U.S. Stock Market & Precious Metals - Ahead Of the Long Weekend

While I have never viewed myself as a "perma-bear" on the U.S. stock market, my negative stance on U.S. equity prices is well documented in this column over the last year. And I have been mostly bullish or neutral on Gold/Silver and related precious metal mining shares. On the surface, my market views in both these asset classes over the last year could easily have been recipes for disaster in my managed accounts. Fortunately, this was not the case. My largest managed account is currently up 32% year-to-date, and up 64% over the last 12 months. How is that possible?

The answer is pretty simple, but not easily duplicated. I accumulated large positions in precious metals mining shares last June and then again last December. And when these shares rallied sharply from panic lows during those two months, I liquidated 100% of these positions with gains of 50% or more on each stock. While I lost a significant percentage on a core "short" S&P 500 position over the last year, my trading positions in this same asset class were almost always positive. In other words, I've been flexible and even a little lucky!

On Wall Street and LaSalle Street, it is often said that "you are only as good as your last trade!" Fair or not, every trader, investor, and adviser faces this reality almost every day. My managed accounts are doing well this year so far, thankfully, and over the last 12 months my performance results have been exceptional, especially given my less than optimal market views all along the way.

However, I know from personal experience that success in the financial markets can be fleeting. Maybe I've been lucky. Maybe I won't be so flexible on the next major investment position that moves against me. And with more than 35 years of experience now, I know for sure there WILL be a next time when I commit to a major investment that moves against me. 

While I normally write this weekly column on the weekend, I made the decision to write this particular column tonight (Thursday night), ahead of the long Memorial Day Weekend because I think two major separate markets are now at key turning points. No one will be surprised to hear that I think that the U.S. stock market will soon turn down with conviction. Some of you may be surprised to hear that I have now accumulated a sizable position in precious metals mining shares (EXK, GG, GDXJ). If you've been around as long as I have, you already know that there are at least a dozen reasons to be bullish or bearish on any given market at any time. Great researchers (and especially chart technicians) can easily make a solid case for either view, depending upon their inclination at the time (or to support those companies or individuals that pay their salaries). It's sad, but true!

I wish I could tell you that my current market views are NOT biased by my positions, but you all know better! Hopefully, my positions reflect solid research and strong quantitative methodology. I have a couple of charts for you that may better illustrate my thinking right now.

For the U.S. Stock Market, here is the latest Weekly chart of the Dow Jones Industrial Average ETF (better know as "The Diamonds" symbol DIA). Please note the official sell signal from my computer trading system from last week!

Dow Jones Industrial Average ETF Weekly Chart (symbol DIA) with Computer-generated Buy & Sell Signals

And here are the latest monthly charts for the Gold and Silver ETF's (GLD & SLV). The way I have drawn the key trend lines, Gold has already broken out to the upside, while Silver is poised for a major upside breakout very soon!

Gold ETF Monthly Chart (symbol GLD) with Downtrend Line

Silver ETF Monthly Chart (symbol SLV) with Downtrend Line

U.S. Stock Market - Record Highs, But Then Down On The Week

The closely-watched Dow Jones Industrial Average, the S&P 500 Index, and the New York Composite Index all printed record highs last week, but each of them posted a loss on the week. Bulls and Bears were both equally frustrated last week.

Is it too early to call someone "Legendary" when he's earned 28.5% compounded annually over the last 20 years for his investors (net of fees!)? In addition to a stellar return for his investors, David Tepper, founder and chief executive at Appaloosa Management (a hedge fund) earned $3.5 billion for himself last year, which makes him the top dog in the hedge fund industry for 2013. I think it's safe to use the word "Legendary" when describing David Tepper in terms of his investment management skills. However, I don't think we can use the same word to describe his oratory skills.

At the SALT hedge fund conference in Las Vegas last week, Mr. Tepper used the following words to describe his recommended position in the U.S. Stock Market here:

“Don’t be too fricking long right now!”. “The market is kind of dangerous right now,” said Tepper. "I’m nervous.” 

Tepper's less-than-positive comments on the U.S. Stock Market probably contributed to last Thursday's slide of about 1% in most major averages. However, buyers were back on Friday and most major stock indexes recovered about half their losses sustained the prior day.

So where does that leave us?

The S&P 500 Index, the New York Composite Index, the Dow Jones Industrial Average, and the Dow Jones Transportation Average all remain close to record highs, while the Nasdaq Composite is down about 6% from its 2014 high, and the Russell 2000 is down about 9% from its record high. So-called momentum stocks, the big winners from last year, are down about 20% to 60% (or more) from their all-time highs, depending upon the name.

Bottom line: Large-cap stocks are showing remarkable resilience in the face of significant recent damage to small-cap stocks and momentum shares. However, I remain convinced that the entire equity market will move in sync on the downside very soon. While I am unsure what the negative catalyst will ultimately be, I strongly suspect that most investors will soon come to the realization the Federal Reserve is now in "tightening" mode. I feel that most market participants are underestimating Chair Yellen's resolve to end Quantitative Easing (at least for now). The vote on the latest $10 billion taper was 12 - 0 in favor. And the vote on the next $10 billion taper will almost certainly be unanimous in favor as well. Corporate earnings won't be strong enough to offset a Federal Reserve that is sending strong signals that "the punchbowl won't be refilled any time soon" and maybe the party is over!

Russell 2000 Index Weekly Bar Chart with 30-Week Moving Average Line

S&P 500 Index Weekly Bar Chart with 30-Week Moving Average Line