The Golden Rule of Reactions

Those who are new readers are probably unfamiliar with what I have called the Golden Rule of Reactions.  When it comes to TIMING, it is vital to understand the basic tenets of cyclical analysis. That fundamental principle is where do we draw the line between a change in trend and a mere reaction. That line is drawn in units of 2 to 3 maximum. In other words, a reaction making a counter-trend move is limited to a maximum unit of time being 3 regardless of the level of time be it daily to yearly. After that period of time, trends then emerge. Right now, we have a 3 day reaction in gold from the low of last week. To establish a change in trend, we must continue BEYOND merely 3 days. Failure to do so warns of only a reaction counter-trend.

DJ20-40

Even when there are free markets and a dramatic panic takes place, the same timing emerges during Phase Transitions. We will go over these points at the Princeton Conference. Nevertheless, even look at the Great Depression, you see a 90% decline still contained by the Golden Rule of Reactions – 1929 to 1932.

You must understand that the news is interpreted according to the trend – never in the reverse. US stocks rebounded from their worst decline since November on Tuesday after Federal Reserve Chairman Ben Bernanke defended the Fed’s bond-buying stimulus and sales of new homes hit a 4 1/2-year high. The focus on Italy’s stalemate in the general election failed to give any party a parliamentary majority, was interpreted as prolonging instability and financial crisis in Europe. Of course this will be the case, but then Bernanke’s comments were interpreted as easing investors’ concerns about the Italian mess and refocused on the US economy.

Bernanke, in testimony on Tuesday before the Senate Banking Committee, strongly defended the Fed’s bond-buying stimulus program and quieted rumblings that the central bank may pull back from its stimulative policy measures, which were sparked by the release of the Fed minutes last week. Keep in mind BECAUSE of turmoil in Europe and Japan the capital flows are pointing into the US right now. The U.S. markets shifted from the Italian political circus to Ben Bernanke and the gains in housing because rates have fallen thanks to cash inflows. This should help housing short-term and banks write mortgages right at the bottom once again. Economic reports that showed strength in both housing and consumer confidence. The US home prices rose more than expected in December, according to the S&P/Case-Shiller index, and this should continue into February. Consumer confidence rebounded in February, also jumping more than expected, and new-home sales rose to their highest in 4-1/2 years in January.

Ben Bernanke put in the plug for Obama urging lawmakers to avoid sharp spending cuts set to go into effect on Friday, which he warned could combine with earlier tax increases to create a “significant headwind” for the economic recovery. Our models have been warning about high volatility going into March and April where it should peak. So far, the computer has been pretty good.