And so it happened; the Dow Transport index closed above 3774 (I spoke about this last week).  If Dow Theory is any guide- and history has proven it to be most of the time- the market is headed higher for now.

All the old rules and adages seem to be going out the window this year:

“Sell in May and Go Away.”

And now the ‘rule’ about September being a notoriously bad month for the market could be about to be violated too. The market really does like to embarrass the most people.

But does that mean other ‘rules’ will go out the window too? November through December is supposed to be an UP time for markets….

So caution is warranted.

In the coming weeks, if this prediction plays out as expected, the Dow will go through the psychological 10,000 level again. The media and ‘experts’ will tell you that this means we can all come out of hiding and that this marks the beginning of a new bull market. I can just see the headlines now: “Obama really is Jesus Christ after all and has truly saved us by miraculously defying the natural laws of economics and markets.”

They will be WRONG. In fact, it won’t be long after those claims that the bear comes out of hibernation.

Please understand, I’m not being negative here, I’m being realistic. The problems in the economy are still there. This is a bear market rally and one thing history teaches us is that these rallies can feel like the real thing… and that they can turn down rapidly without warning.

In the coming weeks you’ll think I’m a fool for saying this. Heck, I’ll probably even call myself a fool as I watch the next stage of this rally, which could be very explosive indeed.

If I was going to play this rally, I’d have my hand firmly on the ‘eject’ handle for starters. Then, I’d invest in stocks that have not yet joined the party. Healthcare stocks for example are badly beaten down and have gone too far; these might be the best beneficiaries of the imminent madness and mass delusion.

Also, the natural gas drubbing has opened opportunities for natural resource stocks and a falling dollar will mean rising commodities too. Contango Oil and Gas is appealing as are many of the more junior (not exploratory start-ups) oil and gas companies.

But best of all, you’re about to be handed your last exit for any stocks you still own either directly or through your investment plans. Once the gains start, people will see their 401ks get closer and closer to the level from which the losses began. They’ll get excited. Worse, greed will kick in and they may even start to think they will be in profit again.

But here’s the big question: Even with this newfound confidence, will people start buying and remortgaging their homes and go on a spending spree? In other words, jump start the real economy.

Assuming this rally does materialize as I’m saying, this question is absolutely critical.

Anything can happen and it’s usually what people least expect.

If people are still worried about pink slips, debt, the declined (and still declining?) value of their home, will making up the losses in their 401ks mean anything (assuming the losses do get completely made up)?

Again, I’m not being negative. When stocks represent fair value again I’ll be shouting their praises from the rooftop (which will coincide with the exact time when nobody wants to watch the CNBC cheerleaders anymore).

So I’m not saying ‘sell’; I’m suggesting that you enjoy the rally BUT keeping your hand firmly on the eject handle.

AND when the market starts down again, look for a way to play it. A way to do that, and hedge any further downside to your real estate, is to consider buying a fund like SRS which makes triple money from REITS (real estate investment trusts) falling. Remember, property is at the epicenter of this disaster, particularly commercial property- that one is a ticking time-bomb and could be the catalyst. In recent letters I wrote about retail space vacancy and you only need to look around at all the empty store-fronts to see what I mean here.

And the market isn’t the only thing that looks to be going up either. Gold burst through the $1,000 mark once again and traders seem to feel it’s in four-digits for the foreseeable future.

Just as I believe the stock market is in a primary bear market (primary = the underlying trend), I believe gold is in a primary bull market.

One thing we know about all bull markets: they always end in a big blow-out speculative phase where everyone and their dog is buying gold. This is the time where your barber and taxi driver is a gold expert and people start investing in highly speculative gold explorers. And it’s the time to sell.

But we haven’t seen this yet. Could this be that last phase starting? Well, most people give you a blank look regarding gold and wouldn’t consider buying any, so probably no, not yet. Plus, I think the gold bulls could be in for one last scare before that phase as gold tries to shake off all but its firmest followers.

Deflationary concerns will be the thing that sends both gold and stocks down again over the next few quarters in my opinion.

Now, if you’ve been ignoring my pleas to get some gold, you’re probably wondering if it’s too late and that’s really what I’m talking about. Longer term, government counterfeiting is set to destroy paper currencies so I think it’s dangerous to not at least have some anyway, even at this price.

But if you’re worried you’re missing out, you might want to consider gold’s little brother: silver…

Historically, there’s a ratio of gold to silver that is 50. That’s to say, if you divide the price of gold by the price of silver, you should get 50. More than that, and silver is undervalued and vice versa.

Gold is about $1000 an ounce and silver about $16, so that makes the ratio 62, meaning silver is cheap in relation to gold.

This could well be the next commodity China wants to accumulate (and send the price soaring). Unlike gold, silver isn’t just a precious metal; it’s used in many industrial applications. Even better, China is encouraging its citizens to buy silver (as it’s cheaper for them than gold) to defend against Washington’s counterfeiting.

The trouble with silver is that it’s quite impractical to store it- it would take 62 silver coins to equal just one gold coin currently. Another way to is play it through a silver fund like SLV and/or a silver royalty company like Silver Wheaton (SLW).

But all this is assuming Dow Theory works as it’s supposed to and this psychological rally continues regardless of all the ugly fundamentals.

We’re at an important crossroads in any case and money will be made and lost. Now is definitely not the time to be asleep at the wheel.
Until next time…

Kevin Raymond