Apr. 2, 2016, Weekly Summary: Equities are Indecisive, and Gold is Vulnerable

Weekly Summary

Equities are Indecisive, and Gold is Vulnerable

The FOMC’s March meeting showed that the median member’s forecast is for two rate hikes in 2016 rather than the four hikes anticipated in December. Our take-away from this, is that rates are NOT going down, they are going up more slowly than earlier predicted.

The situation in China is stabilizing as the country’s property market appreciates again. The European economy appears to be on better footing after the ECB increased its stimulus, and the situation in the U.S. is looking up because the U.S. dollar has been depreciating against other major currencies, taking some of the pressure off the manufacturing industry. In addition, the regional surveys from the Empire State Manufacturing Index to the Chicago PMI have all printed sharply higher and oil prices are stabilizing.

The rally in stocks can be seen as a recognition that growth prospects have improved and that a couple of rate hikes by the FED are unlikely to affect that growth.

Our Price Modelling System continues to give a neutral reading which means the probabilities are not skewed in either direction for equities. We are in a similar situation as last week, equal chance of equities moving up or down.

The chart below outlines several recent S&P maxima (green areas), and minima (pink areas), as well as the present situation (purple area). Notice that during the minima (pink), bear assets and bear sentiment tend to be high, while bull assets and bull sentiment tend to be low. This correlation is quite strong.

spx rydex assets and sentiment Apr. 1 #2

The S&P maxima (green), on-the-other-hand, show an opposite, but weaker correlation where the bear assets and bear sentiment are low, and the bull assets and bull sentiment are high. The majority are wrong at tops, and at bottoms.

The present situation (purple), shows a neutral stance by these measures. Bear assets and bear sentiment are both relatively low, but they both have shown small increases in the last week, which demonstrates some residual fear concerning the rally. At the same time, bull assets have increased, but only to average levels, and bull sentiment has actually weakened despite the rally, which again demonstrates some fear. There seems to be enough fear to continue the rally, but not enough to bet too heavily on it; the bears are hiding, but they haven’t left the forest. We will continue to take profits as they arise since we calculate a limited upside to the rally at this time.

Gold

We have taken considerable on-line criticism (and even insults) for our probability calculations that point to a decline in gold prices for the medium-term. Despite the push-back from the gold-bug perma-bulls, the picture is still pointing to a decline in gold prices, and as long as the FED continues to favor a tightening stance, the path of least resistance for gold will be down.

The chart below, demonstrates the synchronised move between gold and the 30-year bond (blue rectangle).

apr 1 gold

Below is a comparison of the gold price with the commitment of trades. Notice the continued high short interest of the commercial traders which indicates their expectation of a future price drop. We remind readers that commercial traders are usually correct.

gold price apr 1