The Silver Lining in Tuesday's Tape
New York (Mar 22) Just about everything was lower Tuesday, including oil and all the major averages. However, there was one group which offered a ray of sunshine on this very stormy day. That's right the precious metals sector, the stocks that derive these metals, and the various ETFs and ETNs that track the price action of the stocks in this sector.
•(NYSEARCA:GLD) Up .81%
•(NYSEARCA:SLV) Up .62%
•(NYSE:NEM) Up 1.40%
•(NYSE:ABX) Up 2.05%
•(NYSEARCA:NUGT) Up 4.34%
Why the Divergence?
Gold is often referred to as a safety asset, and investors flock to it in times of anxiety and market turmoil, which is precisely what happened Tuesday. Further downward price action in broad market averages should continue to provide favorable conditions for gold, silver, and gold related trading vehicles.
Will the Correction Continue?
Stocks appear grossly overvalued and market averages look like they want to let more hot air out. There are numerous technical and fundamental factors that are pointing towards the likelihood that this is the beginning of a correction and a precipitous decline in major market averages is going to continue and will intensify in the weeks to come.
Time tested technical indicators such as the RSI, CCI, full stochastic, waning upside volume, and others are all signaling a loss of momentum in stocks and are pointing towards a high possibility of reversal from extreme overbought levels of late
Furthermore, fundamental factors such as the S&P 500's PE being at 26, the Shiller PE at 29, perhaps most alarmingly the S&P's price to sales ratio trading at 2.08, and others are clearly confirming the technical analysis and are signaling that this market might be in for a rough patch these next few weeks.
Are Gold Stocks Insulated?
On the other hand, gold, silver, and gold miners appear to be entering a goldilocks zone here. Inflation has been heating up and by the government's own admission is now well above the FED's 2% target rate. This is great for gold, as historically the commodity performs extremely well in an inflationary environment, even while the FED raises rates.
Moreover, on a technical note the GDX chart looks very bullish. The RSI, CCI, and full stochastic are all pointing to a continuation in the uptrend. In addition, we can clearly see that GDX made a higher low recently, and has formed a very positive cup and handle pattern, along with a reverse head and shoulders. These are key elements that further support the thesis that the upward trajectory will continue.
Will the FED Continue Hiking Rates or are we One and Done?
The FED once again looks committed to raising rates. However, if markets continue the decline will the FED stay on this path to normalization, or will it take its foot of the gas a little bit? At the beginning of 2016 many market participants thought we would see 3 or 4 rate hikes in the year, and we only saw 1. History very well could repeat itself in this regard, as it is clear this post QE market does not like the prospects of higher rates.
Source: SeekingAlpha
