One More Canary

The leader groups in the market have been telegraphing the turns in the S&P 500 pretty well the last few years, and recently they have all held hands and sung a new song. I've written an article all about this What Tunes Are The Market Canaries Singing These Days ? over at Seeking Alpha, but since it's an exclusive to them, I can't post it here. I was remiss, however, in not pointing out one of the biggest, baddest canaries of them all, which I will do here.

This bad ass canary is the tracking of the cash levels of mutual funds. It is a contrary indicator because it depends on funds being the market, and if they are all in, the supply of dry powder for further upside gets pretty low. And for the last 40 years, that's about the way it has played out:

This history clearly shows the market was crusin' for a brusin' any time the cash level got down anywhere near 4%. This happened in 1972 in front of the '73/'74 beating, in early 2000 in front of the '00/'01/'02 beating, and in 2007 just in front of the '08/'09 beating. Well, Mister Market may want to brace for another assault and battery, because we are at around 3.5% now.

It should be noted that economic cycles are also very important, and each of these dips to below 4% happened in front of recessions. The only dip that didn't was the one in 1976, and the market's decline wasn't very bad after this cash level drop to around 4.5%. We currently are in an economic recovery cycle, so if we can avoid another recession, a market drop may not be so terrible.

Nichols' Last Stand ?

The 64 month parabolic gold fractal as espoused by David Nichols in The Fractal Gold Report is entering a do-or-die zone the next couple weeks or so. As you know if you've been reading my posts, Nichols has been using fractal analysis to call the moves of gold to a high level of accuracy for years now. He says these moves are all within the context of a large scale parabolic growth fractal - the 64 month pattern that repeatedly shows up in big bull markets. This fractal must end in a parabola ending blow-off spike to around $2000 - and then the big collapse. The sprout point of this he reckons as September 2005, which agrees strongly with the silver chart; and the end of it is January 2011. Given that plus or minus a month is his tolerance for the pattern, and that other big scale cycles would have a flip occurring in gold from bullish to bearish by Feb 18, the finish line for the 64 month drama is just in a couple of weeks.

Well, where is the drama ? There is no drama ! Nichols first expressed puzzlement many weeks ago over gold's "delayed launch" and now must have a huge collapse immediately to mark the end of this 64 month growth fractal. Gold clearly isn't in any kind of 1979 style parabola ending mode. And it appears to be finishing up a pretty normal and orderly correction from overbought to oversold - as if it were tooling along somewhere in the middle of a bull market. No blow-off spike to a top and thus no big collapse. What's going on here ? How could a guy who has been getting the intermediate term moves in gold so right for so long be so wrong on the big overall pattern ?

Well, as I've been suggesting for awhile now, I think it is a matter of scale. My fractal posts basically say Nichols is right about the overall fractal pattern gold is in, but he may have the wrong scale of it in mind. As fractals are wont to do, they proliferate the same thing in all different scales. And gold may well be in the larger scale version of the 64 month iteration that Nichols has been focused on. I've given several examples from history of this bull fractal in my previous posts - it happens. And it seems to be happening with gold, as it did in gold's previous bull market of the 70s.

But Nichols has not recanted his 64 month doctrine - that apostate, that hard-necked heathen. As I've mentioned before, he used to be a true believer, saying in 07 and 08 that the commodity bull in general and gold in particular is the anti-fiat way to invest and has many years to run. Then he went astray with this January 2011 thing. He may have to come back into the fold, however, in two weeks. He more or less has drawn that line in the sand himself. From his February 1 Report on gold's action:

I have been pointing to a retracement up into the $1,355 to $1,365 zone to give us a clearer picture of this pattern, and the "tails" on the daily candles are starting to stack up just under this zone.

This seems like a set-up for an intraday foray up into the $1,355 - $1,365 zone that cannot hold into the close, leaving a long "tail" on the daily candle. This would not be a bullish development, as it would satisfy the requirement for a 38.2% retracement of the drop, but leave gold with a weak price pattern. If I had to guess, this is how I think it will develop right here.

The other alternative is a strong rally higher that holds up in this $1,355 to $1,365 zone through the close. But in my opinion it is going to take a close solidly over $1,365 to warrant taking baby steps back onto the bullish side.

He seems to be saying, "OK, if gold climbs back up over $1365 and doesn't do any February dive to oblivion, I was wrong about the 64 months". We'll take him back wholeheartedly into the flock of gold bulls.