Gold vs. S&P 500

Gold vs. S&P 500 – Where is the Value?

This past week we received the final 4th Quarter GDP number which came in at 0.39%. The total 4th Quarter growth was terrible, plain and simple. Based on the performance in the equity markets that we have seen thus far in the 1st Quarter of 2013 investors would expect strong GDP growth. However, the only thing spurring stock market growth is the constant humming of Ben Bernanke’s printing press.

The real economy and the stock market are no longer strongly correlated. Essentially, they are meaningless. How do you evaluate risk when Treasury linked interest rates are artificially being held down by the Federal Reserve? How do you evaluate earnings growth estimates when most government based statistics are manipulated or “smoothed” to perfection?

My final argument to anyone who is a true believer that the stock market is representative of the economy is a very simple premise. If the stock market is the economy, how does the stock market evaluate small business earnings growth when most small businesses are not publicly traded? It is a simple question, but I have yet to find a sell side analyst that can work around it with facts.

To back up this information, here is a chart courtesy of www.zerohedge.com that demonstrates the S&P 500’s price action compared to economic data and overall macro risk.

The chart above clearly depicts the divergence between the macroeconomic data and the performance of the S&P 500 Index. Yet the sell side continues to scream that stocks are cheap, earnings are going to ramp up later this year on insane S&P 500 earnings growth expectations, and the consumer is going to remain strong even though payroll taxes have increased and the “wealthy” are paying more in taxes.

Even amid those concerns, no one knows for sure what the impact that Obamacare and the various new taxes associated with it will have on the business community. Again, the only thing driving growth is directly linked to the Federal Reserve’s balance sheet expansion. The chart below is courtesy of the Federal Reserve’s website.

On August 8, 2007 the Federal Reserve’s total assets were $869 billion dollars. As can clearly be seen today, according to the Federal Reserve the central bank’s total balance sheet has grown to over $3.2 trillion dollars. The increase is on the verge of rising exponentially. With QE, QE2, QE3, Operation Twist, Extended Operation Twist, and now with QE 4 in Perpetuity this trend is certainly unlikely to shift.

At this point in time the Federal Reserve is printing roughly $85 billion dollars each month to purchase Treasury securities with a focus on the long end of the maturity curve. As primary dealers of Treasury securities process these flows the money eventually finds its way into riskier assets that offer higher rates of returns through balance sheet machinations at large money center banks.
It has proven that the flow of the Federal Reserve’s printed monies are more important than the total money stock for a variety of reasons and inflation according to the government’s data is under control ex food and energy.

However, how are people supposed to survive without food and energy in today’s world? The last time I went to fill up my gas tank or to purchase food prices have gone up significantly. According to the 1990 version of consumer price reporting, real consumer inflation is running around 6% currently and shadowstats.com has the following comparison.

Unfortunately the 1980 based inflation numbers are even uglier, which based on Shadowstats’ data chart would place consumer inflation at nearly 10%. The calculations being used by Shadowstats.com are based on the government’s OLD ways of calculating inflation. The calculations were adjusted over time and today the data is completely manipulated by not including items that typically experience the largest levels of inflation.

Normally I talk about price action, probability based option trading, and technical information. However, before investors consider buying stocks near the all-time NOMINAL (non-inflation adjusted) highs, why not simply consider the backdrop of the total economic situation.
Central banks around the world are printing money at an alarming rate and their balance sheets are growing to levels not seen in human history. Interest rates are being manipulated to levels that are historically at record lows or near record lows based on real inflation data.

Macroeconomic indicators are issuing a cautionary tone with significant divergences showing up in many areas. Earnings expectations for the S&P 500 in the 3rd and 4th Quarter of 2013 are extreme and borderline ridiculous.

So before jumping headlong into equities based on some sell side analysts recommendation or even worse, a financial advisor who is more interested in his/her commission than they are about producing gains consider the following comparisons.

S&P 500 Index (SPX) Price Chart – 1 Year Price History

Gold Futures Spot Price Chart – 1 Year Price History

Clearly paper gold represented by gold futures is no substitute for physical ownership, but when one considers the fundamental backdrop for gold versus the S&P 500 Index, it should be clear which asset is offering the most value at current price levels. It does not require any inserted trendlines or oscillators, it should be clear which asset is expensive and which asset is cheap based on the real long-term economic fundamentals.

