Markets head South while Gold Goes North

The markets for the USA along with the markets of the rest of the world sold off this week as investors sought to reduce risk in their portfolio’s across the globe.

Concerns over the unresolved European banking crises continue to pressure global equity markets.  However, new realizations that the growth in the Chinese economy has stalled has affected markets in the far east, Australia, Brazil & Canada as these resource economies that feed Chinese growth are impacted by the falling demand for commodities, especially industrial commodities.

In the USA – the realization that the US economy may also be slowing sent the S&P 500 down to it’s lowest level since January, 2012.  The S&P 500 is now down 8.5% from it’s recent highs on April 2nd.

We posted here last week that the support for the S&P 500 was at 1,340 and if that level was broken then you could expect a dramatic move lower – well unfortunately we were right as the chart below of the closing of the S&P 500 on May 18th shows.

 

(Click on Image of Chart for a Bigger Picture)

 

 

The stock markets are in a full blown correction mode – we believe that the 200 day moving average at 1,278 – another 1.5% lower –  should provide a support level for stocks.

We would like to note that many technical indicators are reporting that stocks are their most oversold since the bottoms in October, 2011 and September 2010.  Additionally, the Investors intelligence surveys are showing very high levels of bearishness among individual investors – and from a contrarian viewpoint that is usually bullish for stock prices – at least for the intermediate term.

Then most concerning aspects of the recent rotation out of stocks to safety is the question “are the markets now forecasting a recession for the USA economy”?

The recent action in the high yield debt market offers us a clue that perhaps the market participants are forecasting a US recession in the immediate future.

Below is a chart of the Barclays High Yield Debt ETF.

High Yield Debt will be bought when Investors believe that the economy is improving.  Likewise, High Yield Debt will be sold when Investors believe that the economy is slowing.  Notice in the chart where there was a dramatic sell-off in High Yield Debt this past week.

 

(Click on Image of Chart for a Bigger Picture)

 

 

Investors chose this week  – at least for the time being  – to embrace the theory that the US economy will not entirely escape a global economic contraction and that the growth rate of the US economy is indeed slowing.

Now – the performance of something that glitters caught our eye this week.

Gold and the Gold  Miners bucked the down trend of literally every single sector and every single market worldwide by finishing the week in positive territory.

Below is a 5 day chart of the following.  Note on May 15th how Gold and the Gold Miners reversed their multi-month decline and finished the week positive.

  1. Gold ETF
  2. Gold Miners
  3. S&P 500

(Click on Image of Chart for a Bigger Picture)

 

 

The Gold ETF finished up for the week at 2.3%

The Gold Miners ETF finished up for the week at 1.5%

The S&P 500 finished down for the week at -3.8%.

After the worst six month performance of the 10 year gold bull market, it looks likely that gold could be at the end of it’s correction and is now in a position to move higher over the next 3 months.

So far in 2012, the markets are almost a mirrored reflection of how the markets behaved in 2011 – a strong January – March followed by corrections beginning in April – May on European Banking Concerns.

We will close this commentary by reminding our readers that in 2011,  Gold increased 25% from the period of May, 2011 – August, 2011 on the fears of the European banking crises and on expectations of a slowing economy and more assistance from central bankers worldwide.

 

 

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  • Reliance Investment Management LLC is a Registered Investment Adviser in the State of Washington. The adviser may not transact business in states where it is not appropriately registered, excluded or exempted from registration. Individualized responses to persons that involve either the effecting of transaction in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption.
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