Investors Staying Away from Banks; Gold Attempts to Break Downtrend

February 08, 2009 | By: Chris Ciovacco

If the regulators hope to bring stability to the markets, they might want to consider leaving the rules unchanged for more than two weeks at a time. Why would private capital want to come off the sidelines to make a long-term investment in banks when it is nearly impossible to make an assessment of regulatory and balance sheet risk? There are rumblings from Washington that "mark to market" accounting rules may also be "altered" or "suspended", which will bring even less transparency to the risk-reward equation. Investors have voted with their feet by walking away from bank shares. Traders will react to the new plan on Monday, but investors will largely stay away for now. As a result, taxpayers will continue to pay the price for incompetent risk management by bank executives and boards. Two-month charts of Bank of America, Citigroup, Wells Fargo (WFC), and the KBE Bank Index (KBE) are shown below.

click to enlarge

Government Policies Could Get Gold Over The Hump: Gold is somewhat of a unique investment in that it can perform well in both during periods of price inflation and deflation. It has appeal as an alternative store of wealth to paper currencies. The supply of paper currencies can be rapidly expanded via the government’s electronic printing press. Gold also serves as a safe haven in times of crisis. Deleveraging across the entire economy has contributed to gold’s lower lows and lower highs since March 2008 (a downtrend).

Technical Cons: Referring to the labels on the chart above: (1) Gold experienced a negative “death cross” in September 2008, (2) the slope of the 200-day moving average turned negative in October 2008, and (3) the downtrend from the March 2008 highs (see thick blue line) has not yet been clearly broken. These are all reasons we have remained patient despite the fundamental reasons to own gold.

Technical Pros: (a) Several higher-highs since the November 2008 lows, (b) price is above the 200-day moving average, and (c) slope of 200-day moving average is trying to make a turn for the better.

What we would we like to see? (a) A close above $906.50 (this has already happened – another positive), (b) an intraday high above $936.30 (not yet), (c) a clean break of the thick downtrend line from the March 2008 highs (close, but we still could fail and reverse course), (d) a reversal of the “death cross” where the 50-day moving average (thin blue line) rises back above the 200-day moving average(thin red line) - not yet, but close.

Not Too Late To Protect Principal: If you think it is too late to adopt a stop-loss discipline in the event the U.S. stock market continues to fall, Japan's post-bubble history may cause you to reconsider. On Dec. 29, 1989, Japan's Nikkei Average stock index, helped by booming real-estate prices, hit its all-time high of 38,915. It has never seen 38,915 again. It closed at 7,825 on Tuesday (2/3/09) or 79.9% below the 1989 high. If the U.S. market were to fall 79.9% from the October 2007 high on the S&P 500 of 1,576, we would drop to 315. 315 on the S&P 500 is not a forecast or prediction, but it does highlight the need to protect your hard earned principal in the event things continue to deteriorate. Learning how to cut losses is extremely important.

Disclosure: Author does not hold positions in any securities mentioned in this article.

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