Ride the market bounce?

samsonWell, the market went to the edge of the cliff, looked down, and turned back. But are we out of the woods yet?

What caused the sell-off and how can you profit from what comes next?

The clues are in these simple pictures…

Since the Midas Legacy Market Trend Alert turned red over a couple of weeks ago to warn us of the correction, we’ve said throughout the recent sell-off that we believed this was simply a sharp but healthy correction in an ongoing uptrend. And it appears this was the correct assessment, especially if the S+P 500 can nudge up over its 50 day price average (wavy blue line) this week:

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The bounce I had hoped for came a tad later than I expected, but it came, and strongly. It just needs to get above 1810 to get things rolling again.

But how can we be sure this correction wasn’t something more sinister? Well, apart from the trend still being firmly upwards, the clues were in a couple of other charts.

See, the arch enemy of this bull market is deflation, it’s what The Fed has been fighting since 2008. If deflation was a problem currently, gold should be tanking. But here’s what gold did for the last two weeks (far right):

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It barely moved. In fact, as I’ve been saying, gold is staging a healthy comeback and is getting close to being a trade.

And, if the cause of the sell-off was The Fed scaling back its purchase of US debt (through bonds), then surely the price of bonds would have dropped? No…

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Any trouble coming often shows up in the bond markets first, but bonds barely moved.

So what was all the fuss about?

Various solid reasons that The Midas Legacy team has offered, but here’s my view, and it goes back to something I said in early January:

“To keep pushing this market upwards, from a fundamental perspective, we need to see earnings increasing, but now, the only way we’re going to see that is by revenues increasing… Interest rates can be as low as they like, but if people don’t have the money to spend, they won’t spend it, period.”

2013 finished with high expectations for revenues, and in the cases where companies didn’t deliver recently, their prices got hammered. It didn’t take much of a scare to cause some of the extreme drops we’ve witnessed in certain stocks, and that tells us that there was a lot of weak and dumb money in this market (and a lot of pure gamblers trying to play earnings season). Rightly, that money got shaken out, and the bull emerges healthier for it.

And it’s this being the cause that tells me that the bull has further to run- because bull markets typically end with entrenched overconfidence and denial, combined with the longer-term price averages rolling over, and that’s not what we saw here. This was simply a purge of the Johnny-come-lately gamblers.

So the question you need to ask yourself is are you one of them? Are you the dumb money or the smart money? Ride the bounce with confidence, and you should find yourself in the latter camp.

Best,

Jim.

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