Over a year ago I published the article entitled “The SKI Triple BUY Signal: Long-Term Implications for Gold Stocks” (please read one of the following links for that article and a description of the SKI indices: http://www.mineralstox.com/info/street.asp?newsid=30, or http://18.104.22.168/editorials/kern/kern020703_ triplebuy.html, or search for Jeffrey Kern). That article (with the obvious BUY in the title) portended a major rise in the precious metals. Robert Prechter (whom I greatly respect) wrote shortly thereafter that the golds had topped and cited the fact that even new technicians (me? Or am I too narcissistic?) were issuing large buy signals. The average gold stock, as measured by the performances of gold mutual funds (e.g., USERX), rose more than 125% off of that triple buy over the next 13 months. Readers were instructed that they could simply stay long until a triple sell signal at some unknown distant time in the future. That first triple buy pattern in 30 years led me to expect a decade of rising gold prices. This article is being written to inform you that, surprisingly, the triple buy signal has been reversed. I know that almost all of the famous technicians that I respect (the Aden Sisters, Richard Russell, Adam Hamilton, Jim Sinclair, and more) are writing articles touting the oversold nature of gold this week (I apologize if I misrepresent or misquote anyone, but I don’t believe that I am). Maybe my face will be full of SKI dung, but all I can tell you are my empirical results. This is not my opinion or the results of an oscillator or a moving average. It is pure original SKI indices. And I act upon those indices and always use stops. The indices and statements are of an extreme nature.
That triple buy article also contained the statement (yes, read every statement because each sentence is carefully written and is important), “Note however, that although the SKI system portends a secular rise, a shorter-term primary bull market signal has not yet been generated. It will take at least 6 more months and probably, several years before a 92-96 index buy signal is obtained. Until that signal is generated, gold stocks should experience longer and more severe periods of decline than during such primary bull periods as 1979-1980 or 1982-1983 (when the declines last only two or three months).” The SKI indices never obtained that primary bull market, although in the mid-summer of 2003 (6 months later), the indices missed that signal by one day, did predict a major rise, but missed declaring the massive primary bull market signal.
For more than a month before the middle of this April I was describing the 2 weeks in the middle of April as being THE critical time period for the determination of the answer to the great “Inflation vs. Deflation” debate. This period was highlighted because my indices were going to do an extraordinarily rare “triple cross-over”, whereby the longer-term (92-96) index was going to rise above the medium-term (35-39) index while simultaneously, the medium-term index was going to rise over the short-term (16-20) index. When that happens, I had to get either the great primary bull market signal or the extremely bearish “triple sell” signal (a 5-month major topping pattern). Nick Laird (“Sharefin”), at his wonderful chart site ( http://www.sharelynx.com/chartstemp/SKI-Global-Sentiment1.php ), was able to see it in advance and even highlighted that area of time for his viewers because he could see the cross-over approaching.
On Monday, 4/11/04, I was forced to send an email alert (free) to readers. The following is an excerpt from that special alert: “Since you are kind enough to read my Updates, I feel the moral imperative to alert you to the fact that my 92-96 index, has generated a sell signal for tomorrow. Tomorrow WILL be marked. Although many major gold stocks and indices (e.g., the XAU) closed slightly higher today, my measure, USERX (the gold mutual fund), closed meaningfully lower, dropping below 8.50 and 8.44, to 8.36, generating my 92-96 index sell signal. I sold today. A drop of about 4% tomorrow (USERX below 8.07) will generate a triple sell pattern. Today’s action suggests that tomorrow may yield a large decline across the gold stocks. This was the critical time period and the gold stocks did the unexpected and ominous fall today.” The next day the gold stocks fell 5% and the triple sell pattern occurred. That weekend I wrote, “all I can say is that the prior three triple historical sells have yielded 60-90% declines in USERX over several years corresponding to disinflation or deflation”. Remember that my data include all SKI indices since 1974. Detailing that further, the first triple sell in the mid 1980s caused a fall of about 35% within 2 weeks after the signal followed by months of sideways action and the eventual decline of 80% over two years. The second triple sell in the mid 1990s did not result in any immediate decline. In fact, prices stayed flat and actually rose about 15% for a frustrating year (for me) before a 90% decline into September 1998. The third triple sell at the end of December 1998 led to an immediate decline of 20%, up and down action for 7 months and an eventual decline of about 50% into the bottom of late 2000.”
THE CURRENT TRIPLE SELL WAS THE PUREST IN HISTORY AND THEREFORE IS EXPECTED TO GENERATE THE GREATEST AND HARDEST DECLINE EVER WITNESSED. I realize that this is an extreme statement and that anyone who makes predictions will avoid trying to pick the proverbial “needle out of the haystack” so as to protect “their rear end”. Nonetheless, that is what I have and so I state it publicly with sweat on my brow. My indices are usually so precise that they’ll mark points to within a day and a penny. Since that triple sell pattern the gold stocks have fallen another 5% in a week and THE ONSLAUGHT SHOULD JUST BE STARTING.
