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Are Markets Setting Up for Runaway Moves?

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We may get a big clue when the markets move down into the now-due daily cycle low.

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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).


Last week I hypothesized that the markets are On the Brink of an Asset Explosion. If this is going to play out then we can probably expect to see runaway moves develop in virtually all assets soon.

The rally out of the `06 bottom to the February `07 mini crash is a classic example of a runaway move (chart below). Note the brief measured corrections. Needless to say, if something like this develops soon, one doesn't want to get caught on the bearish side of the tracks.


Click to enlarge


This kind of rally doesn't happen that often, but when it does, it is a ticket to get rich on the long side of the market or poor if you choose to try and fight one of these runaway moves.

We already potentially have moves like this developing in multiple markets; technology, small caps, S&P 500, platinum, palladium, silver, oil, and gasoline to name a few.


Click to enlarge


I think we may get a big clue when the markets move down into the now-due daily cycle low if the correction is brief and mild like the late February pullback. If this scenario indeed transpires, the odds are going to increase dramatically that all markets are setting up for runaway moves.

I'm expecting that move down to begin at any time, although I think there's a good chance the markets will hang in until options expiration on Friday.

Next week positive seasonality disappears. That will probably be the most likely period to look for stocks to move down into a cycle bottom.

Tuesday was the 26th day of this rally. That's deep enough into the daily cycle that we can expect a top at any time. The cycle rarely runs longer than 35 to 45 days trough to trough.

Not only is it getting late in the cycle, but multiple other signs are springing up suggesting this rally is starting to run on fumes. Sentiment is starting to skew extremely bullish (contrary indicator), there are signs that institutions are starting to take chips off the table, and breadth is deteriorating.


Click to enlarge

Next I want to call attention to the fact that the market made no attempt to test the Feb. 5 bottom. I've noted previously that there was also no test of the March '09 bottom or the last intermediate cycle low in July.

The Fed has literally flooded the world with liquidity (printed money), and that liquidity is pouring into the markets on every pullback. Apparently any test of the lows is out of the question in this hyper-liquid environment.


Click to enlarge


Fundamentally, we have the setup necessary for a runaway move. These same ultra-liquid conditions existed in `06 as the Fed went on a currency-debasing spree to avoid a recession. It produced the runaway move shown in the above chart.

And I think we probably have the emotional conditions in place for a runaway move as well. Retail investors are still gun shy of this rally. If this does develop into a runaway move, we'll have a steady stream of retail money flooding back into the market as Joe Sixpack becomes convinced of the sustainability of the rally and fearful of missing the chance to recover his retirement.

Geez, what a recipe for catastrophe the Fed has created. When this very same liquidity unleashes the next crisis (most likely in the currency markets), it will release the return of the secular bear. Sad to say, investors' 401Ks are going to get decimated again.
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No positions in stocks mentioned.

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