Lately we've been writing about the negative correlation between the equity
market and the precious metals market. This phenomenon has been in place since
summer 2011 and has re emerged in the past few months. Since November 23, the
S&P 500 is up 8% while the gold shares are down 14%, Silver has lost 11%
and Gold 7%. For those who have studied history this should not come as a total
surprise. From 1972 to 1977 and November 2000 to July 2002, precious metals
and the equity market trended in opposite directions. We've postulated that
precious metals and the mining shares won't begin a new bull phase until the
cyclical bull market in US equities ends. We don't expect that to happen immediately
but there are some important signals beneath the surface (with the safe-havens)
that we should direct our attention to.
First, let's take a look at the recent activity in a number of markets. From
top to bottom we plot Silver, Gold, GDX, TLT and the US Dollar. The first three
markets have been in a downtrend since the end of September. Meanwhile, TLT
and the buck began their downtrends in the middle of November. It appears that
these markets have been tightly connected since the end of November. That is
the bigger picture. The short-term term picture shows the US$ potentially breaking
out and bonds not breaking to a new low.
Meanwhile, we should take note of the action in some other markets since late
November. Both emerging markets (EEM) and the S&P 500 have advanced, but
EEM is slowing down. Commodities failed to make a new high even as the US$
made a marginal low. As we can see, the inverse of the buck is threatening
to breakdown and realign with commodities and CEF, a fund which is half Gold
and half Silver. The rally since November is now seeing a negative divergence
as emerging markets have not made a new high and the US Dollar could be breaking
out.
The bottom line is the action in precious metals, commodities and the US$
is signaling a warning for the equity market. The bond market needs to confirm
this warning and if it does it could be the catalyst for a selloff in equities.
Keep in mind, the S&P 500 is approaching strong long-term resistance while
in a state of euphoric sentiment. If you don't believe that, check the recent
sentiment surveys and ignore those who don't provide hard data. By the way,
public opinion on bonds (from sentimentrader.com),
is only 14% bulls! Sounds like we should sell bonds and buy stocks, right?
Meanwhile, the precious metals appear likely to test major support in the
coming days and weeks. There will be some more pain but things are setting
up perfectly for the next cyclical bull market. Gold is positioning itself
contrary to risk-on assets. It has detached from the stock market and that
is a good thing. There will likely be a transition period as precious metals
find a bottom and the equity market reaches its peak. For now, look to buy
precious metals if they reach an extreme oversold condition next week.
Good Luck!
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guidance in uncovering the producers and explorers poised for big gains then
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