Gold Breaks Out And Another Wildcard Next Week

THE FINAL NUMBERS - ANOTHER WILDCARD NEXT WEEK NEWS: The major markets were moved once again by two reoccurring factors: oil and financials. Friday the indices had to deal with record oil prices and a collapse in Fannie Mae/Freddie Mac and managed to close off the lows. The Dow finished with a loss of 128 points or 1.1%, but did close 123 points off the intraday low. The S&P 500 moved in similar fashion with a drop of 14 points or 1.1%. The NASDAQ faired the best with a loss of 0.8% or 18 points; at one point the index was down 54 points. The Russell 2000 completely bucked the trend with a gain of 0.7% on the day.

THE BOTTOMLINE: The volatility never ceases to amaze me and with the focus of traders on every word coming from the government regarding Fannie Mae/Freddie Mac, it only adds to the intraday movements. The major newswires broke a story that Bernanke would open the discount window to the two beaten down companies and the Dow went from down 200 point to positive territory in minutes. That rally did not last long and the index finished the day down triple-digits. The one positive sign I saw today was the fear level finally increasing in individual investors and traders. The VIX confirmed that fear with a spike of 7.4% to the highest close in over three months. At one point today the fear/complacency measurement spike almost 15%; the VIX is now almost at levels comparable with the January and March lows.

Next week a third wildcard is added to the mix - earnings season. The daily swings in the market will now be tied to the second quarter earnings numbers from a bevy of large names. Companies such as Merrill Lynch (NYSE: MER) report next week and could set the tone for an entire trading session before the bell. If I am wrong and there is a capitulation bottom, I believe next week is as good a week as any to have one take place. Just a guess.

McCALL’S CALL - THERE WILL BE NO CAPITULATION

NEWS: One of the buzz words that the bulls are throwing around on Wall Street is capitulation. Capitulation occurs when investors believe the world is coming to an end and that the future has nothing positive going for it. The end result is a mass exodus out of the stock market that results in a major drop in prices of stocks.

THE BOTTOMLINE: A capitulation is often associated with a bottom in the stock market because when everyone has given up on stocks it will mark the end of the downtrend. This is a contrarian theory that is based on the fact that the masses are usually wrong — which I believe is true. But because everyone on Wall Street, whether you are a professional trader or novice investor, is looking for a capitulation bottom, it will not occur. Instead the slow, drag-out process that has been taking place is what we have to look forward to until the stock market turns around. And mark my words, by the time CNBC and your neighbor calls the bottom, the stock market will already be up 10% from the low.

THE DAILY ETF UPDATE - GOLDEN BREAKOUT

NEWS: For three months GLD has been moving sideways with support at $85and resistance at $93. During that time the ETF has formed a “W” pattern, that when broken to the upside can be a powerful buy signal. Today that breakout occurred.

THE BOTTOMLINE: A gain of $1.63 Friday helped GLD close at the best level in nearly four months, $95.16. The breakout from the Bullish “W” Pattern triggered a buy signal that should have the gold bugs smiling. We have had exposure to GLD since the $60’s in our ETF Bulletin newsletter and held through the consolidation during the last four months. The reason GLD was not sold when it hit $100 in March is two-fold.

For starters, gold is a great hedge against any geopolitical events that may occur (Iran/Israel, etc.). When unexpected events occur it is not uncommon for gold to become the “safe haven” for investors. The second catalyst for higher gold is a weak US Dollar. Even though the greenback is trading off its multi-year lows, the chart of the US Dollar Index remains weak and could get weaker. Holding some GLD or another comparable ETF is a good strategy for the long-term investor that prefers to diversify their portfolio.

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