Article contributed by JW Jones from Technical Traders

SP500 Wave Pattern

Final Stages of The Advance on SP 500-The Wave Pattern

Over at our TheMarketTrendForecast.com service we have been projecting  a potential rally pivot at 1552-1576 for many weeks now.  The recent drop to 1485 although harrowing, was a normal fibonacci re-tracement of the last major rally leg to 1531 pivot highs.  We believe that this 5 wave advance 1343 pivot lows is nearing an end based on mathematics and relationships to prior waves 1-3.

At 1569 the SP 500 would mark a perfect fibonacci relationships to waves 1-3 for this final 5th wave to the upside.  In the big picture, we are still working higher off the 1010 pivot lows on the SP 500, and this rally takes 5 full waves to complete. We think we are near wave 3 highs, and wave 4 correction would be up next, followed by another thrust to highs if all goes well this year.

That all said, a multi-week correction and consolidation wave 4 pattern is likely once we pivot at 1552-1576.  We should expect this correction to retrace anywhere from 80-100 points on the SP 500, but one week at a time.

 

Article contributed by Chris Vermeulen from Market Trend Forecast

The currency wars

The currency war: now and then

Global currency wars worries have resurfaced in recent weeks, mainly because of Japanese action on the yen. In order to understand the meaning of this so-called war, we would have to go back in time to the 1930's. Back then, the currency wars scared economists as they had a big part in the Great Depression in the 1930's. The damage done to global financial markets in that period took several decades to repair, and a repeat of this nightmare cannot be ruled out completely. However, there are large differences between the 1930’s and nowadays and the results of what is happening may differ as well. In the past, it seems like currency wars were defined as any policy that is intentionally designed to drive down the value of a currency, whether by local inflation or an exchange rate decline. It is quite the same thing in the long run since a rise in inflation relative to other countries will eventually be fully reflected in a lower exchange rate.

So what about today's currency wars? The conclusion of what happened back then was that a currency war which results in an equal currency devaluation, along with monetary easing, would probably have been much less damaging than the direct trade and exchange control retaliations which actually occurred in the 1930’s. Currency wars could still develop into direct trade wars, though even if they do not, they could lead to other problems like commodity inflation and asset price bubbles in the emerging economies, though so far, we are not seeing a repeat of the 1930’s.

Goldman Sachs bank support this opinion, stating that "this configuration of asset market moves - the real rate declines, steepening in nominal curves, currency depreciation and the pattern of domestic equity sector outperformance - is  more consistent with a bout of monetary easing that is expected to prove expansionary, rather than a currency war interpretation".

American economist Paul Krugman also believes that what is going on today is all a currency war misconception. According to Krugman, it would be a very bad thing if policy makers take it seriously, as "the stuff that’s now being called “currency wars” is almost surely a net plus for the world economy. In the 1930’s this was because countries threw off their golden fetters, they left the gold standard and this freed them to pursue expansionary monetary policies".

G-20 and the currency war

The Group of 20 finance chiefs sharpened their stance against governments trying to influence exchange rates. Two days of talks between G-20 finance ministers and central bankers ended last week with a commitment not to “target our exchange rates for competitive purposes”. This stance is stronger than the one they took three months ago and might affect Japanese officials to stop publicly giving guidance on their currency’s value. Today the yen is near its lowest level against the dollar since 2010, while policy makers are trying to calm concerns that some countries might be trying to weaken their exchange rate in order to encourage export and by that, the economic growth. According to the G20, and contrary to the opinions of GS and Krugman noted above, the risk is a 1930’s style of devaluations and protectionism. Bundesbank President cited that “Politically-motivated devaluations can’t sustainably improve competitiveness; they don’t solve structural problems and they set off reactions”.

We shall mention Japan once again, as the Bank of Japan Governor Masaaki Shirakawa said: “The Bank of Japan’s measures have been and will remain targeted at achieving a robust economy through stable prices". In the G20 meeting, Japanese officials denied driving down their currency, and according to them, its fall was a byproduct of their effort to accelerate the Japanese economic growth rate.    

More we shall mention that the IMF Managing Director said that the talk of currency wars is overblown, and Federal Reserve Chairman Bernanke said: "the U.S. has deployed domestic policy tools to advance domestic objectives and bolstering the U.S. economy will support world growth".

