold post was followed up by one on Treasury bonds, So Bad, They Are Actually Good, where I opined that there were so few bulls left, and T bonds had been pounded so hard, it was actually bullish. Below you can see the chart at that time.

Today, as you can see below, bonds rallied nicely and have recently pulled back to a point where risk can be identified and contained by the 2011 low. Until proven otherwise, the path should take them higher into next quarter.

On the flip side, cotton has been in bubble land for a while as I wrote about in HUGE Bubble In The Making.

Once again, cotton MAY be peaking, but after being burned so many times, who is going to stick their neck out and become overtly bearish? That's the exact making of a bubble and why so few people actually profit from the first and most severe leg down.

I am going to finish this piece with the U.S. dollar, which I wrote about late last year. As you can see from the chart below, when the masses were uniformly bullish at 90%+, the dollar fell hard. Who was left to buy? Conversely, with less than 10% bulls, the buck rallied with few left to sell.

Today, the dollar is back to being the second most unloved investment after Treasury bonds with less than 10% bulls for the second time this year. It's hard to find many folks who believe it has any chance of rallying over any timeframe. As usual, I am taking the other side, having turned long-term bullish in early 2008 and continue to believe the greenback is in the early stages of a major, multi-year bull market. Of course, I will temper that view when rallies become overloved and unsustainable.
As I finish typing this, the stock market remains under pressure on geopolitical concerns from the Middle East. I do not believe this is going to be a large decline and should wrap up this month. The market has come very far in short order and it is overdue for the pause to refresh.

On a technical basis, as you can see from the chart below, the S&P 500 has been a pattern called a triangle, which is essentially a compression of volatility. This usually leads to volatility expansion, which is what we are seeing right now. Once the bottom of the triangle is exceeded and a rush of fear hits the market, I would expect the bulls to begin to fight back and rally to ensue.

FYI, I will be on CNBC’s Squawk on the Street on March 15 at 9:35 a.m.

Feel free to email me with any questions or comments at

Until next time…

Paul Schatz
Heritage Capital LLC

Follow us on Facebook at and on Twitter at Paul_Schatz

No comments:

Post a Comment