That’s the foundational premise of relative strength studies.
Remember, we always want to buy the strongest and sell the weakest. It sounds simple. But it’s impossible to overstate its importance.
One of the best ways to increase our probability of success is to buy assets that are trending higher on absolute terms while outperforming their alternatives.
Those are key ingredients of a strong uptrend. And it just so happens that gold checks both boxes…
Here’s a chart of gold futures posting fresh two-year highs versus the S&P 500 index:
The message comes through loud and clear: Rocks over stocks!
Silver is back above a crucial support level, and gold is reclaiming its former 2011 highs.
The precious metals space is starting to get spicy!
I imagine these rocks and their associated stocks will turn up the heat once the miners break out relative to the broader market.
Check out the Gold Miners ETF $GDX versus the S&P 500 ETF $SPY:
For now, the GDX/SPY ratio continues to find support marked by a shelf of former lows as it trends below a multi-year downtrend line and its year-to-date highs.
Gold bugs want to see this key intermarket ratio resolve higher.
A violation of the trendline signals increased risk appetite. It would also reveal a flow of money into the mining space as the market rewards investors for buying those names.
The stock market isn’t there yet.
But gold is.
As long as gold holds above its prior cycle highs and continues to outperform its alternatives, I believe it’s just a matter of time before GDX catches higher on absolute and relative terms.
I could cook up a grand macro thesis on why gold could go to 5K. Instead, I prefer to focus solely on absolute and relative trends today.
