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On the Brink of an Asset Explosion


Unsuspecting investors won't recognize the market top and will get sucked down into the depths of the bear.

Editor's Note: Toby Connor is the author of Gold Scents, a financial blog with a special emphasis on the gold secular bull market. Mr. Connor's analysis skill of the markets is largely self-taught, though he admits to being an avid reader of Richard Russell and Jim Rogers, among several others. Toby is an avid rock climber and world class weight lifter (for his age).

I can virtually guarantee that what I'm about to suggest isn't on anybody's radar screen. But before I share my prediction, a little background analysis is in order.

There have been seven previous bull markets that were born in the depths of vicious bear markets similar to what we just went through. Each one of those bulls racked up impressive gains during the initial thrust out of the final low. Throwing out the '32 to '37 bull as an anomaly not likely to be repeated, the average gain for the first two legs of bulls with similar DNA as our own has been between 41% and 73%. After the second leg, each one of these bulls underwent a mild corrective pullback of 8% to 14%.

I've been looking for that pullback since December and we obviously got it from mid-January into early February.

Click to enlarge

Next I'm going to put up a long-term chart of the S&P from the '02 bottom to present so we can make some comparisons for what should and should not happen in a "normal" bull market -- if there is such a thing. Both bulls were born on the back of massive liquidity injections by the Fed. So it's not surprising they have followed a similar path, well at least up to now.

Generally we'll see the most aggressive moves at the beginning and the end of a bull market. At the beginning smart money piles into perceived value. At this stage of the game retail traders are still too shell-shocked from the bear to trust the rally.

Finally, toward the end of the bull, retail investors will panic into the market on fears of getting left behind, sending the market surging higher. This is of course when smart money is unloading their shares.

Click to enlarge

You can see that the '02 to '07 cyclical bull followed this script almost to a T. The sharpest rallies occurred from March '03 to early '04 and then again as the market surged out of the '06 bottom into the final top in October of '07.

The cyclical bull we're in right now is about to morph into a completely different animal than just about any other bull market in history. And most certainly this bull won't fit in the same category as the '02 to '07 bull. I think we're about to bypass the second phase of a normal bull market and jump straight to phase three, the ending stage.

This is a bull spawned by the printing of literally trillions and trillions of dollars by central banks around the world. You can see by examination of the chart above that this bull has been much more aggressive than the last one, rallying over 70% in its first 10 months.
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No positions in stocks mentioned.

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