Who Is Right - Gold Or Stocks?

Tyler Durden's picture

From early October of last year (Grand Plan and Global CB intervention) until the start of the LTRO program in Europe, Gold and Stocks (and Treasuries and the USD) all traded in sync with one another. Since the LTRO program, the equity market has generally been on its own in terms of belief. While growth hope, Europe's recovery, and the Bernanke Put (as well as a short-squeeze of epic proportions) were at play, it seems to us that the Fed's Twist program has been ignored by the money-printing crowd (since Twist was sterilized and did not expand the monetary base (excess reserves) - which gold reacts to; but did provide flow - helping stocks - as the Fed's DV01 increased; implicitly devaluing the currency even though Fed's efforts to dissuade have worked) while the ECB's LTRO provided a liquidity overhang that at-first-glance removed one short-term structural risk from US markets (the Europe contagion). Since we made clear that LTRO is in fact an encumbrance and not 'clean' debt monetization (which fits with gold not moving as much), equity markets in Europe have retraced all of those gains - leaving US still elevated. The last few days, gold and stocks have surged together as hope for LTRO3 (seemingly gone now) and Fed QE3/4 (not sterilized; with ES -7.75% from its highs?) has become imminent. However, Gold and stocks remain very far apart in the medium-term and Rick Bensignor sees trendline support and DeMark TD Setups providing an excellent risk-reward for a Short Stocks, Long Gold trade from here.

Via Rick Bensignor of Merlin Securities,

Gold’s correlation to the S&P 500 has been virtually non-existent for the past year. But right now, charts suggest that gold can outperform the SPX. In and of itself, that not only presents a trading idea, but also some possible negative implications for the likelihood of a sustained equity rally.

What We See

Not long ago we published a piece, showing that gold’s daily correlation to the S&P 500 was virtually at 0.00. This, of course, means that not only doesn’t gold travel in the direction of the S&P, it also doesn’t travel in the opposite direction of the S&P. It simply sometimes does and sometimes doesn’t; so in and of itself, one shouldn’t be using gold as a market to trade either with or against the equity market.

But when we look at a chart of gold vs. the SPX, we now see some very interesting characteristics:

  1. The uptrend line (in blue) from the 2007 low held as support from the decline that started last fall,
  2. The 100-week moving average (in yellow) of this pair – which in the past has been a good place to buy and then hold -- again appears to have given some support,
  3. The old TDST line (horizontal dotted red line) – previous resistance – held as support, as did the current TDST line (dotted green line),
  4. The MACD oscillator on the bottom chart – recently got a buy signal from the most oversold level it has seen in 21 years,
  5. Prior TD Setup 9 counts – whether up or down ones – have been pretty good at calling turns. Though there was none on this recent potential bottom, this week presents itself as a +4 reading, potentially suggesting that this idea has at least another 4-5 weeks upside.

Even with today’s early 15 point rise in the SPX (about 1.25%), gold, too, is up virtually the same 1.25% today. If you put on this long gold / short SPX idea, we’d use a weekly MACD sell signal as your stop out.

 

or in Ounces of Gold to Buy the S&P 500... we see each asset deflation and reflation ramp...

 

and across asset-classes things look out-of-line also... (with Gold 1900, S&P 1170 or somewhere in between)...

Given last night's perspective on inflation (well the deflationary impulse) we suspect a Fed push is coming sooner rather than later but could see gold rallying on that belief (discount inevitable printing) while stocks fade as equity players know that the Fed will not be motivated unless asset prices are falling fast and -7.75% from its highs does not seem motivation enough.

 

Simply put, equities have over-extended on hope that the relatively sterilized central banking juice in the last 7-9 months will create a self-fulfilling recovery (and so growth expectations have been repriced and multiples expanded). However, gold remains muted for the same reason as the Fed has persuaded all that increasing its balance sheet duration is not devaluation. The re-emergence of European stress, China growth slowdowns, and the reality of a completely coupled US leaves market expectations for unsterilized QE which we think Gold has not priced in but stocks have.

Charts:Bloomberg