The BarkerLetter

January 8, 2008

Greetings investors

I want to provide some kind of look ahead for 2008 based on some fundamental and technical events of late.

The technical indicators for the broader US market are showing a ‘topping’ effect which we haven’t seen since before the last bear market. This is not cause for optimism looking forward.

It’s worth noting first and foremost that the 50-day moving average of the DJIA has moved below the 200-day MA for the first time since November 2005. It’s known as a “dead cross”, and it’s bearish.

Also worth noting is the lack of response to the recent interest rate cut by the fed, the fourth to occur since August.  The first two rate cuts fueled the rally from mid August to mid October. However the last two rate cuts resulted in subsequent sharp sell offs after fueling a pair of brief  - but diminishing - highs on Nov. 2 and Dec. 11.

As my favourite technical analysts at stockcharts.com says, ‘…the negative reaction to the last two rate cuts indicates that something is rotten in the kingdom of stocks.”

Last week’s lacklustre employment report took the Dow below 13000 and finished the week below the 17-Aug close. The Dow is now down after four rate cuts.

What does this mean? Probably that something more than rate cuts is needed to keep the bull market burbling along. Or it could mean the real reaction to the Fed’s medicine hasn’t trickled through the markets yet. That’s kind of doubtful, since the markets are the first to react to that sort of news.

The short term forecast: I think we’ll see even greater strength in gold as the US$ withers in the face of a continued, aggressive rating cutting policy by the fed. That will also drive capital out of bonds and into equities, as investors seek higher returns.

Conclusion: Continue to hold gold!

So much for the big picture. My prognosis for gold notwithstanding, I don’t think mineral stocks will be immune to a sell off if bearish sentiment takes hold over the longer term. They’ll get caught in the downdraft like everything else. However, some stocks will rebound, so it’s worth speculating on what those may be.  As I’ve already stated, gold is still your best hedge against uncertain times. Moreover, undervalued companies with ridiculously low operating costs will enhance your gains considerably, even if we encounter diminishing commodity prices. These stocks always become the market darlings in this scenario.

I’ll have a few suggestions for those in the days to come.

Be careful out there!

Kb