The "Rally" Just Flinched

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The "Rally" Just Flinched

Pardon me for speculating here, but did anyone else just see what I saw?

Despite of (or rather because of) ubiquitous inflationary bullish sentiment, the current rally just hiccuped. And the set-up for a major market top couldn't be more perfect:

It is my belief (pure speculation) that the set-up for a major top in the markets is in place, and that we have seen early indications that that the top is near.

 

.

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Re: The "Rally" Just Flinched

A second that JAG.  All my indicators say the drop is dead ahead.  Glad I'm wearing SHORTS.

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Re: The "Rally" Just Flinched

Hm.  Well, I've had my shorts on for about 2 months now, so I was a shade early to the party.  But I've resisted the urge lately to shuck 'em off.  (For which everyone at the party is, no doubt, profoundly grateful.  Tongue out)  It'd be nice to watch my numbers go up for a change...

Viva -- Sager

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Re: The "Rally" Just Flinched

I'm with ya JAG but I keep thinking it is ready to fall off the table then away we go again!  I was very surprised to here Jim Puplava lean toward a possible 4th quarter and "maybe into the first quarter" rally during his last weeks Financial Sense Newshour.  No one can be more confused then I. My shorts are getting worn out!

BJ

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Rydex Traders Are Getting Cocky

The rydex traders are buying the dips and are holding very little cash. Downside risk is growing exponentially.

Figure 1. Rydex Bullish and Leveraged v. Rydex Bearish and Leveraged/ daily

Figure 2. Rydex Money Market Fund/ daily


Link: Rydex Market Timers All In (zerohedge)

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Trading On The Conventional Wisdom

From Daneric' blog : The Conventional Wisdom

Ok, where to begin? Let me begin by first stating that many traders like to pride themselves on not accepting conventional wisdom. After all, conventional wisdom represents the herd. And betting with the herd will work for a while but eventually a cliff will be reached. Think lemmings.

I will say that governments tried desperately for 17 months at stimulus measures. Look up the numbers. The FED and treasury had already spent trillions even before the December to March final wave down occurred. Fear ran rampant despite the Fed's efforts.

The number one media mantra of "walking a fine line" between removing and keeping stimulus in place will result in success or failure type thinking. This is all hogwash is all I can tell you. If you buy what the media is spewing out on this you might as well listen to "analyst" upgrades on stocks and trade off of that.

Let me interject a bit of logic in this equation; the underlying reason the general media spews forth the "walking a fine line argument between stimulus and not stimulus" is the underlying conventional wisdom that the Fed does indeed control the fate of the economy.

So taking that next step further, if you believe the FED controls it all, then you must believe in the general media mantra of the "fine line" argument! You cannot separate the two with logic!

And you now agree with Jim Cramer, financial guru of the masses. You are trading on Cramer-logic!

Jeff

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The Last Bear Standing

As usual, Mish says it better than I ever could: Reflections on "The Last Bear Standing"

Weiss lists four Inflationary Forces

  • Inflationary Force #1: Never-Ending, Out-of-Control U.S. Federal Deficits
  • Inflationary Force #2: New Lows in the U.S. Dollar
  • Inflationary Force #3: U.S. Household Wealth Now Expanding Again
  • Inflationary Force #4: Exploding U.S. Money Supply

I suspect we will do through periods of inflation-deflation for a decade, with painfully slow growth followed by recessionary and deflationary relapases. Those expecting the CPI to go soaring anytime soon are likely very mistaken.

Deflation will end with a whimper, not a bang.

What Weiss is doing is extrapolating the recent past into the foreseeable future. He is overlooking the fact that the number of dollar bears is now extreme. Only 3% are bullish on the dollar. I am in that group, not perpetually, just right now.

The same goes for expanding household wealth. Yes there was a huge stock market bounce, but as I have pointed out there was a similarly huge bounce in early 1930.

