SPX should be expected to retrace the recent decline

Sep.07, 2008 in Market Outlook

Over the weekend I posted that the SPX should be expected to retrace 50% of the recent decline back to former support at 1,261 where resistance should be considerable and if 1,261 is bettered then 1,270 to 1,275 wont be.

Well it looks like 1,261 has been totally by-passed but SPX does have a support/resistance level at precisely 1,274.40 which seems to be capping forward progress for the present moment … keep your eye on this level. If 1,274.40 doesn’t hold the bulls then 1,292 at the top of a larger trend channnel looks like the next pit stop.

In the same post I also noted that I was getting excited because we were within an inch of a significant buy signal for gold equities and that the cementing of this signal could be determined by the outcome at the close on Monday. The term “significant” is this sense means specifically that such a signal has only manifested 8 times previously in the last 34 years.

Looking at a basket of 14 currencies gold is up at present in 12 of those 14 … the Aussie and the Rand are the 2 laggards. However at the sea of green on the Australian All Ordinaries (+3.61) every sector is up including Banking (+6.15%) and Gold Miners (+2.62%). Bottom line is the significant buy signal on gold equities is looking on course but will still need obsolute confirmation on what happens on the NYSE today.

For those who are not sure gold is the most non-correlated asset class to more conventionial stocks. When stocks are in a bull market you don’t want to be top heavy in the gold sector. However when stocks are on the nose the gold sector is the place to be.

As an example gold outperformed the Dow by a factor of 9 to 1 from 1929 to 1932. From 1966 to 1980 gold outperformed the Dow by a factor of 28 to 1. During the current decade gold has outperformed the Dow by just 3 to 1 which is still small change when measured against historical precedence.

Some argue that a weak stock market has a negative impact on gold equities. This view, as a generalisation, has some merit but a closer inspection of the facts indicate that when gold stocks decide to disconnect from the broader market they do so with gusto.

Another point which I know has some people concerned is the possibility of U.S. Government confiscation of individual gold bullion holdings. I don’t have a view on whether such an event will happen again. However if it does where do you think individuals will be forced to turn in order to gain some exposure to gold … equities no doubt which is precisely what happened in the 1930s.

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