Half Monty's "The Trauma of Transition"

Posted earlier over at Gold Forum


The Trauma of Transition
(Half_Monty) Jul 27, 09:22

In the continuing rotation from bonds to stocks to commodities, periods of transition have proved volatile for all markets. As one investment theme is exhausted, there is a resort to cash as investors await clarification of the next investment theme.

In June 2003 the bond market made a 50-year top. In the following weeks, bonds sold off, and the PM sector, which had tracked higher with the bond market for two years, also sold off. POG fell back to $335 from much-publicized resistance at $354. The HUI failed for the third time at 155, falling back to 141.

As we now know, the action of Jun-Jul '03 marked a transition of investment focus from bonds to stocks. In the time since, the PM sector has tracked higher with the broad SM, just as did previously with bonds. In the immediate aftermath of Jun-Jul '03, gold stocks launched to a new cycle high, while gold and silver followed along to new highs in 1st quarter 2004.

It is possible that we have just witnessed, in Summer '07, a stock market top akin to the bond market top of Summer '03. It is possible that we are seeing a transition period very like that of Jun-Jul '03. Just as PMs had risen with bonds, they fell with bonds; just as PMs have since risen with stocks, they are now falling with stocks.

What we have seen, imo, is a secondary rotation from bonds to stocks within the context of a primary commodity cycle. What we will see next, I think, is a secondary rotation from stocks into commodities. We will finally see the secondary rotation in commodities meld with the primary cycle in commodities.

At the risk of overstating the similarities with 2003, the $354 and $682 resistance levels for POG are both Jim Sinclair "lines in the sand." HUI 155 was a level that resisted penetration for over a full year, just as 370 has.

To sum, I believe that the final rotation from stocks to commodities may be on the threshold of a launch. We have seen, in this primary commodity cycle, a topping of the secondary cycles in bonds and, quite likely, in stocks. It may be now be time for the primary and secondary cycles in commodities to conjoin in a final, multi-year run to the top.

JMO.

Best.