In regards to exploding money supply, Weiss is late to the party. This happened some time ago. More recently the rate of many measures is falling. But also note that in the early 1930's money supply soared and it did not help.

Yes this was a spectacular rally by any measure. Enough so as to change Weiss' mind. How many more dollar bulls and stock market bears are left in the house?

Not many. Even Rosenberg is discussing decoupling. Sheesh.

The next wave down could be a doozy.

Its going to be a doozy alright, which is why my capital is invested with the "Last Bear Standing".

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Jobless Prosperity?

No real content in this post, just a great quote from David Rosenberg:

"We still marvel at the shills who believe that the market is fairly valued and that somehow it is not fair to compare how far the market has ballooned over the March lows since those lows were “artificial”. Excuse me. The 676 closing low on March 9th was any more of an egregiously oversold low than the October 9th/02 low of 776? Or the August 12th/82 low of 102 when the S&P 500 was trading at an 8x P/E multiple, a 6 1/2% dividend yield and below book value? It always appears to be an oversold low at the trough, with the benefit of perfect hindsight. But the stock market, at the lows, was merely pricing in reality, a -2.5 GDP growth trajectory which is exactly what we will see posted for 2009 when the books are closed for the year. The market was down 60% from the highs, but guess what? So were operating earnings. And reported “unscrubbed” profits tumbled 90%. To think we can have a 60% rally from the lows in six months and believe that somehow this is normal – please. By the time the market is up 60% from any low, it usually is up that amount in three years, not six months; and over 2 million jobs have been created. This is the first time the market has rallied this much with the economy shedding 2.5 million jobs."

Link

Beautiful, just beautiful....

 

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Re: The "Rally" Just Flinched

JAG,

I am beginning to think that the DOW, S&P, and Nasdaq are not just not reacting to fundamentals, they are reacting in cohort with government bond prices.  

Please allow me to rewind:

Normally, in a robust economy, private capital has two choices:  productive private investment, or government debt.  Those two choices are exemplified by the "stock market" vs. "government debt" choice, and those respective markets mirror each other in an inverse fashion.  That is, bonds go up, stock markets go down, and vice versa.  To be fair, it is really a "private market" vs. "government debt" choice, and the "private market" includes not just the stock markets, but also private debt (corporate bonds).

In this "normal" scenario, there is a "scarcity" of capital and a "surplus" of capital demand.  No market can go up (say bonds) without another going down (corporate debt or stocks).  That is what has been our experience for decades.

By contrast, the current environment appears to be heading (or is already at) towards a scenario where there is a surplus of capital and a scarcity of capital demand.  In this scenario, capital outweighs demand, so normally divergent investment classes converge.  This is because one of those three investment categories (the three are stocks, corporate debt, and government debt), namely corporate debt, has left the dance floor, leaving only stocks and government debt to waltz with each other.  They can both go up at the same time precisely because there is an excess of capital and not enough capital demand.

For anyone wondering how there can be an excess of capital when unemployment is up, wages are down, layoffs are around the corner, etc etc:  Most of the unemployed, underemployed, and soon-to-be-employed people are not the ones who were previously funding Americas economic engine.  The capital is still there, there is just nowhere to put it.

Back to the story:  When there is excess capital and scarce capital demand, capital demand sources don't have to compete for an "insatiable" pool of capital.  So, both stocks and bonds can go up.  The thinking goes, "if I can only get 0.25% on a bond, why not invest it in a stock that's trading at a PE of 90?  The "PE" of that bond is even more than that so why not?"  

The bond price and PE ratio used above may not make any sense, but you get the drift.  It's late, and I'm too lazy to get my calculator out.  

I am now not so sure the stock market will crash and am seriously rethinking my shorts on the stock market.  I think gold will get hit worst of all as it does not provide any return whatsoever (PE = Infinity).  I think we are in a capital whirlpool of ever-diminishing returns which will continue until all this capital somehow makes it into the pockets of people who actually buy goods and services and the hyperinflation wave can begin.

