The stock market flashes gloomy signals. What does it mean for the gold market?

Last week, some analysts pointed out the ominous behavior of the U.S. stock market. On Tuesday, the number of companies traded on the NYSE setting new 52-week lows surpassed the number hitting new highs. Moreover, the market sent two other bearish signals: the Hindenburg Omen and Titanic Syndrome.

The former is a technical indicator that is based on the number of stocks that formed a new 52-week high, and that reached a 52-week low, relative to the total number of issues that trade on the market. The idea is that a high number of both highs and lows implies a significant probability of a major correction, as investors are uncertain about the market’s future direction. On Tuesday, the number of both highs and lows totaled more than 3 percent of advances plus declines, high enough to trigger a Hindenburg signal.

According to the Business Insider, the latter is “a sell signal triggered when NYSE 52-week lows outnumber 52-week highs within seven days of an all-time high in equities.” These signals seem scary – should we worry about the U.S. stock market?

Well, there are definitely some reasons for anxiety. The three indicators analyzed above have not occurred simultaneously since the memorable 2007. And there is, indeed, a growing dispersion of stock market returns – a few stocks drive the overall index. Just three companies – Facebook, Amazon and Apple – account for almost one-third of the gains in the S&P 500. Hence, the rally in the S&P 500 may hide some weaknesses.

However, this is how a market-cap weighted index works: a few biggest companies account for the majority of gains. And you know, some analysts have been calling for a crash for years. But the stock market does not care and continues its rally. Another problem is that the Hindenburg Omen often sends false alerts. Sometimes there are also corrections which are not accompanied by that bearish signal. Last but not least, these indicators are long-term indicators, not necessarily short-term ones. So there may be a correction – actually, we will be surprised if it does not occur at some point – but it is not imminent.

To sum up, the U.S. stock market sent some bearish signals. The doomsayers called for an approaching crash. If that happens, the price of gold will go up. Surely, investors should have some gold in their portfolios – just as a diversifier and a hedge against stock market turmoil. Indeed, we have not seen a correction for some time, so it would be not surprising at all. However, a correction is not the same as a crash. The Fed’s tightening may cause some problems, but the Morgan Stanley equity-risk indicator is still in neutral territory. Actually, several economic indicators support strong economic growth in Q4 – so, the current macroeconomic situation does not support the view of an imminent stock market crash and does not look like an excellent environment for gold to shine. But we will observe the markets carefully. Stay tuned!

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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

Thank you.

Arkadiusz Sieron, Ph.D.
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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