By: P_Radomski_CFA
It seems that everybody’s hanging on the Fed’s every word. Yesterday the S&P 500 index climbed above the closing record of 1,669.16 reached May 21 and closed at its record high (1,675.02) as Ben Bernanke backed sustained monetary stimulus.
The index has advanced for six straight days, the longest winning streak since March 11, and is heading toward its biggest weekly gain since Jan. 4. In this way, the S&P 500 erased losses since Bernanke first suggested the Fed might curb stimulus this year.
Without a doubt, the U.S. Federal Reserve stimulus has helped fuel a rally in financial markets which spread across stocks and bonds to oil and metals. Many investors have jumped to rallying stocks and dumped holdings in gold-linked exchange traded funds.
“The story in stocks for this year is about confidence replacing uncertainty and anxiety,” Hank Smith, a chief investment officer at Radnor, said. “It’s really more about an improvement in sentiment. That’s being a big driver for equity returns and we are still a long ways away from worrying about there being too much optimism or exuberance.”
Could these events trigger another rally? Will the S&P 500 index climb decisively above the May 21 top? Before we answer these questions, let's find out what happened during the last several days and check the current situation in stocks. At the beginning, let’s take a look at the long-term S&P 500 chart (charts courtesy by http://stockcharts.com).
On the above chart we see that stocks moved back above the rising support line, which means that the breakdown below this line was invalidated. The recent decline was likely nothing more than another correction and the outlook is still bullish.
Now, let’s check if the short-time outlook is also bullish.
During the past week, the S&P 500 Index has continued its rally. On Monday, we finally had a breakout above the declining resistance line based on the May and June tops. The following days brought further rallies. Another bullish factor was the breakout above the November-May upward trend line. The price climbed up over the area of the June 18 local top, and as we had previously mentioned, the S&P 500 index reached the May 21 closing record of 1,669.16 and closed at its record high yesterday. The next resistance level is at the May 22 high.
Let us move on to the financial sector, which often leads the general stock market, for more clues regarding the future moves of the S&P500 - we'll use the Broker-Dealer Index as a proxy here.
In this week’s Broker-Dealer index chart we see that the financials broke above the resistance level at 130. This could fuel further gains in the stock market. Please keep in mind that the financial sector used to lead the general stock market lower and higher so the bullish sign here is also a bullish confirmation for other stocks. However, the breakout has not been confirmed so far, so the situation improved just slightly.
Summing up, the situation for stocks in the long and short term is quite bullish, and it seems that we could see further gains in the stock market. If you’re interested in short-term commentary on the stock market, please note that we have started publishing such in our Articles section.
Once we know the current situation in the stock market and the financial sector, let’s take a look at the Correlation Matrix. This is a tool, which we have developed to analyze the impact of the currency markets and the general stock market upon the precious metals sector (namely: gold correlations and silver correlations).
The correlations between gold and the general stock market reminded us of a question regarding whether we felt gold was starting to trade along with the stock market. This may seem to be true this week, but we doubt this will last. The very short-term coefficients are basically non-existent, the short-term are positive but weak, and the medium-term ones are negative and stronger than the short-term positive ones. The situation overall is mixed, but the negative correlations prevail in our view. It seems that if stocks rally in the medium term (which is likely), this will probably have a negative impact on precious metals, not only on gold but also on silver and the mining stocks (note an analogous situation in the Silver / S&P and HUI / S&P rows).
Summing up, the situation in the general stock market improved this week. The short and long term outlook is quite bullish, and it seems that we could see further gains in the stock market. For those looking for bullish implications, it might seem that gold started to trade along with the stock market last week, but we doubt this will last. It seems that the impact that the stock market has on gold, silver and mining stocks is still bearish.
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