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The Secular Bear Market and Gold's A-Wave Advance


The days of easy money from the gold bull are probably over for the next year as stocks move down into their four-year cycle low.


In this report I'm going to take a look at what has transpired and what is likely to come as the third leg down in the secular bear market begins to intensify.

Back in April of this year I warned investors to get out of stocks in their 401(k) accounts. At that time the dollar was moving into the timing band for a major three-year cycle low. It has always been my expectation that the rally out of that major bottom would correspond with the stock market moving down into the third bear market leg of the secular trend that has been in place since 2000. As we now know, the dollar did bottom in May of this year and that did correspond with the top of the cyclical bull market that began in March 2009. It has also been my expectation that the next four-year cycle low would occur in the fall of 2012, and that 2012 would be one of the worst economic years in human history.

This is already starting to unfold across the globe as social unrest that began in the Middle East has spread to Europe and now the United States. Economic data has been steadily eroding for months now. We should expect this trend to continue and intensify as we get into 2012.

As most of you know, I use cycles and sentiment analysis to determine likely timing bands for major turns in the stock market, gold, and the dollar. This is what allowed me to anticipate a bottom in the dollar cycle at a time when everyone was expecting the dollar to collapse, and a top in the stock market when everyone was bullish and expecting a move back to new highs.

An interesting development in the yearly cycle for the stock market has now emerged. Generally speaking most yearly cycles run about 12 months, trough to trough. However, the Fed's quantitative easing programs have stretched the yearly cycles from March 2009 into June 2010, and this year the yearly cycle has stretched again to arrive in October. The market is now set up for the next yearly cycle low to occur in the fall of 2012 which, not surprisingly, is exactly when I have been expecting the next four-year cycle low in stocks to bottom.

Click to enlarge

I have also indicated the expected timing bands for the next three intermediate degree cycle lows. For reasons explained in the nightly reports, I don't think the current decline is going to move below the October low. I expect we will find a bottom sometime in the next one to four days, followed by a Santa Claus rally into the middle of December.

If the market avoids making a lower low, it will embolden the bulls to continue holding long positions. Their hope for a miracle will be misplaced, though, as the market will almost certainly begin to roll over before making higher highs, and by the next intermediate degree bottom in February/March, we will see the October lows broken and the summer 2010 lows tested.

The recent rally out of the October low will undoubtedly prove to have been the most powerful countertrend rally of this bear market. Any further countertrend rallies (and there will be several) are likely to be short-lived and weak. The window of opportunity for these long side trades is probably going to be too brief for the average investor/trader to successfully trade. From this point on, investors should keep 401(k) accounts solely in money market funds until we reach the bottom sometime in the fall of 2012.

This brings us to the topic of gold. Despite what is happening in the stock market, gold is clearly still in a secular bull market. That being said, the days of easy money from the gold bull are probably over for the next year as stocks move down into their four year cycle low. In the chart below you can clearly see the affects QE1 and 2 had on the gold bull.

Click to enlarge

The QE programs drove the largest C-wave advance of gold's entire secular bull market. However, and for reasons I will explain below, I think the C-wave topped in September, and gold is now going to enter an extended consolidation phase for the next year.

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No positions in stocks mentioned.

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