SERENITY NOW!

 

a) there is no private debt (corporate debt) choice.  This is a fact that can be verified by looking at the collapse in corporate debt.   

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Re: The "Rally" Just Flinched
Farmer Brown wrote:

I am now not so sure the stock market will crash and am seriously rethinking my shorts on the stock market. 

Attention Goldman Sachs: The Farmer Brown Sentiment Index has officially rolled over..... Proceed with Directive One: FULL MARKET CRASH!!!!

 

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Re: The "Rally" Just Flinched

Seriously FB,

I don't blame you for pulling your shorts....its not worth the stress. 

But regarding the convergence of markets, I seem to remember the bond market not behaving as expected during the crash last year. During last years decline, all asset classes declined, including bonds. So it stands to reason that a countertrend move in the market would involve a rise in all asset classes as well, doesn't it?

I don't think the stock market will crash either, not from here anyways. But I think 1080 on the S&P was the top, though a couple retests of the 88 week moving average are likely.

But then again, what the hell do I know? 

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Re: The "Rally" Just Flinched
Farmer Brown wrote:

JAG,

I am beginning to think that the DOW, S&P, and Nasdaq are not just not reacting to fundamentals, they are reacting in cohort with government bond prices.  

Please allow me to rewind:

Normally, in a robust economy, private capital has two choices:  productive private investment, or government debt.  Those two choices are exemplified by the "stock market" vs. "government debt" choice, and those respective markets mirror each other in an inverse fashion.  That is, bonds go up, stock markets go down, and vice versa.  To be fair, it is really a "private market" vs. "government debt" choice, and the "private market" includes not just the stock markets, but also private debt (corporate bonds).

In this "normal" scenario, there is a "scarcity" of capital and a "surplus" of capital demand.  No market can go up (say bonds) without another going down (corporate debt or stocks).  That is what has been our experience for decades.

By contrast, the current environment appears to be heading (or is already at) towards a scenario where there is a surplus of capital and a scarcity of capital demand.  In this scenario, capital outweighs demand, so normally divergent investment classes converge.  This is because one of those three investment categories (the three are stocks, corporate debt, and government debt), namely corporate debt, has left the dance floor, leaving only stocks and government debt to waltz with each other.  They can both go up at the same time precisely because there is an excess of capital and not enough capital demand.

For anyone wondering how there can be an excess of capital when unemployment is up, wages are down, layoffs are around the corner, etc etc:  Most of the unemployed, underemployed, and soon-to-be-employed people are not the ones who were previously funding Americas economic engine.  The capital is still there, there is just nowhere to put it.

Back to the story:  When there is excess capital and scarce capital demand, capital demand sources don't have to compete for an "insatiable" pool of capital.  So, both stocks and bonds can go up.  The thinking goes, "if I can only get 0.25% on a bond, why not invest it in a stock that's trading at a PE of 90?  The "PE" of that bond is even more than that so why not?"  

The bond price and PE ratio used above may not make any sense, but you get the drift.  It's late, and I'm too lazy to get my calculator out.  

I am now not so sure the stock market will crash and am seriously rethinking my shorts on the stock market.  I think gold will get hit worst of all as it does not provide any return whatsoever (PE = Infinity).  I think we are in a capital whirlpool of ever-diminishing returns which will continue until all this capital somehow makes it into the pockets of people who actually buy goods and services and the hyperinflation wave can begin.

SERENITY NOW!

 

a) there is no private debt (corporate debt) choice.  This is a fact that can be verified by looking at the collapse in corporate debt.   

Farmer Brown;

Once again, "Thanks!" . . . for cutting through all of the noise, to present a clear analysis . . . Your analytical posts are like river water with the suspended particulate filtered out . . . . clear, cool, and satisfying . . . .

 

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The Herd Market

Wall Street "Animal Spirits" Stampede Across the River

Hilarious post by Robotrader at Zerohedge:

Anyone see 60 Minutes last night?  The story about the animal migration across the Mara River in Kenya?  All the Wall Street particpants were there.  And this morning they were stampeding back into the "inflation" and "re-risking" trade once again.