I know that I am preaching against the choir. It is not me, I only follow my indices, which my 20 years of experience suggest have captured the true natural laws of the precious metals’ market (I know, no one believes that they exist or that this is possible except crazy old scientist SKI). I believe and know that gold will eventually be THE asset to own in order to preserve one’s wealth. However, apparently, that time has not yet arrived. A year ago while I was camping with my friends, one asked me, “Well, Jeff, you’ve been predicting disinflation/deflation for 15 years now. You’ve finally been vindicated as the Fed used the words “deflation concern” in their last statement. Congrats. What now?” My response was, “I’m on a triple buy signal and have now become a major inflationist”. Prices have been rising. But the triple sell pattern now turns me back to deflation (unbelievably to me because everything is still going up, except my gold stocks). Real estate should crumble within the next year and I AM selling (see: http://22.214.171.124/ editorials/kern/current.html, or http://www.mineralstox.com/info/street.asp?newsid=215 &PageSize=20&Page=1&order_by=DateTime&desc=1 ).
A number of analysts have suggested that we are entering the equivalent of the 1974-1976 period for gold stocks, meaning that a decade-long rise is still intact, but we may be about to go through a major correction. Perhaps that is true, but from 1974-1976, the gold mutual fund USERX declined 80%. I don’t want to sit long during such a “correction”. Incidentally, the SKI indices never generated a true primary bull market signal prior to 1978. The system did give the “great bottom” buy signal one day after the all-time low in 1976.
Other markets: The SKI indices only work for the gold stocks as a broad group. I have learned through study and experience that ALL inter-market relationships may persist for many years, but eventually and suddenly they change. In the early 1980s I paid ($15?) for the “Big Files” (or something like that), the first of which was on how to make a fortune trading the TED (T-Bill vs. Eurodollar) Spread. The little book showed how that spread always vacillated between two extremes and how one could initiate positions at one extreme and then just make a fortune riding it down to the other extreme and then reverse it back up. It had worked for a decade. You can guess that as soon as I tried it, the spread broke through the historical range and never returned.
I have successfully predicted major changes in the direction of interest rates using my SKI indices on gold stocks for 26 years. The simple rule has always been: After the indices predict a major rise in the goldies, interest rates will bottom (bonds will top) 6-9 months later. For example, look at 1993-1994, a SKI bull market in gold stocks and the greatest decline ever in bond prices. BUT THIS RELATIONSHIP HAS BEEN REVERSED FOR THE PAST THREE YEARS: The gold stocks have risen and the bonds have also risen (interest rates have continued down)! When the government announced the cessation of the issuance of new thirty-year bonds, I wrote, on that day, that the bonds had topped on a long-term basis. After all, that Fall day came 9 months after the gold stocks had begun their major rise and it was a massive spike up in bond prices. That day was an intermediate (months) top, but bonds eventually kept rising even as the gold stocks kept rising. THE RELATIONSHIP BETWEEN GOLD AND BONDS HAS INVERSED AND THIS APPEARS TO BE OF MAJOR HISTORICAL IMPORTANCE. Now, if the golds decline as expected, bonds may actually decline along with them. It makes no sense to me, EXCEPT that this inversion may be the unknown fundamental factor that precipitates the ensuing disinflation/deflation that the triple sell signal portends. The general stock market has been following the gold stocks with a lag of three weeks. They may not have topped as of yet, but their top appears to be likely this year.
I am a “goldbug” in the sense that I believe that the precious metals are the true source of wealth preservation. History shows that all fiat paper currencies eventually are debased and become worthless. That’s what led me to research the gold stocks and it’s all that I purport to be able to do with my empirically-derived and theoretically-driven indices. The current situation is extraordinarily ominous for all asset classes that can lose principle value. The triple sell has occurred and I can’t do anything about it. If it’s reversed, I’ll report it. I can’t predict when that will occur (In a month –unlikely, or in a year). I’ll know when it happens. Be safe and extremely vigilant. Use stops to protect yourself in case my indices are correct and you don’t believe this.
This is your moral, ethical, overly-emotional chicken SKI scientist reporting….
P.S. I like to employ a little levity in my serious financial writings. Hence, my best trade recommendation is to sell short Donald Trump. The shares are symbol TRUMP and sell on the BIGHEAD exchange. Trump went “bankrupt” in the mid to late 1980s and the shares appear to be topping again along with everything else, a true contrarian recommendation based upon his hit TV show, commercials, real estate, and “highly” moral/ethical personality style. Legal Disclaimer: This is a joke, don’t sue me because you can’t collect anyway (and I’ll be correct).
Jeffrey M. Kern, Ph.D.
April 22, 2004
Jeffrey M. Kern, Ph.D., is an academic psychologist with a specialty in the measurement and prediction of human behavior. The communications provided are for informational purposes only and are not intended to be investment advice or recommendations for specific investment decisions. Dr. Kern is not a registered investment advisor. The information provided is considered accurate, but cannot be guaranteed. Investments/trading in narrow market segments or gold futures is for individuals willing to accept a higher level of risk for the opportunity of greater returns. Past performance is no guarantee of future performance. Communications should be sent to: firstname.lastname@example.org . However, Dr. Kern will NOT be reading or answering emails for at least several weeks due to the deluge that has stressed him to the point of needing a vacation from such correspondence! DO NOT EMAIL FOR ONE MONTH. I DO NOT WANT TO WATCH THIS HAPPEN. SERIOUSLY.
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Mar 10 04
TRIPLE SELL SIGNAL!
Apr 13 04
Apr 12 04
On April 12th, 2004 Jeff issued an alert to sell as a very rare TRIPLE SELL SIGNAL was about to execute. Readers were able to exit befor price plunged. The system was late here, and shows the value of Jeff's email alert system for SKI traders!
» Alert: Jeff Sells
Apr 12 04
» The Sell Signal
Apr 13 04