Economic releases and events of the week

• Monday: Eurozone Finance Ministers Meet in Brussels
• Tuesday: EU-27 Finance Ministers Meet in Brussels, Eurozone Services PMI, Eurozone Composite PMI, U.S. ISM Non-Manufacturing (all for February), Eurozone Retail Sales (January, expected to slightly increase)
• Wednesday: Eurozone GDP 4th quarter (expectations for a decrease of 0.6%), U.S. Federal Reserve Releases Beige Book
• Thursday: ECB Main Refinancing Rate, Draghi to hold a press conference after Rate Decision, U.S. Trade Balance January (expectations for an increase in the deficit)
• Friday: Germany Industrial Production, U.S. labor market data - unemployment rate and Change in Nonfarm Payrolls

Gold, Oil & the SPX Trends and Setups

Over the past year my long term trends and outlooks have not changed for gold, oil or the SP500. Though there has been a lot of sideways price action to keep everyone one their toes and focused on the short term charts.

We all know that if the market does not shake you out, it will wait you out, and sometimes it will even do both at the same time. So stepping back to review the bigger picture each week is crucial in keeping a level trading/investing strategy in motion.

The key to investing success is to always trade with the long term trend and stick with it until price and volume clearly signals change of trend. Doing this means you truly never catch the market top nor do you catch market bottoms. But the important thing is that you do catch the low risk trending stage of an investment (stage 2 – Bull Market, Stage 4 Bear Market).

Let’s take a look at the charts and see where prices stand in the grand scheme of things for gold, oil, energy and stocks…

Gold Weekly Futures Trading Chart:

Last week I talked about how precious metals were nearing a major tipping point and to be aware of those levels because the next move is likely to be huge and you do not want to miss it or even worse be on the wrong side of it.

Overall gold and silver remain in a secular bull market and hav gone through many similar pauses to what we are watching unfold with them over the past year. As mentioned above the gold market looks to be trying to not only shake investors out but to wait them out also with this 18 month volatile sideways trend.

A lot of gold bugs, and gold investors of mining stocks are starting to give up which can been seen on the charts when reviewing the price and selling volume for these investments. I am a contrarian in nature so when I see the masses running for the door I start to become interested in what everyone is unloading at bargain prices.

Gold is now entering an oversold panic selling phase which happens to be at major long term support. This bodes well for a strong bounce or start of a new bull market leg higher for this shiny metal. If gold breaks below $1500 – 1530 levels it could trigger a bear market for precious metals but until then I am bullish at the current price.  I do think we could see another spike lower in gold to test the $1500- $1530 level this week but after that it could be off to the races to new highs.

Crude Oil Weekly Trading Chart:

Oil had a huge bull market from 2009 until 2011 but since then has been trading sideways in a narrowing bullish range. I expect some big moves this year for oil and technical analysis puts the odds in favor for a higher price.  If we do get a breakout and rally then $130 will likely be reached. But if price breaks down then a sharp drop to $50 per barrel looks like the next stop.

Utility & Energy Stocks – XLU - XLE – Weekly Investing Chart

The utility sector has done well and continues to look very bullish for 2013. This high dividend paying sector is liked by many and the price action speaks for its self… If the overall financial market starts to peak then these sectors should hold up well because they are services, dividend and a commodity play wrapped in one.

 

SP500 Trend Daily Chart:

The SP500 continues to be in an uptrend which I am trading with until price and volume tell me otherwise. But there are some early warning signs that another correction or a full blown bear market may be just around the corner (Selloff in May??).
Again, sticking with the uptrend is key, but knowing what could happen in the coming months gives you some time to start looking for some great shorting opportunities for when the trend changes. Your transition from long positions to short positions should be a simple measured move in your portfolios and not a panic reaction.

Weekend Trend Conclusion:

In short, I remain bullish on stocks and commodity until I see a trend change in the SP500.
The energy sector is doing well and looks bullish for the next month or so.

Gold and gold miners, I feel they are entering a low risk entry point to start building a new long position. Risk is low compared to potential reward so depending on how things unfold this week I may start to get active in this sector.