Despite the warnings from Nouriel Roubini, despite the crash warnings from the survivalists who have suddenly become expert market technicians, etc., the market was ramped up on a Goldman Sachs upgrade of a few bank stocks, and that was enough to get the "Animal Spirits" going.

Here's a picture of the Wall Street Herd crossing the river called the 50-day EMA:

....

Goldman Sachs Prop Desk Traders lying in wait:

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Re: The "Rally" Just Flinched

OK....so now that I see that this rally can seemingly go on forever. Why? Because no one wants to play ball on Goldman Sachs playground. Until, the majority of the market joins GS in the game, they are forced to trade the market higher and higher in an attempt to attract players. It doesn't look like that ploy is working though. Look how volume is trending down on this rally:

Lack of volume means the Hal9000 can move the market higher.....How can I expect GS to pull the bid from this market when they are making plenty of money just playing with them self? Sooner or later Joe Sixpack will come and play and GS will have a motivation to short the market, but right now, its "If it ain't broke, don't fix it" as far as the eye can see.

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Investor Sentiment: I Am Changing My Tune

From "thetechnicaltake" at ZeroHedge:

Investor Sentiment: I Am Changing My Tune

Figure 1. "Dumb Money" Indicator/ weekly

The "Smart Money" indicator is shown in figure 2. The "smart money" indicator is a composite of the following data: 1) public to specialist short ratio; 2) specialist short to total short ratio; 3) SP100 option traders. The "smart money" is neutral.

Figure 4. Rydex Bullish and Leveraged v. Bearish and Leveraged/ daily


I haven't been keeping up with market sentiment as of late. If this data is accurate, I would definitely be bullish on the markets right now. I guess I disagree with the author in my interpretation of this data.

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Re: The "Rally" Just Flinched

Thanks for the charts Jaq. Your posts (like many here) are always helpful & one reason I keep up with this site.

Charts last week looked bullish so I lowered my shorts & increase my longs. Looks like we are headed up still but where ever this is going the out come still seems bad to me. I agree with Mish in that it is hard to imagine they can hide the cr*p for ever (never seen anyone polish a turd for long lol). Just hope I can time the shorts at a good point. I am hoping you, FB & Davos know that point LOL.... I just am having trouble fight the tape.

Glad the ressession is "officially" over LOL.... http://www.cnbc.com/id/33278490/ but tell that to the unemployed http://www.cnbc.com/id/33280948????

Saw a guy on CNBC on the floor going on & on about how cars are going to be flying of the lots. Somebody here is going to be wrong & hope it is not us. Since even I am starting to get a little bullish it must mean the marked is close to its top. Jag maybe Jeff Gunlach willl be right & the S&P crawls up to 1100 & that is it but I remember him saying hw was not a gold bug & kind of scoffed at gold while saying if gold breaksout maybe he is all wrong.

I still have trouble with this......

Realty Check: Foreclosures http://www.cnbc.com/id/15840232?video=1293173068&play=1

I really feel in no man's land at the moment (flat footed).

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Where is the Re-test?

The biggest reason that I haven't jumped on the inflation-trade is that the markets have not retested their March 09 lows. Very few people even consider this, which I find strange because history shows us that markets always retest their lows. I was happy to see this mentioned today in this article.

Bear Case

Why is this time different so far and is still only a bear market rally at best?

An analysis of the prior twelve historical lows in the S&P reveals that it can be identified as a substantive low if certain conditions are met.

First is that the S&P crosses above both the 50 and 200 day moving averages. Paramount is that the S&P then goes back and retests the lows, and if that happens, then the next year produces on average, a return of the magnitude of about 25%.

So based on this historical data, this year we should be seeing the S&P around the 1200 level. Well then what gives? Why is this year different so far than the prior twleve historical lows when we have the major crossover as described above?

