Stock bulls aren‘t yielding an inch of ground, and technically they have precious few reasons for doing so. It‘s still strong, the stock market bull, and standing in its way isn‘t really advisable. With the S&P 500 at new highs and the anticipated slowdown in gains over Friday, where is the momentary balance of forces? The proverbial rubber bands pushed upwards still. So, what about those rising probabilities of seeing at least a short-term pause in the stellar pace of gains since last Monday?
Gold did recover on Friday and didn‘t disappoint after Thursday‘s slide. The weak non-farm employment data certainly helped, sending the dollar bulls packing. It‘s my view that we‘re on the way to making another dollar top, after which much lower greenback values would follow. Given the currently still prevailing negative correlation between the fiat currency and its shiny nemesis, that would also take the monetary metal’s short-term pressure (s).
What would you expect given the $1.9T stimulus bill, infrastructure plans of similar price tag, and the 2020 debt to GDP oh so solidly over 108%? Inflation became roaring – red hot copper, base metals, corn, soybeans, lumber, and oil, and Treasury holders are demanding higher yields, especially on the long end. Apart from the key currency ingredient, I‘ll present today more than a few good reasons for the precious metals bull to come roaring back with a vengeance before too long.
Let‘s dive into the charts (all courtesy of www.stockcharts.com).
S&P 500 Outlook and Its Internals
Stocks keep pushing higher, and the bulls are strong regardless of the little contraction in the daily volume. The daily indicators attest to the strength of the uptrend. But the pace of daily increases looks set to slow down as a minimum, though.
Imagine that all the constituent shares in the S&P 500 had equal weight (i.e., forget about $NYFANG) – this is the chart you get. RSP ETF is only now challenging its highs, which is not a disappointment or a red light flashing divergence. The march to new highs in the S&P 500 still looks satisfactorily broad-based.
Market breadth confirms that very clearly. Both the advance-decline line and advance-decline volume aren‘t disappointing in the least. It seems new highs-new lows have made a strong comeback from the preceding setback. The intermediate picture is one of strength.
Credit Markets and S&P 500 Sectoral Ratios
High yield corporate bonds to short-term Treasuries (HYG: SHY) ratio with S&P 500 overlaid (black line) shows that the two are tracking each other tightly in recent days. Stocks haven‘t yet yielded in their attempt at taking leadership positions, regardless of their performance since the start of November. That makes the attempt suspect in the very short-term, as stocks have lagged a little relative to the credit markets back then. Bearish prospects? No way, dips are still to be bought.
The financials to utilities (XLF: XLU) ratio still broadly supports the stock market advance. Looking at the bond market dynamics, I expect utilities to remain under pressure while financials would gain faster. I‘m not worried by the current relatively depressed ratio‘s value and don‘t consider it a warning sign for the S&P 500 in the least.
Consumer discretionaries to consumer staples (XLY: XLP) is another leading ratio worth watching. It‘s currently at quite elevated levels, as I view the discretionaries as extended while the staples have undergone an appealing pullback. Even though that makes for short-term headwinds in the ratio, it‘s still primed to support the stock market bulls.
Gold & Silver
Friday‘s gold session still causes optimism among the gold bulls about an important low being made. The other option would be a brief dip below Thursday‘s lows, which I, however, due to a more powerful $USD reversal on Friday (erasing all Thursday‘s gains on the heels of poor non-farm payroll data), don‘t look at as the more likely scenario currently.
For now, it remains most probable that Thursday‘s bottom in gold won‘t be overcome by much, not going down to more than $1760. Though I am obviously not betting all in my trading plans on this strong support– if at all. It‘s the „if at all“ part that I subscribe to most heavily.
Silver‘s chart is the livelier one, less under pressure but given the recent squeeze-driven run. In contrast, the white metal might need to cool down a bit here. The 1H real economy recovery outlook is guaranteed to put a solid floor below any sub $26 dip. It is as questionable as in the case of gold. The base building at roughly current levels would be a healthy development for the bulls to rejoice.
Precious Metals Ratios
Checking out on the gold to all corporate bonds ($GOLD:$DJCB) ratio reveals relative strength in the yellow metal currently. It‘s trading much farther above its late Nov low than the metal itself. Similar to the case junior miners to senior ones are making, this is a hidden sign of strength in the precious metals sector, whose next upleg is knocking on the door.
The miners to gold ($HUI:$GOLD) ratio‘s false breakdown announcing another upleg that I discussed on Feb 01 already, is still intact and sending the same signals of internal strength inside the precious metals complex. The 1H 2021 future is bright and approaching fast.
The stock market keeps powering higher. Despite the rather clear skies ahead, a bit of short-term caution given the speed of the recovery and its internals presented is in place. It would be no surprise to see a brief and weak whiff of lower prices today or tomorrow.
The gold and silver bulls appear to be staging a return, slowly but surely. It is consistent with the price damage repair pattern frequently experienced after sizable red candles that felt to at least part of the marketplace as out of the left field. The case for the next upleg remains as strong as it has ever been, in my view.
Thank you for reading today‘s free analysis, which is available in full here at my personal site. There, you can subscribe to the free Monica‘s Insider Club, which features real-time trade calls and intraday updates for both Stock Trading Signals and Gold Trading Signals.
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All essays, research, and information represent analyses and opinions of Monica Kingsley that are based on availability and latest data. Despite careful research and best efforts, it may prove wrong and be subject to change with or without notice. Monica Kingsley does not guarantee the accuracy or thoroughness of the data or information reported. Her content serves educational purposes. It should not be relied upon as advice or construed as providing recommendations of any kind. Futures, stocks, and options are financial instruments not suitable for every investor.
Please be advised that you invest at your own risk. Monica Kingsley is not a Registered Securities Advisor. By reading her writings, you agree that she is not responsible or liable for any decisions you make. Investing, trading, and speculating in financial markets may involve a high risk of loss. Monica Kingsley may have a short or long position in any securities, including those mentioned in her writings. She may make additional purchases and/or sales of those securities without notice.
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