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posted on 07 August 2017

The Market Is Fracturing

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It was in February or March 2009, near the bottom of the last major decline in the stock market, that Warren Buffett was quoted as saying “The stock market has nowhere to go but down." He was mistaken. That was exactly when he should have opened up his corporate checkbook and picked up bargains.

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Now, the reverse situation is dominant, where measurements of optimism are at their extreme peaks and complacency rules. The deep-pocketed players are engaged in a game of musical chairs as they concentrate on only a very few large-cap stocks. The professionals who respond to the sentiment surveys believe that the stock market is on the verge of a major liftoff, while the man-in-the-street investor, who plays with his own money, is running away, as shown by the fall-aways from recent Highs in the Russell 2000 and the SmallCaps.


The stock market is fracturing. The major Indexes tend to provide a false reading of the general state of the market because of the huge market capitalization of just a few of the dominant stocks. The Value Line Geometric Index provides a more balanced picture, because it considers 1700 or so individual stocks, across the board, in which all stocks are given equal weighting. In the Value Line, Apex Gizmos Corp. counts for just as much as Apple. Below is the Daily chart of the Value Line. You can see that its view of the state of the market is very different from that of the Dow Industrials, which is up in the clouds, all alone:


At a time when the Dow seems to post a new High nearly every day, sales of new cars are down; defaults are rising on subprime used car loans; the Fed holds off on ramping up the Federal Funds interest rate; some food prices have declined a bit; and the rate of inflation has not risen in spite of the Fed’s quantitative easing experiments. The Fed is terrified of Deflation; but it’s coming. Expect to see home prices begin to peak and then fall off, first in selected markets, then across the country.


Gold is in a bull rally within an underlying bear market. It is in an upside, countertrend advance, a correction, which is climbing toward a peak and reversal. It still has a good distance yet to go. However, Gold will not “go celestial" this time. Maybe next time, many years or even decades from now; but not this time. First, it will sink to below $1,000 per ounce.

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