Thoughts to ponder this weekend with the US equity markets at all time highs…

“We spend our time searching for security and hate it when we get it.” — John Steinbeck. 

One of the basics of Dow Theory is the thesis of three psychological phases in both bull and bear markets. In a bull market, which we are now in, the first or initial phase is the early accumulation phase. This is the phase where wise and seasoned investors enter the market at or near the bottom, when many stocks are selling at great values after having been battered for months by the preceding bear market. Here many blue-chip stocks are selling “below known value.” 

The second phase of a bull market is usually the longest and most deceptive, containing many secondary reactions. During the second phase the retail public shows interest in stocks, and enters the market carefully and sporadically. 

The third or speculative phase of a bull market is characterized by a wild and wooly and ever-increasing entrance by the retail public. This phase is characterized by hot tips, hype and pure greed.”

Take a look at the divergence below between the gold miners spectrum (using the ARCA Gold Bugs index) and the S&P 500 (top orange line) over the last 3 years. Anybody of rational mind cannot argue that we are not in the latter stages of the bear market in the gold arena and the latter stages of the bull in the conventional equity market. 

This could be THE pairs trade for 2014.

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