In last week's Chart of the Week, we wrote about our bullish outlook on Gold and followed it up with a deep dive on the entire Precious Metals space, which included a number of trade ideas to express our thesis. This week, we have a table that helps provide a different perspective on its recent price action but arrives at the same bullish conclusion.
The shiny metal has gotten a lot of attention lately as it currently sits around its highest level in seven years.
After about a 9% surge off of this month's lows, we'd expect prices to consolidate in the near-term. But after that, we're betting on new all-time highs for Gold in the coming quarters as long as prices are above last year's highs near 1,560. Here's how we see it.
We've been very clear about how we wanted to avoid owning stocks this month. Fortunately, bonds have been the beneficiaries of the relentless selling in these stocks. Nothing has changed for the positive. But it's actually some former leaders completely falling apart that now has my attention.
Remember when Industrials broke out to new all-time highs? We said that as long as that was the case, how bad could things be? Well, Industrials are no longer above those former highs and actually just broke down to new 10-year relative lows. This is behavior consistent with an environment where we want to be selling stocks, not buying them:
Options premium sellers profess a deep and undying love for elevated volatility. But when they get it, are they willing to act? Sometimes when you're in it -- like right now -- it can feel very scary. The urge to sit it out may overtake you. I get it. Been there.
For those of us who plow ahead and like to take advantage of opportunities when statistical edges are backing them up, this next trade is for us.
Larry McDonald is the guy I turn to when I want to talk about the Bond Market. He always has something insightful about what's happening that I'm probably not seeing. We've become friends over the years but I originally got to know who Larry was by reading his book, Colossal Failure of Common Sense. This is a book about the collapse of Lehman Brothers being told by a bond trader inside the firm. I encourage you to pick it up and give it a read. It will give you good insight as to what exactly was taking place at the time. In this podcast Larry tells us a good story about the day his team had the most profitable day in the history of the bond desk at Lehman and Dick Fuld didn't even bother to come down and say hi.
For those new to the exercise, we take a chart of interest and remove the x/y-axes and any other labels that would help identify it. The chart can be any security in any asset class on any timeframe on an absolute or relative basis. Maybe it’s a custom index or inverted, who knows!
We do all this to put aside the biases we have associated with this specific security/the market and come to a conclusion based solely on price.
You can guess what it is if you must, but the real value comes from sharing what you would do right now. Buy, Sell, or Do Nothing?
The risks associated with owning stocks are currently elevated.
There are a lot of things I can say, levels I can point out, possible outcomes I can walk you through, all those things. But the one common denominator between all of those is that the risk in owning stocks is currently higher than it normally is.
This is an important time to remember your original investment objectives, time horizon and risk parameters. Before buying a stock, or entering any investment for that matter, these 3 questions need to be answered. I can't answer them for you. But what I can do is show you what we're seeing from an intermediate-term horizon.
Our goals here are to make money this quarter. We care about the coming weeks and months. It doesn't matter to us what the market does next year, and it doesn't matter what it does today. Weeks and Months. That's our focus.
Let's take a look at what it means and what it's going to take for it to finally sustain new highs.
First, let's start with the Nifty IT Index on an absolute basis. Last week prices pushed above resistance near 16,500 to new all-time highs, but momentum diverged negatively and prices are now confirming a failed breakout...suggesting more time is needed to work through this overhead supply and continue its long-term trend to the upside.
Some of you are in the BUY THE DIP camp and champing at the bit to make a heroically timed buy here. Others are in the APOCALYPSE camp and are eager to "short-the-world!"
The strongest Equity market in the world has been the US, however, last week prices started to confirm the weakness we were seeing under the surface since January. Today we wrote a brief piece on US market breadth which reinforces our view that defense remains the name of the game.
This follow-up is to make the point that if the strongest market in the world is catching down to weakness in the rest of the world, then India and other countries that have underperformed are likely to continue struggling in the near-term.
In fact, the breadth divergences we highlighted in the US are also playing out in India.
We've made it clear over the last few weeks that we don't want to be long stocks given current conditions and think there's downside risk from a short-term perspective, despite the structural picture remaining largely unscathed.
Given last week's slight downside follow-through in US Stocks, I wanted to share two breadth charts from our Market Internals Chartbook that summarizes current conditions well.
