Fundamental analytics

Gold VS USA Stock Market


It finally happened!

The US stock index NASDAQ 100 easily, like a shot, set a new historical maximum. The last two months, in the media, have not ceased disputes about the slowdown in global economic growth, the impact of BREXIT on the Eurozone economy, the future policy of central banks and the trade negotiations between the US and China. Nevertheless, all this time, the US stock market showed growth, the US dollar index reiterated its strength, and the US economic statistics data exceeded the positive forecasts of many experts.

Surprisingly, retail sales data in March came out at the level of 1.6 instead of the expected 1.1 and turned out to be the best since 2017! For the first time in almost 50 years, the jobless claims rate fell below 200K, signaling a healthy and growing US domestic labor market. The rate of new housing sales in March also showed a positive trend and amounted to 692K against the expected 647K. All these facts indicate that the weakness of the US economy was greatly exaggerated and that in the minds of analysts, pessimistic assessments clearly prevailed over the real picture.

However, there was a strong reason for such pessimism. Let's not forget that despite the fact that it took only 4 months for the leading US stock indexes to recover and  for the Nasdaq 100 to hit the new height, this growth was preceded by a rapid and panic collapse. The autumn of 2018 turned out to be merciless for the world markets and many investors recorded significant losses not only due to the crush in US stocks, but also from the ensuing recession on Asian and European stock exchanges.

And now, does it look like a fairy tale? All the troubles are left behind, and on the horizon, we observe prospects to grab profits being in a new up trend of the American stock market? Is this true, and how will this affect gold investments?

First of all, our attention was attracted by the fact that the S&P500, being the flagship of the American stock market, was unable to update its historical highs at the time of this writing, and despite the obvious growth following that of the Nasdaq 100, it has not managed to rise above the mark of 2940, from where it started autumn crash. The volume of day trading also does not exceed the average value. A similar picture on the Dow30 chart. Despite the fact that both indices have come close to their maximum historical values, traders should not take it for granted that the S&P500 and Dow30 will easily update their highs. Traders should take into account that near historical highs, volatility increases dramatically and, therefore, the possibility of correction arises. The chance for price correction becomes even greater when we enter the “new high territory”. The slightest negative economic or geopolitical news can provoke a cascade of orders for closing positions and fixing profits. This is how corrections usually begin, and sometimes they go into something bigger.

Secondly, it is necessary to take into account that this upward movement has been lasting for more than 4 months, and it began from the lows of December 2018. It was a very dramatic and painful growth, during which the confidence of investors gradually recovered and traders built up their positions. During this time, there was not a single serious correction that exceeded 23% on the Fibonacci scale. If we assume that the correction will start from the current historical highs, the correction with a high probability will last at least 30 days and will be at least 38% of the current price levels. For the S&P500, therefore, the first correction target will be the mark of 2,700 (-240 points), and for the Dow30 the mark of 24,750 (-1900 points).

In addition, traders must note the steadily strengthening positions of the dollar and US government securities in recent weeks. In aggregate, this may indirectly indicate the sales by a large institutional investors of some portion of US stocks at the maximum prices of the last 4 months and the reinvestment of profits into reliable assets with a guaranteed coupon yield. Conclusions about the riskiness of investing in the US stock market at this stage are becoming obvious.

What does it all mean for gold?

Analytical department of broker FortFS expects an increase in volatility in the US stock market in the next 3 months. Since,now the US indices are spinning near historic highs, increased volatility may trigger a correction and a temporary decline in prices on the stock market. We expect that this decline in stock indices, combined with concerns about global political and economic factors such as Brexit, the deteriorating European economy, the risks of the Chinese economy and the like, may lead to markets entering consolidation and range trading at lower price levels. This situation is an excellent catalyst for gold and silver to test the price peaks of 2019 once again and to start a gradual movement even higher, amid increasing investor’s nervousness on global financial markets.

In the next weekly review, FortFS analysts will review the situation on the global energy market and its relationship with the precious metals market.

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