Keep in mind that when the price of a commodity or index trades near the apex of a narrowing range or long term support/resistance level volatility typically increases as fear and greed become heightened. This creates larger daily price swings so be prepared for some turbulence in the coming weeks while the market shakes things up.

If you like my work then be sure to get on my free mailing list to get these each week on various investments for investment ideas at www.GoldAndOilGuy.com

Article contributed by Chris Vermeulen

Polarity in the European economy

Polarity in the European economy, German economy improves while further deterioration is recorded in the French economy.

Europe's composite PMI (preliminary estimate) dropped unexpectedly in February to a level of 47.3, compared to 48.6 in January and expectations for a rise to 49.0. The decline, following three months of increases, signals the expectations for further economic contraction in the first quarter of 2013.
France's composite PMI continued to decline to a level of 42.3 (42.7 in January) and it indicates a further quarterly contraction of the second largest economy in Europe. Germany's composite PMI declined to a level of 52.7 (compared to 54.4 in January), but its relatively high level is still encouraging.

More in Germany, The ZEW and IFO surveys also indicate the expected recovery of the German economy during the first quarter of 2013, following a quarterly sharp drop of 0.6% during the fourth quarter of 2012. The Business Climate of the IFO survey rose for the fourth consecutive month to its highest level in ten months. The IFO survey examines managers’ expectations in the manufacturing and services sectors. The ZEW survey, which examines investors' assessments of the economic situation in six months, jumped to its highest level since April 2010.

To summarize our comments regarding the European economy, we note that the European Commission lowered last Friday its forecast for growth in 2013 to a level of 0.3%, compared with the previous forecast in November 2012 to an expansion of 0.1%. According to the new forecast, the German economy will grow in 2013 by approximately 0.5% and the French economy by 0.1%. The Commission expects the French deficit will be higher than the government's target (3.7% of GDP compared to a target of 3.0%), another indication for the growing concerns of the developments of the French economy.

Fed signals a possibility for a sooner than expected end of QE3

Is the Fed changing its approach? The Fed's January interest rate decision minutes indicated the committee members’ change of approach. According to the protocol, "many participants also expressed concerns about potential costs and risks arising from further asset purchases". Moreover, the minutes revealed that some participants argued that it might be time to reduce the volume of purchases, regardless of the pace of recovery in the labor market, while examining "the efficacy and costs of such purchases". Until recently, markets assumed that the Fed would continue the program of bond purchases until the unemployment rate drops to a level of approximately 7.0%, but now there is a big question mark around that assessment. According to the minutes, the Fed will examine the asset purchases in its next meeting in March, with hopes that Fed Chairman, Ben Bernanke, will provide more insight regarding the move next week, during the semi-annual Congressional testimony. We note that immediately after the publication of the minutes, U.S. stock indices fell sharply, the dollar strengthened and Treasuries yields actually declined. All that in light of the risk increase in the markets and despite fears that the Fed will reduce the volume of U.S. debt purchases.

U.S. politicians continue to wrestle on the issue of the automatic cuts ("sequester") which are supposed to apply at the beginning of March. If no compromise is reached soon, some transverse automatic cuts will take effect, totaling at approximately $85 billion in 2013 and approximately $1.2 trillion over the next decade.

President Obama held a press conference last week to increase the political pressure on Republicans. Obama required the approval of Republicans (who control the Congress) to postpone budget cuts. Obama stressed that these cuts “are not smart, they are not fair, they will hurt our economy and they will add hundreds of thousands of Americans to the unemployment rolls". Recall that the U.S. Budget Office estimates that the U.S. economy will grow this year by 1.4%, mainly due to taxes increases in the beginning of the year and the expected spending cuts.

Economic releases and events of the week

• Sunday: general elections in Italy on Sunday and Monday
• Monday: U.S. Conference Board Consumer Confidence for February
• Tuesday: Fed Chairman two-day semi-annual congressional testimony starts, U.S. Durable Goods New Orders for January
• Wednesday: Eurozone Consumer Confidence Indicator - final estimate for February, Eurozone Economic Sentiment Indicator for February, ECB's president Speaks in Munich
• Thursday: second estimate for U.S. GDP growth in the fourth quarter of 2012, expectations for a growth of 0.5% vs. -0.15 in the preliminary data
• Friday: U.S. Personal Income and Personal Spending, both for January, U.S. ISM Manufacturing PMI for February, Germany Retail Sales for January, Eurozone Unemployment data for January, Manufacturing PMI in the Eurozone and China - final estimate for February

Gold in cyclical low

GOLD should be completing a cyclical low in February

Over the past 5 calendar years we have seen GOLD either complete an intermediate cyclical top or bottom in each February.  My forecast was for February of 2013 to be no different and for Gold and Silver to make trough lows this month.  With that said, I did not expect the drop in GOLD to go much below $1,620 per ounce at worst, but in fact it has. Where does that leave us now on the technical patterns and crowd behavioral views?

