Equity averages continue to whip around Dow 14,000, emboldening �Nouveaux Bulls� and making many tactical traders unsure of which way the market will ultimately trend in the coming weeks.
I continue to pound the table on the idea that probabilities favor a market correction given the intermarket analysis I do in my writings. What is being missed by those who counter the argument is that when sectors and asset classes BEHAVE a certain way in terms of relative price movement, absolute price for the most part follows underlying sentiment.
To that end, I thought it might be worth revisiting gold GLD . Early in January, I argued that falling bond prices would likely make it hard for gold to meaningfully outperform stocks, given the yellow metal's historical behavior during negative real rate environments. I also noted that because shares outstanding in the stock market have been shrinking, market participants tend to make stocks outperform because of the smaller supply.
"A man can't be too careful in the choice of his enemies."
None of my reasons have changed � I do think stocks will have a good 2013, and gold likely underperforms for the above stated reason. In the here and now, though, I suspect a correction is likely.
The main reason I am bringing up gold is my very first point in that article. I noted that "price behavior in gold indicates it is less of an inflation hedge, and more of a deflation one. Gold has tended to outperform equities when in the midst of a risk-off period, and underperform in environment characterized by increased animal spirits in the past three years." While Nouveaux Bulls are excited about a continuation of stock price movement, behaviorally the opposite may happen in the short-term.
Take a look below at the price ratio of the SPDR Gold Trust Shares ETF relative to the S&P 500 SPY . As a reminder, a rising price ratio means the numerator/GLD is outperforming (up more/down less) the denominator/SPY. For a larger chart, visit here.
Gold tends to outperform stocks during risk-off correction periods, as money on the margin favors less volatile assets during deflation scares. The trend has unequivocally been down as stocks have performed considerably better than gold, and I suspect that broader trend lower will continue. However, in recent days, gold appears to be stabilizing.
Why would this be the case as the Dow hovers around 14,000? Should not part of the �Great Re-Allocation� out of bonds and into stocks by definition also result in a move away from gold and into equities?
Remember folks � its all about probabilities. Our ATAC models used for managing our mutual fund and separate accounts remain out of stocks until things improve behaviorally and more confirmation internally takes place to suggest the odds of a near-term correction have diminished.
This isn't about what I think � this is about listening to price as I have done in every major call of mine. Can a correction be averted and these intermarket trend warnings be wrong? Absolutely. Nothing in life is every guaranteed. But the risk isn't that this is but a temporary blip of weakness internally in market averages. The risk is that a correction happens.
And if it does? That can be one beautiful buying opportunity.
This writing is for informational purposes only and doesn't constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.