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Published: October 5, 2009
Russell Napier, a well-known stock market historian,
studied market tops and bottoms over the last 100 years and
showed corporate bonds tend to lead the stock market by several
months at important turning points.
When this bond fund starts falling, you should exit the stock
market, but until then, you have a green light to speculate...
LQD has turned lower in the last four trading sessions. Please
keep an eye on this chart. If it breaks below 103, immediately
exit the stock market. A large decline may be imminent.
LQD isn't the only indicator I follow to track
the health of the market. I also watch the British pound...
The British pound is one of the most
important financial indicators in
the world. Britain was at the
epicenter of the credit crisis. It
had a huge housing and mortgage
bubble... even bigger than the
housing bubble in the U.S. Britain
also had a huge banking and finance
bubble. In this bubble, London
became the world's largest financial
center. Finance represents almost
10% of Britain's GDP.
In other words, the pound is the
perfect symbol for housing and
financial excess. When the pound is
rising, it means the pain is
subsiding and the storm clouds are
breaking. When the pound is falling,
financial misery is increasing.
Here's the chart of the pound. On
Friday, the pound broke down to new
four-month lows.
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Here's another bearish development. Commodities are falling
in terms of gold...
Gold is a safe haven. People turn to gold when they're afraid of
financial chaos. But when they're optimistic, people use more
energy, eat more food, and live in bigger houses. These
activities require industrial commodities like oil, copper,
aluminum, and corn.
So the relationship between gold and industrial commodities is
an excellent barometer of fear and greed in the stock market.
When commodities fall against gold, there's fear in the air. But
when they rise against gold, people are growing optimistic.
This chart shows the price of gold set against the CRB Index of
commodities. This barometer led the stock market by three weeks
in March, when the bull market started.
In September, the commodity-gold ratio broke down to a new
four-month low. It hasn't made a new low for three weeks. But
watch this one. There may be misery coming in the stock market
if it makes a new low...
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If you invest in the stock market, you need to follow the
performance of these three charts. They're among the best gauges
of fear and greed in the market. As their prices go, so goes the
stock market.
Right now, these charts are hinting at a new downtrend. My
advice, hold off on making new buys, cut your most risky
positions, and tighten your stop losses.
-- Tom Dyson
Contributing Editor
Daily Wealth Editor's Note: This
article originally appeared in
Daily Wealth.
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