INVESTMENT EDGE
For those who were lulled to sleep with August's market action, seasonality says it time to sit up and pay attention since September is historically the weakest month of the year for stock returns. Weak or not, we are in the midst of a powerful bull market so plan accordingly.
August's video link is below.
https://www.youtube.com/watch?v=0PfC6I2wVE4&t=6s
After bottoming in December of last year gold went on to make a series of higher highs and higher lows through June, the sign of a possible new uptrend. Since June though, it has chopped sideways, stuck in a well-defined range, where $1210 acted as support while $1300 as resistance. That all changed on Monday as gold broke out above both the 2017 range and November 2016 high. Yesterday, gold gapped up at the open but ended the day near the lows, forming a gravestone doji, and two legs of a 3-legged bearish shooting star reversal pattern.
There is no question how Wednesday closes will be critical for both gold bulls and bears alike. A close higher will likely invalidate the shooting star and put gold back on the path to retest 2016 highs near $1375. On the other hand, if gold closes lower and below the breakout level, there is nothing more bearish than a failed breakout which puts the nail in the “new uptrend” coffin and warns of a retest of this year’s lows.
Sometimes breakouts are event not market driven (could Monday's big move be caused by the fear trade brought on by North Korea’s missile launch or the fact on the same day a breakdown of the dollar occurred?). And when they are, they are susceptible to reversals as they turn in to “fake outs”. With that in mind investors need to be aware of this possibility and react to insure the protection of investment capital.
Palladium, Pd46, is a rare and luxurious silvery white metal. Without wanting to start the next world war by bringing up this topic (I will leave starting WWIII to Washington, DC), there are some that view palladium as a precious metal right along with gold, silver and platinum. While palladium was never historically used as coinage (and therefore the argument as to why it is not a “precious” metal), it, like the 3 other precious generals, has been assigned an ISO 4217 currency code. So, that’s precious enough for me.
In the combination 9-year chart above, the price of palladium is represented by the candlestick bars while gold, silver and platinum are the colored (and labeled) lines. As you can see palladium is breaking out to chart highs while gold, silver and platinum are mired in investment purgatory. Interestingly, palladium has been priced higher only once before occurring in 2001 when traders went into a speculative frenzy pushing its price to almost $1100/oz, about $150 from where it closed yesterday.
I wish I knew why the divergence was occurring. Some will say it’s because palladium is an industrial metal and should be increasing as the economy grows. The good thing is in technical analysis we don’t worry about the “why’s” but rather focus solely on price. With new highs on the radar (it has not been confirmed yet because this is a monthly chart and August is not over), once confirmed signals higher prices ahead with the next target being the 2001 highs
It seems those writing newsletters and also (coincidentally, wink, wink) sell gold never seem to change their story.
All kidding aside, I do realize there will likely be sometime in the future where gold (and other precious metals) could, once again, be worthy of more than just a portfolio hedge or a diversification tool. As such, I like to occasionally check in with the metals to see if there are any new clues or setups in the making. In today’s look, I am reviewing the ratio of US stocks (SP500) to the price of gold. When looking at ratio charts it’s always best to keep things simple and not overcomplicate the analysis. So in this case, when the long-term ratio is rising buy stocks, when it’s falling buy gold (I told you it was going to be simple). A different (lower risk) approach would be to create a pairs trade of buying SP500 and holding an equal amount of gold short.
As you can see the ratio bottomed back in the second half of 2011. Of course we did not know that was “the bottom” until much later in our rear view mirror. In fact from 2009-2013 there was really NO advantage of holding one over the other as they were performing virtually the same (hence the sideways choppy consolidation of the ratio). That all changed in early 2013 when the ratio created a higher high (a break above the blue horizontal line). From that point on, stocks became the better investment and continue to be to this day. This will change someday but since it has not happened yet nor I do I know when it will, watching this chart and waiting until the ratio turns down and eventually forms a lower high and lower low will be my signal. My guess is it could be longer than we think because market trends tend to last for many years and this one is relatively new. Until the trend changes, those wanting the greatest returns would do best to keep their gold investment to a minimum and maximize their exposure to equities (SP500). Gold bugs and metals newsletter writers on the other hand, know that one can never own enough of the shiny stuff so it’s a great time to buy, buy, buy.
With the markets and investors apparently lulled into a bullish induced coma (not unlike what happens to Homer Simpson when he sees doughnuts), seasonality tells us to expect more of the same for August. Instead with the extreme levels of complacency, extended price levels, this would be an ideal time for investors to revisit their management plans ... justin case.
My July highlights in the video link below.