October 7th, 2010

Three Simple Rules That Explain Everything

I’m intrigued by two dramatically different charts that I’d like to bring to your attention: EEM and GLD. I’ve superimposed onto both of these the S&P 500 (in blue) for comparison purposes. Before saying another word, let me show you what I’m talking about (click on images to enlarge):

  • EEM vs. S&P 500

    The take-away from this chart is that both the U.S. and the Emerging Markets had similar declines from the 2007 to the 2010 peaks, EEM has be able to break above that trendline (solid red) while the U.S. is struggling just now to break above its trendline (dashed blue). I fall back on the mid-term election year market cycle I wrote about back in January along with the trickle of better economic news (leaving the politics of it aside) and count on the U.S. markets to follow the rest of the world to higher ground in 2011.

  • GLD vs. S&P 500

    The take-away from this chart is the huge divergence between GLD and the S&P 500. Listening to the day’s market reports you’d think that the world began in the morning. The reports usually are shouted as if they were actionable alerts, critical turns, outstanding price movement. In fact, the real story stretches over years. While it’s true that GLD has seen some dramatic volatility, it has been in a fairly steady uptrend. Will this move carry GLD up to 200+, where the top boundary extrapolated might wind up? No one can say but I’d say the odds are pretty good if you have the patience (and the world’s central banks don’t spoil the party.

If you key your eye on the long-term rather than day-to-day fluctuations, I believe the following three wonderful phrases encapsulate just about all you’ll ever need to know about the stock market:

  1. “Trends, once established, have greater odds of continuing than of reversing.”
  2. “Focus on the turns and the trends will take care of themselves”
  3. “Extremes tend to always revert to the mean”

How could that apply to GLD and EEM?

  • GLD is in a trend that will continue. It is approaching the mean today, will probably go to an extreme above before trend reverts back to the mean.
  • EEM is breaking out of the year-long consolidation to continue its uptrend. The rest of the world, including the US will follow suit soon.
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  • Anonymous

    So this means sell EEM right? And wait for buy signal on SPY!

  • Joe

    Dog, I'd say buy all three: EEM, SPY and GLD. That's what I and subscribers to my Alerts have done.

  • Anonymous

    XLK (=23) has the chart looks like in 2006.. could it make a run to 26-27??? thx guru.

  • Joe

    XLK price target of 26? Very modest stretch and reachable by early next year, IMHO.