Because since achieving the conditions mentioned above, this year we have failed to go back and retest the lows.  So bears, historically this is the first time the condition has not been met, and if history is any indication, it should!

Call me an old-timer, but I just can't ignore history. The re-test is still coming.

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Hell to Pay

I love this guy's perspective, a true trader IMO.

We come toward the end of another report that cannot tell you exactly when things are going to change, even as I remain confident that the dynamics of change are falling into place.

The USD remains at the center of the show as a nation (and literally a world of assets) depend on its continued devaluation to keep the party going. My playbook generally calls for the deflationists to once again get a chance to claim the high ground, from which they will once again lecture the great unwashed masses of ‘greedy’ inflationists.

At that time, deflationist hubris in full swing, NFTRH will look to revert back to its more comfortable (than the current holding pattern) mode of buying misperceptions and fear, in the form of quality gold mining and exploration enterprises, hopefully being burped up yet again by scorned inflation traders.

As for the USD [weekly] chart, we have a would-be bullish falling wedge down to support and we have some serious ‘Banana Republic’ / ‘death of the dollar’ stuff going around in the media. The set up is there for change. The set up is there for the less committed of the commodity and stock bulls to be washed away.

But on the bigger picture, there is also a set up taking shape that shows the USD having lost critical long-term support in the 78-80 range. This level will need to be watched closely during any dollar rally that may spring here in the coming weeks. If that level holds as resistance, the next leg down could well happen in the global race to the bottom in currencies, led by Uncle Buck. But if an enraged USD ever surmounts that level and holds, there is going to be hell to pay to the deflationists before any thoughts of recovery.


Link

(PS: I realize that this probably doesn't belong in this thread, but starting a USD bullish thread in this community is asking to be banished to the CT dungeon)

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Re: Hell to Pay
JAG wrote:

(PS: I realize that this probably doesn't belong in this thread, but starting a USD bullish thread in this community is asking to be banished to the CT dungeon)

 

LOL!

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Re: The "Rally" Just Flinched

Well my 2c:

I see inflation, falling stockmarket, falling dollar.  Therefore the safe bet would be deflation, DOW 11,000, and a dollar rally with gold down to 950 by Christmas, because i am unfailingly wrong.Wink

 

Doc -- very accurately wrong

BTW the quarterly GNP is out Thursday.  Expected number is a fictitional 3% rise.  We will probably see the market break out up or down then.

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Multi-Year Stock Market Top Could Be In

Mish: Multi-Year Stock Market Top Could Be In

Of course, I'm hoping this is the case because I'm positioned for it, but I think this last line is very prudent given recent history.

This is not a recommendation to short; this is a notice that risk is tremendously high and a top could be (and in my opinion should be) in. The market may have other ideas.

I'm not sure we have seen the inflation-trade's climatic panic buy yet, but I'm sure Goldman Sachs has something in the pipeline.

 

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Got Bear?

The inflation traders keep feeding the bear....

S&P 500 at 1036.....Its all downhill from here...

 

1030-es

 

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In The Air Tonight

I always have to play this song when I get cocky....

I made a little cash-ola in the market today....its been a while since that has happened for me. Its going to be a good weekend.

(edit: I'll quit while I'm ahead)

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Re: In The Air Tonight

JAG,

The dollar turn, if I can call it that without knocking on wood, throwing salt over my shoulder, and saying 12 ave marias, has been fascinating.  I watched a lot of CNBC today, which was torturous (I wanted to buy a Dennis Kneale life-size doll, tie it to the back of my truck and drag it 1/2 way across CR) and not one person considered the possibility that the dollar could be going up for reasons other than the stock market going down.  It's a one-way street for these wall-street zombies.  What if the dollar is going up for reasons unrelated to the stock market and that is causing stock-market liquidations to cover dollar-carry loans?  I'm sure that is just completely inconceivable for these people.  Not that I'm right, but I would just appreciate a mention of the possibility.

