Peek Into The Future …

Want to peek into the future of some key markets?

Let’s do that now, by using the best forecasting methods I know of. They’re based largely on a science I’ve been deeply involved with for more than 30 years — historical analysis of the internal rhythms and hidden forces that truly drive the markets: Cycles.

Cycles capture the sum totality of human behavior in the markets via rigorous statistical methods.

Today, I’ll cover what’s foremost on readers’ minds: The Dow Jones Industrials, the dollar, and gold. Then, I’ll show you a startling new forecast.

First, the Dow Industrials: Is the recent rally from the March record low over? Highly unlikely.

Consider this chart, based on my work using the data and cycle methods that my colleagues use at the Foundation for the Study of Cycles.

Dow Monthly

Although the Dow has pulled back on a short-term basis, the important intermediate-term 24 and 40 month cycles on the Dow have already bottomed and point solidly higher into April 2010.

That doesn’t mean you won’t see more short-term pullbacks in stocks. You probably will. What this cycle chart does tell you though is …

arrow That the downside in the Dow right now is limited …

arrow That selling short the Dow or buying inverse ETFs on a short-term basis is not the way to go right now, and instead …

arrow The correct strategy is to hold existing low-risk positions you might have entered into previously, and buy additional positions on weakness.

That’s even more true now because the important short-term 10-week cycle should be bottoming any minute, as you can see from the weekly cycle chart below.

Dow Weekly

Bottom line: If you’ve acted on my previous suggestions to buy positions such as Dow Diamonds Trust ETF (DIA) … or even the Energy Select Sector SPDR (XLE), I recommend holding them for a continued rally. Since I first suggested them, these positions are up 19.2 percent and 13.2 percent, respectively.

Now, you’re probably wondering, with all the bad economic news out there, how could stocks rally again?

My answer: Who’s to say the news won’t improve? Besides, the best stock rallies tend to occur when hardly anyone believes stocks can rally, and precisely when news is bad. Hence the expression “stocks often climb a wall of worry.” I believe we’re in such a period now.

Second, the all-important U.S. dollar: Take a peek into the future here. Notice how the short-term cycles in the dollar show a choppy picture going forward, with the dollar having a slight upward bias to it.

U.S. Dollar Monthly

That’s why the dollar has been trying to lift its head, but is getting nowhere. It’s pretty much stuck in a tight, sloppy trading range.

Meanwhile, the intermediate- and longer-term scenario for the buck remains as bearish as ever, as you can see from this longer-term monthly chart on the dollar.

Notice here how reliable this forecasting method has been for the buck. It’s based on data going all the way back to 1912, and it’s called virtually every major trend in the greenback, including the peak in 2001, the short-term bottom in 2004, the record low in 2008, and the recent bounce.

U.S. Dollar Monthly (Long-term)

Combined with the previous short-term chart on the dollar, it’s not hard to see where the greenback is headed: For the next few months, sloppy, sideways trading with a slight upward bias (not worth trading on the long side), and then down hard for the next few years.

The fundamentals support the long-term bear market in the dollar as well. Just recently, for instance, India and France have joined with Russia and China calling for the dollar to be replaced as the world’s reserve currency. And now there are even rumblings coming out of Japan that it, too, is looking to diversify its dollar reserves — at $685.9 billion, the second largest in the world — away from the dollar.

And then there’s the U.S. budget deficit, which just hit $1,000,000,000,000 … and trillions more in liabilities soon coming due.

My view: Ignore any short-term rallies in the dollar.

Instead, use them to diversify out of the buck into natural resources, other strong currencies such as the New Zealand dollar, the Singapore dollar and the Swiss franc, and/or hedge your dollars and aim for some gains by using an inverse dollar ETF such as the PowerShares DB U.S. Dollar Index Bearish Fund (UDN).

