As you likely know, over the past several months I’ve been saying that the latest rally in the equity markets is unsustainable. Well, Tuesday’s bullish move in equities now has me convinced that my stance has been a bit too cautious.
Until now, I’ve been of the opinion that the weak fundamentals of the economy, as well as the debt issues in Europe, posed too much of a threat to the value of stock prices. And while I still think these issues are cause for concern, the fact is that investors are focusing on the positives, both fundamentally and technically, and that’s a bullish tailwind that I can no longer dismiss.
Tuesday’s action in stocks was the proverbial last straw for me, as the Dow closed at its highest level since 2007, with the industrial average now within 1,000 points of its record high. The NASDAQ Composite also was strong, closing above 3,000 for the first time since December 2000. Yet, perhaps the real bullish move from a technical perspective was the breaching of the 1,370 level on the S&P 5000 Index.
The chart above clearly shows the broad measure of the domestic market breaking out with conviction. Even if we were to see stocks fall back and begin to form a base, it will probably be a case where the market is setting the stage for the next big leg higher.
Now, despite my change in disposition about this market, I still think that you should be über-cautious when it comes to your existing allocations, and when it comes to any new allocations to stocks. Practically speaking, this situation means you don’t want to hold winning positions without some downside protection. It also means that if you are contemplating a new allocation that you don’t haphazardly buy stocks that have become extremely overbought.
Finally, I want to add that though my sentiment now regarding stocks has turned bullish, that change doesn’t mean there aren’t sound reasons to be wary of this market. The mere fact that seemingly everyone also now is bullish concerns me, and even though the facts are on the side of the bulls, too much sentiment in one direction is always a warning sign of a potential reversal. Another warning sign is the fact that so many stocks are trading above their short-term moving averages. When stocks are trading above their short-term moving averages, it usually is a sign that a top is forming in the market.
The bottom line here is that I’ve been too cautious with respect to this bull market, but that view doesn’t mean you should proceed without caution when investing. Always make sure your money is protected, and always proceed with the utmost care when putting your money at risk.
A Golden Opportunity in the Works
In the midst of Tuesday’s big equity market rally, the Federal Reserve came out with a rather optimistic outlook on theU.S.economy. Though the central bank did acknowledge the potential negative effect that high gasoline prices could have on the economy, its statement also acknowledged what it called a notable decline in unemployment in recent months. The Fed also cited the continued advance in household and business spending.
The Fed’s words were good for stocks, and they were good for the value of the U.S. dollar vs. rival foreign currencies, as the central bank basically was signaling that there was no need for additional monetary stimulus right now. One sector that the Fed’s words didn’t help was gold.
Gold prices fell sharply Tuesday, and again Wednesday, as traders exited the yellow metal and the stocks tied to its fortunes. The chart below of the SPDR Gold Trust (GLD) shows that the price of gold bullion now has fallen below both the short-term, 50-day moving average as well as the long-term, 200-day moving average.
The sell-off in gold mining stocks has been even more pronounced than the selling in the spot price of the yellow metal. The chart below of the Market Vectors Gold Miners (GDX) shows the tumble that’s taken place in the sector over the past two weeks.
The potential for a rapid decline in gold and gold mining stocks is something I wrote about in the special report, The Complete Guide to Gold Exchange-Traded Funds. In that report, I explained that when gold comes under the pressure of a correction, we usually see some very aggressive selling that takes prices down very fast, and in a very big way. We’ve already seen this situation occur in March, and there may be more downside to come for gold.
The upside here is that when gold prices finally do settle in, there is a very high probability that we’ll see a big rebound in the value of the yellow metal and the stocks tied to its fortunes. This situation is because the fundamental factors pushing gold higher still are very much in place.
If you’d like to find out more about these fundamental factors, and if you’d like to discover how the Fabian Gold Plan can help you make money in gold and gold ETFs, then I invite you to check out my Successful Investing advisory service. A new subscription to the newsletter also gives you access to my special report, The Complete Guide to Gold Exchange-Traded Funds.
I don’t want you to let the next buying opportunity in gold slip through your hands, but here’s a word of caution — I will not be giving out a new buy signal in gold here in the Alert.
The only way to find out when the time is right to jump into gold is to become a subscriber to Successful Investing.
Don’t let this golden opportunity pass you buy. Subscribe to Successful Investing today!
Punk Rock Wisdom
The ones who don’t do anything are always
The ones who try to put you down
And you could spend your entire life walking around
In the nowhere land of self doubt
–Rollins Band, “Shine”
Punk rock icon Henry Rollins often yells out pearls of wisdom in his aggressive songs, and here he reminds us that it’s easy to criticize from the sidelines. Those of us who put ourselves out there and who take a stand on important issues like how to protect your money can listen to the naysayers, but then we’d just spend our time in the nowhere land of self doubt. I prefer to shine, and that’s why I always will put myself out there in defense of your money.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else.