IN THIS ISSUE:

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• Which analyst's followers have banked a total gain of 178.13% since January 2011?

• How to avoid a stock market crash...

• Why gold is Dominic Frisby's best bet in the market

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From Gary Booysen, analyst, Stockmarket Sleuth

Dear reader,

Last week, we pegged 27,000 on the Alsi Top40 as a critical level for investors.

There was a 7% sell off in the local market and we were in desperate need of a bounce. Our level held firm (the market dipped below by a mere 9 points in intraday trade) and proceeded to rally hard from there.

We closed the week at a whopping 28,578! And, with a 1,500 point rise in under a week, the world is looking rosy again!

The buying came in on the back of the anticipated temporary resolution of the Greek crisis. But, by the time the Greeks actually voted through their austerity measures, most of the gains were already priced in.

The hum of excitement reached fever pitch as the vote took place. Both the Dow and the Alsi were spiking up and down with every vote cast. And traders across my dealing room were on their feet screaming as the Dow fell 40 points after a certain deputy voted against the measures, when the experts were expecting him to vote that way!

The volatility that afternoon was massive and there were fortunes made and lost as traders furiously second-guessed the outcome. Of course, Greece is now fading into memory as we turn towards solid economic data to inform our decisions.

The Chinese inflation outlook looks more benign and we're seeing the Volatility Index - the market’s established fear gauge - falling as investors shrug off their worries and move back into risk assets. But when everyone's buying it could be a key indication that it's time to sell.

A quick look at the trends on our local market gives us two potential turning points. The first resistance comes in at 28,800 and the second at around 29,200.

If we manage to break through then it's all the way up to old highs at least. But looking at seasonal data it's more likely we'll see one more small dip before we head for the sky.

When markets are falling it's natural for us all to believe the worst. Thoughts of double dip and complete apocalypse start gaining traction. Of course, that's exactly when we should be buying.

Today, I'm going to hand you over to renowned technical analyst, Dominic Frisby, as he looks at some of the trading patterns surrounding the 2008 financial crisis. While he reckons a complete crash is unlikely, he hints that with a thorough inspection of the price action, you have a far higher chance of getting out before you do any serious damage to your portfolio.

On top of that he looks at the one "asset class" that survived the 2008 crisis better than all the rest...

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From Dominic Frisby, analyst at MoneyWeek, London

A number of people are still asking: "Will Greece be the new Lehman Brothers?"

Even with the austerity measures in place there is still some room for collapse. The S&P ratings agency is still warning that a debt roll-over will amount to default.

So, would a default by Greece freeze up the financial system, just as the Lehman Brothers collapse did, triggering another stock market crash?

2011 has seen stock markets behaving badly, there’s no doubt. But are we headed for a crash?

Today I want to take a look at the chart action of some of the key sectors leading up to the crash of 2008 and compare it to the chart action of the same sectors today, to see if they shed any light on the matter...


Crashes are extremely rare

Even though we’ve had two in the last 11 years, crashes are in fact extremely rare. So the laws of probability suggest to me that crashes are not worth betting on. Even if Greece defaults, creating untold problems in the financial markets, it probably won’t freeze the financial system in the way Lehman did.

Lehman wasn’t the world’s biggest bank, but it was a major component in the global financial network. Being involved in so many trades meant that when it went under, the whole banking system froze. Greece is not involved in the financial system to anything like the same degree.

But a default by the banks that are exposed to Greek debt? Now that’s another matter. This of course, is what much of the noise around the crisis was all about. Policy makers are more concerned about the ramifications of a few leading European banks getting into trouble than they are about Greece itself.

Financials were also the first sector to warn investors of impending disaster in the last crash. In the lead up to the 2008 financial crisis, the financial stocks actually peaked in February 2007. They retested that high a few months later, failed the retest and it was down from there.

The major stock markets – the Dow Jones and the S&P 500 – peaked a whopping six months later in October 2007. The warning came from the financials. They led, and the Dow followed.

Gold was one of the hardiest asset classes during the crash

Interestingly, Canadian stocks – a market I follow closely – peaked in April 2007, before the financials failed their retest.

Canadian stocks are closely linked to oil and metal prices, of course, but because many are either exploring for or developing mineral deposits, they don’t actually have cashflow, so are dependent on funding. When liquidity dries up, they sell off. So in many ways they reflect the state of the financial markets as much as they do commodities prices.

Elsewhere, gold made its high in March 2008, six months after the Dow. The last to peak was oil in July of 2008. By the northern hemisphere's autumn everything was crashing.

But gold made its low in November 2008, as did oil and Canadian juniors. The Dow and the financials carried on falling until March 2009. Gold’s late peak and early rise was a display of comparative strength.

You can see what I have just described in the chart below. It’s a bit of a spaghetti junction, I’m afraid, but I have described above what I see as the key messages to take away.

The Dow is the black line, the financials the red line, oil the green, gold the gold (it’s very clear on this chart just how much more durable it was than every other asset class) and Canadian juniors the blue.

There’s bad news and there’s good news

The bad news is that this sequence is repeating – at least to an extent – today. The good news is that while I think the correction will continue, we won’t get a repeat of 2008. Hopefully.

This time round, the financials were once again the first to peak, in February. The Canadian juniors peaked a few weeks later, while oil, gold and the Dow all pushed on to new highs, before peaking simultaneously at the end of April. Since June, the financials have stabilised a little, but oil and the Canadian stocks have been in freefall.

For all its weakness over the last few days, gold has still been relatively strong.

Here is the same chart of the various markets over the last 18 months. The same colour scheme applies as before.

This whole process has happened over a much smaller time period than between 2007 and 2008. That leads me to think that any further declines won’t be as dramatic as those of three years ago.

Europe has somehow managed to fudge its way through the Greek debt crisis, just as it did last year, and put off the great day of reckoning – which we all know is coming – for another year or two.

And if things get really bad in the stock market, I’m sure gold’s great allies in the central banks will introduce QE3 or something similar.

As usual, I reserve the right to change my mind as events unfold. But I see this current stock market bounce as something of a dead cat bounce and I reckon we'll still come back to test the lows before we get a break on the upside.

Until next time,

Dominic Frisby