Third, the only real currency in the world, gold: If you’re a subscriber to my Real Wealth Report, then you received the Flash Alert I sent out on July 9 issuing a short-term sell signal in gold and recommending you hedge your positions against a swift, sharp decline. Here’s why I issued that alert — the short cycle forecast for gold:

U.S. Dollar Monthly

Notice the swift decline the cyclical forces are projecting — into a low around July 28. I’ve also received confirmation of that signal on my other technical systems, which also give me a price projection — that gold could fall as low as $808 by then.

Hence, why I recommended my subscribers hedge their gold.

But longer-term, there’s no need to worry and certainly no reason to exit your gold holdings. Chief reason: Gold’s long-term bull market remains very much intact:

As you can see from this chart, after some short-term weakness, gold is set to resume it’s bull market, which should see it rally strongly into early January of next year, then dip into the spring of 2010, and then rally strongly again into August 2010. That’s when I suspect we will see at least $1,500 gold.

U.S. Dollar Monthly

My view: Hold your core gold and gold shares. Despite some short-term weakness, gold’s bull market is just getting warmed up.

Surprise: Unemployment Should Be Peaking

Good news. Despite what all the pundits are telling you about unemployment, that it will likely continue soaring, my work indicates job losses should soon abate, and employment should soon start picking up.

You can see it here in this long-term chart based on nearly 40 years of unemployment data.

Unemployment should be peaking now; employment picture should look much better

Notice how the cycles projections have called nearly every rise and fall in unemployment over the last four decades.

Does this mean the economy has bottomed since unemployment tends to be a lagging indicator?

It’s too soon to say. But no matter how you look at it, I think this is great news.

Best wishes,

Larry

P.S. For more detailed cycle analysis … including razor-sharp timing recommendations for your core portfolios, certainly consider a subscription to my Real Wealth Report. It’s a mere $99 per year.



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Your thoughts on “Peek Into The Future …”

  1. In your June 22nd column you stated that, “There’s no sure way to say at what levels the current rally in the Dow will peak. It could be just a couple of hundred points higher, to near Dow 9000. Or, it may peak even higher, near 10,000.

    ” But, I can say this with a high degree of confidence: After this rally in stocks is over EXPECT TO SEE ANOTHER MAJOR, MULTI-MONTH DECLINE TAKE PLACE WITH THE DOW FALLING BACK TO RETEST ITS 6,440 LOWS.”

    Yet, now it appears your saying the rally will continue further into April 2010. What happened, or, am I misreading something?

  2. I remember weeks ago, you had said that after this rally is over – it was going to happen in a few months time or something, we would see a new bear market again surprising most people. Of course, the market was nervous or rather fragile then after a few sessions of selling. It seems that you are back very bullish after a few days of up market.

  3. From a timing point of view it would be interesting to see the daily charts. Short term the market may be peaking before a pull back to 8-12th August.

  4. It seems you and Martin are in complete disagreement on this. Martin keeps screaming, “the sky is falling, the sky is falling” and you’re saying “no, everything’s fine.” How can anyone act on any recommendations you guys make when people as smart as you and Martin disagree on the most fundamental aspect of the market, i.e., it’s future direction? Martin says sell everything and get into cash and you say the market’s going up until April 2010. What gives?

  5. Larry,

    I just read your other article in Money and Markets which stated….

    “Take stocks for instance: The Foundation’s forecasts have nailed the recent action in the markets, including last week’s bounce. And looking ahead, the cycles turn decidedly bearish on toward the end of the month. ”

    This seems to contradict what you are saying in this article…..

    “First, the Dow Industrials: Is the recent rally from the March record low over? Highly unlikely.”

    “Although the Dow has pulled back on a short-term basis, the important intermediate-term 24 and 40 month cycles on the Dow have already bottomed and point solidly higher into April 2010.”

    ” That the downside in the Dow right now is limited …”

    “That’s even more true now because the important short-term 10-week cycle should be bottoming any minute, as you can see from the weekly cycle chart below. ”

    Can you clarify this a little for me?

    Stacy

  6. Interesting to see how the Dow moves with the cycles. From what I have seen the NASDAQ follws the cycles (not the same ones) even more tightly. Am I right?

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