Gold Selling Is a Bit Extreme, Compared to Dollar and Stocks
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Wednesday brought us daily consolidation of prior S&P 500 gains, and that‘s a positive outcome for the bulls. Base building at a higher level, if you will, is looking set to continue also today. The credit market performance reveals that it‘s a reasonable expectation, and the internals examination would reveal the details of a coming run higher.
Gold paused yesterday, and of course still doesn‘t look ready to rebound. But does it mean it‘s acting consistently weak? No, and today‘s analysis will show that its better days will come – and we won‘t have to wait for all that long.
Let‘s dive into the charts (all courtesy of www.stockcharts.com).
S&P 500 Outlook
Yesterday‘s daily candle was one of hesitation, not marked by any kind of volatile move. The volume also shows that the price moves didn‘t invite much interest to jump in or out.
The Force index nicely illustrates the directionless nature of very short-term trading. After the steep correction, it‘s back to neutral, and the muddle through February ahead can really start.
Credit Markets and Smallcaps
High yield corporate bonds (HYG ETF) continue trading with an upward bias, and the upper knots don‘t frighten me as the swing structure is positive, and there is no retreat to speak of. I see the credit market strength as conducive to further stock gains.
The Russell 2000 (IWM ETF) is doing better than the S&P 500, and this is to be expected in a maturing bull market run. I certainly look for smallcaps to outperform the 500-strong index in the first half of 2021.
S&P 500 Sectoral Peek
Similarly to the S&P 500, technology has been consolidating its gains, yet with a bit more of a bearish flavor. Also the volume overcame Tuesday‘s levels, unlike the declining S&P 500 one.
Technology being among the stronger sectors, that‘s what the above chart shows. The rotation into value stocks (as the tech took it on the chin) has failed, and this heavyweight sector (led by $NYFANG) is again leading stocks higher. As we‘re seeing absolutely no signs of broad based sectoral outperformance (which would be followed by less and less advancing issues), the stock bull market is far from making a top.
The copper to gold ratio is repeating its December consolidation pattern before launching higher yet again. That‘s a testament to the strength of the economic recovery, which will keep lifting commodities including oil, and also ignite the love trade in precious metals discussed on Tuesday.
Gold in the Spotlight
Today‘s premarket price action isn‘t a nice sight to the precious metals bulls, as gold is largely mirroring silver‘s losses. But how far can this short squeeze reversal trade run? Can it usher a new downtrend?
I don‘t think so. The protracted gold basing pattern I described last Monday, is holding up. What we‘re seeing, is a kneejerk reaction to a 33K drop in new unemployment claims (supportive for risk on assets). Does it mean that we‘re on the doorstep of a strong job market recovery? Given last 6 month payroll developments, it would take us … 5 years to get back to pre-corona levels.
This gold chart will get a fresh facelift and a new red candle today. I look for the volume at the close, and the size of the lower knot first before drawing conclusions. Now that prices sunk below $1800, the lower Bollinger Band is getting pushed. Is a new trend starting here? That‘s the key question and I still say no as this (isolated) kind of a strong move meets corrective forces next.
The dollar and gold chart shows that the strongly negative correlation is slowly giving way to more indepedent trading between the two assets. Now that the dollar is in a short-term run higher, it‘ll exert less pressure upon the precious metals.
Is gold‘s slide today announcing much higher dollar values ahead? The dollar is less than half a percent higher while gold plunged by over two and half percent, which doesn‘t look like a move that can last, based on the fiat currency vs the metal of kings intermediate-term dynamic.
Rising yields accelerating their decline in 2021, are another factor of gold‘s short-term headwinds. While I don‘t see yields as falling from a medium- or long-term perspective any time soon, they are set to stop dragging gold to the downside – and the Dec 2020 and also 2021 performance shows that gold buyers are happy to step in and buy the plunge.
Gold to corporate bonds ($GOLD:$DJCB) ratio reveals the yellow metal as keeping gained ground. The rising Treasury yields are a manifestation of a large spending bill coming, and deteriorating public finances, which will catch up with the greenback.
Summary
The stock market recovery got an unemployment claims catalyst, and powers higher instead of more short-term digestion of recent gains. With a few points away from the highs, the talk about a correction will die down now hopefully as the value stocks have quite some catching up to do still.
Gold is under short-term pressure, and the comming sessions would show just how much the market thinks the current fall has been overdone. The basing pattern remains unbroken, with technicals and fundamentals in place for the upcoming bull run. Patience is still the name of the game in precious metals currently still.
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