Larry Edelson: Several factors are aligning for a short-term pullback in stocks and precious metals, after which both with go on massive bull runs that will push the Dow to 31,000 by the year 2020.
As long-term bullish as I am on precious metals, I’m just as long-term bullish on the major U.S. stock averages.
In fact, the Dow has now exceeded the 18,500 level — after flirting with it all year long basically — a level of resistance I identified more than a year ago.
But, we have yet to see a monthly close above that level. That is necessary to validate my forecast of Dow 31,000 by 2020.
Now, let’s say the Dow Industrials do close above 18,500 this month, on the last day of trading. Is it then going on a moon shot to 31,000?
No, it’s not. In fact, even if we get that major buy signal at the end of this month, it does not preclude a pretty sharp correction occurring first.
Which is precisely what I expect, buy signal or no buy signal, this month. Why?
Reason #1: The major averages are extremely overbought, indicating they need to pull back.
Reason #2: Most U.S. publicly traded stocks are already in bear market territory, down more than 20 percent for the year and there is no way the major indices can advance without the troops, a condition that typically precedes a major selloff.
Reason #3: My AI models for the Dow Industrials, shown here:
Click image for larger view
As you can clearly see, it’s pointing toward a steep drop into early October …
Before resuming its long-term bull market.
I know what you’re thinking: How can the Dow plunge into October, along with the precious metals, which I wrote about last week?
They can move together simultaneously up or down and have done so many times throughout history.
The most recent example is the 2008/09 real estate bust and stock market crash. Back then, gold crashed from roughly $1,035 to $682 — a 34 percent plunge — while the Dow Industrials crashed from roughly 14,240 to a low of 6,465, an incredible 55 percent decline.
So yes, precious metals and stocks can go down together, and, they can go up together.
And that’s precisely what’s going to happen. They will pull back together into October, then liftoff to the upside again …
Giving you the opportunity to load up on stocks and precious metals!
Speaking of gold and silver, the Commitment of Traders (COT) reports from the Commodity Futures Trading Commission (CFTC) still show an overwhelming bullish sentiment in the precious metals, at or near record highs. All it takes is one seller to get spooked, and a selling avalanche will unfold.
In fact, despite another attempt this past week, gold failed again to take out important overhead resistance at the $1,360 to $1,365 levels on a closing basis.
But once $1,320 gives way on the downside, gold should continue lower into October, to the $1,250 level, and possibly even lower.
If it were me, as I noted in last week’s column …
I would hedge any gold and silver holdings you may have with inverse ETFs. For gold I would consider ProShares UltraShort Gold, symbol GLL.
For silver, I would consider ProShares UltraShort Silver ETF, symbol ZSL. Careful though, this is a double leveraged ETF, seeking to deliver twice (2x or 200%) the inverse (or opposite) return of the daily performance of silver bullion in U.S. dollars.
For the Dow Industrials and the S&P 500, I would consider the ProShares Short Dow30 ETF (DOG) and the Direxion Daily S&P 500 Bear 1x ETF (SPDN), both unleveraged.
Lastly, everything I study, all major markets and all my major indicators, tell me we’re rapidly approaching an inflexion point in the markets. Fundamentally, I would explain it this way: Investors are getting more and more nervous about who the next U.S. president will be.
So they are moving to cash, to the sidelines. Soon that move will turn into an all-out run for the hills, causing sharp declines.
But once a new president is elected — no matter who it will be — long-term bull markets will reassert themselves. And the U.S. — whether with Hillary or Donald — will still be the recipient of huge capital inflows.
In afternoon trading today, the SPDR Dow Jones Industrial Average ETF (NYSE:DIA) shook off early losses and got back to even at $185.80 per share. The DIA, which is the largest ETF that tracks the DJIA, has gained 6.8% year-to-date.
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