First let’s examine the last 5 years and you can see how I noted tops and bottoms in the chart below:

That brings us forward to todays $1,573 spot pricing and trying to determine where the next move will go. To help with that end, some of our work centers on Elliott Wave Theory, along with fundamentals and traditional technical patterns of course.  In this case, the recent action around Gold has been very difficult to ascertain, and I will be the first to admit as much.  With that said, one pattern we can surmise is a rare pattern Elliott termed the “Double Three” pattern.  Essentially you have two ABC type moves, and in the middle what is dubbed an “X” wave, which breaks up the ABC’s on each end of the pattern.  For sure, if we add in traditional technical indicators along with sentiment, we can see very oversold levels coupled with the potential Double Three pattern and probably start getting long here for a trade back to the 1650’s as possible:

Obviously this chart shows oversold readings in the lower right corner using the CCI indicator. That said we would like to see 1550 hold on a weekly closing basis to remain optimistic for a strong rebound.

Article contributed by David A. Banister of Market Trend Forecast

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Gold and Silver Nearing MAJOR Long Term Support

Gold and silver along with their related miners have been under a lot of selling pressure the last few months. Prices have fallen far enough to make most traders and investors start to panic and close out their long term positions which is a bullish signal in my opinion.

My trading tactic for both swing trading and day trading thrive on entering and exiting positions when panic trading hits an investment. General rule of thumb is to buy when others are extremely fearful and cannot hold on to a losing position any longer. When they are selling I am usually slowly accumulating a long position.

Looking at the charts below of gold and silver you can see the strong selling over the past two weeks. When you get drops this sharp investors tend to focus on their account statements watching the value drop at an accelerated rate to the point where they ignore the charts and just liquidate everything they have to preserve their capital.

Gold Bullion Weekly Chart:

The price and outlook of gold has not really changed much in the past year. It remains in a major bull market and has been taking a breather, nothing more. Stepping back and reviewing the weekly chart it’s clear that gold is nearing long term support. With panic selling hitting the gold market and long term support only $20 - $30 dollars away this investment starts to look really tasty.

But if price breaks below the $1540 level and closed down there on a weekly basis then all bets are off as this would trigger a wave of selling that would make the recent selling look insignificant. And the uptrend in gold would now be over.

Silver Bullion Weekly Chart:

Silver price is in the same boat as its big sister (Yellow Gold). Only difference is that silver has larger price swings of 2-3x more than gold. This is what attracts more traders and investors but unfortunately the masses do not know how to manage leveraged investments like this and end up losing their shirts.

A breakdown below the $26.11 price would likely trigger a sharp drop back down to the $17.50 level so be careful…

Gold Mining Stocks – Monthly Chart:

If you wanna see a scary chart then look at what could happen or is happening to gold miner stocks. This very could be happening as we speak and why I have been pounding the table for months no to get long gold, silver or miners until we see complete panic selling or a bullish basing pattern form on the charts. We have not seen either of these things take place although panic selling is slowly ramping up this week.

There will be some very frustrated gold bugs if they take another 33% hair cut in value…

Precious Metals Trend and Trading Conclusion:

In short, the precious metal sector remains in a cyclical bull market. That being said and looking at the daily charts the prices have been consolidating and are in a down trend currently. Until we see some type of bottoming pattern or price action form it is best to sit on the side lines and watch the emotional traders get caught up and do the wrong thing.

The next two weeks will be crucial for gold, silver and miner stocks. If metals cannot find support and close below the key support levels things could get really ugly fast. If you would like to receive my daily analysis and know what I am trading then check out my newsletter at:


Article contributed by Chris Vermeulen 
 www.TheGoldAndOilGuy.com