On one segment, Kneale and some other CNBC superstar were wondering why inflation hadn't reared its ugly head yet.  Kneale theorized, and I swear I saw smoke coming out of his ears due to the sheer effort involved, that maybe, just maybe, credit destruction was greater than money supply creation.  I would have given him more credit if he hadn't exhausted himself getting the words out of his mouth in the correct order.

Anyway, I see a huge turn coming, with the $ vaulting past the $77.50 barrier of death and causing sheer-cliff falls in all other asset classes except bonds.  If I could say that while sounding like an idiot, I'm sure I'd be on the short-list for Dennis's slot.

 

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Re: In The Air Tonight
Farmer Brown wrote:

Anyway, I see a huge turn coming, with the $ vaulting past the $77.50 barrier of death and causing sheer-cliff falls in all other asset classes except bonds.  

I'm with you on that FB! I believe this dollar rally has the makings of something much bigger. In my experience, the best investment is always the one considered worthless by the crowd. Not only is the dollar considered trash, its downright feared, a double "wham-bam thank you mam" slam dunk of a trade in my book. Thanks Goldman Sachs for the beautiful set up.

I promised myself no more trading, but after that run-up yesterday I just couldn't resist going short. I'm out now and no way I'm sticking a toe in this market until this cockiness of mine wears off.

All the best....and sorry for the vanity.

Jeff

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Re: The "Rally" Just Flinched

The odd note in today's symphony was the price of gold holding up like it did.

I'll be analyzing that and a few other market phenomenon I saw today that add up to "round 2" in my mind.

I'll post it all in the Insider area tomorrow as soon as I finish scrubbing through everything.

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Re: The "Rally" Just Flinched

Dr. M,

I have been so fixated on the $, I didn't even pay attention to gold today - shame on me!  Look forward to the report!

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Re: The "Rally" Just Flinched

Yes, gold held it's ground today despite the very strong market selloff.

Also, note that 9 banks were closed tonight.  That's a lot.  And a couple were decent-sized.

http://www.fdic.gov/bank/individual/failed/banklist.html

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Re: The "Rally" Just Flinched
Lemonyellowschwin wrote:

Yes, gold held it's ground today despite the very strong market selloff.

Also, note that 9 banks were closed tonight.  That's a lot.  And a couple were decent-sized.

http://www.fdic.gov/bank/individual/failed/banklist.html

the banks were in only 3 different states so i think the FDIC teams can handle the 3 banks in their assigned state in a weekend.  I don't think they have 9 teams.  I think more banks are failed, but the FDIC doesn't have the manpower to close more each week.  Any feedback from someone who knows?

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Re: The "Rally" Just Flinched

Everybody & their dog seems to be short the dollar so one might wonder if the dollar strengthening might set off a monster short covering. This might cause a little "Glitch" in Dennis the mennis Kneale's V shaped recovery. I hope there is little more Rally left so I can top off my shorts. After that I hope they smash it hard so I can start picking up USO as oil has only one way to go on down the road one would think. At least until they get the bright idea to Nationalize it for our national security.

Please watch the video on this link  http://www.cnbc.com/id/33538538/site/14081545 with David Rosenberg on Fast Money on 10/29/09. These idiots kept trying to put words in his mouth. Good to see him get mad & tell them if they are going to ask him on this show they have to give him more than 20 seconds to answer. Once he says something they didn't like to hear they try to cut him off. Jerks!

Today had to set them back some IMHO.

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The "Rally" Just Flinched, Gold Didn't
cmartenson wrote:

The odd note in today's symphony was the price of gold holding up like it did.

Its hard to make a conclusion on one day of data, but this does look very promising for spot gold. Its getting very difficult to maintain my bearish stance on gold. One of the traders that I have been following lately is Tim Knight at www.slopeofhope.com .Here is his recent market commentary (halloween):

The divergence developing between spot gold and the gold miners (GDX) is interesting.

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