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The best gamer always emerges victorious from a duel, racking up his win streak. However, being this conspicuous – who doesn’t want to take him down?

The same is the case with the S&P 500, which hasn’t recorded a two-month decline in nearly 10 months. It’s the fourth-longest streak on record! What’s more, the general stock market suffered another bout of volatility recently — with everyone teamed up to take the index lower, the only remaining question is: when?

Fuel to the Fire

With Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), scheduled to speak at the annual Jackson Hole Economic Symposium on Aug. 27, the Delta variant has clearly paved a dovish pathway. However, could the magician actually reveal his secret? Well, as a not-so-subtle hint of what’s to come (whether today or over the next few months), Fed hawks were out in full force on Aug. 26. Speaking with CNBC, Dallas Fed President Robert Kaplan said that “what we’re seeing in these [lower-income] communities is inflation affects them disproportionately. I think at the Fed we have to take that very seriously.”

And what does this mean for his taper timeline?

Source: CNBC

Likewise, Kansas City Fed President Esther George also told CNBC on Aug. 26 that “I would be ready to talk about taper sooner rather than later.”

“When you look at the job gains we saw last month, the month before, you look at the level of inflation right now, I think it would suggest that the level of accommodation we’re providing right now is probably not needed in this scenario.”

Even more hawkish, she actually downplayed the economic impact of the Delta variant:

“Both the anecdotes I hear from our contacts in the region and the data so far do not show a material change in the outlook.”

Upping the ante, St. Louis Fed President James Bullard led the hawkish brigade on Aug. 26. Also, speaking with CNBC, Bullard said that “we do have a new framework we did say that we would allow inflation to run above target for some time, but not this much above target.”

“I think that there is worry that we’re doing more damage than helping with the asset purchases because there is an incipient housing bubble in the U.S. The median house price, at least the number I saw, was approaching $400,000,” he said. “We got into a lot of trouble in the mid-2000s by being too complacent about housing prices, so I think we want to be very careful on that this time around.”

And not only does Bullard want the taper to begin immediately, but he’s advocating for net-zero asset purchases by the end of Q1 2022.

Please see below:

Source: CNBC

S&P 500 – A Correction Coming?

Furthermore, as the taper drama unfolded on Aug. 26, equity investors responded with expected disdain and the negativity ushered the USD Index back above 93. More importantly, though, with the gold price exhibiting strong negative correlations with the U.S. dollar, a profound correction of the S&P 500 could capsize the PMs. To explain, while the general stock market suffered another bout of volatility, the S&P 500 hasn’t recorded a two-month decline in nearly 10 months. For context, it’s the fourth-longest streak on record.

Please see below:

Moreover, the Institute for Supply Management’s (ISM) manufacturing PMI is highly correlated with the S&P 500. And with the former falling from its recent high and poised to turn lower in the coming months, the S&P 500 may find itself running out of upside catalysts.

Please see below:

To explain, the dark blue line above tracks the year-over-year (YoY) percentage change in the ISM’s manufacturing PMI, while the light blue line above tracks the YoY percentage change in the S&P 500. If you analyze the right side of the chart, you can see that the former’s decline has already outpaced the latter’s. And with Bank of America predicting that the ISM’s manufacturing PMI (in YoY terms) will turn negative by October, the S&P 500 may follow in its footsteps.

Adding to Wall Street’s trepidation, Morgan Stanley also expects a profound correction. Chief equity strategist Michael Wilson told clients on Aug. 20 that unprecedented fiscal spending fueled “a hotter but shorter cycle” and that a reversion to the mean could hammer the S&P 500 in the coming months.

He wrote:

“With Congress expeditiously providing record amounts of fiscal stimulus last year, the table was set for a major consumer stand against the downturn. Fast forward 16 months and it's fair to say the US consumer has not disappointed. But, after a year of remarkable resilience from the US consumer, it begs the question: ‘Is it sustainable?’ While there is little doubt about the US consumers' willingness to spend, the other key variable to consider is their ability to spend.”

Please see below:

To explain, the dark blue line above tracks the University of Michigan’s Consumer Sentiment Index (CSI), while the light blue line above tracks the S&P 500’s consumer discretionary/consumer staples ratio. When the light blue line is rising, it means that consumer discretionary companies (cyclicals) are outperforming staples (risk on). Conversely, when the light blue line is falling, it means that consumer staples companies (defensives) are outperforming consumer discretionary (risk off). If you analyze the right side of the chart, you can see that the light blue line has already rolled over. And with the dark blue line now at a 2021 low, the ratio has plenty of catching up to do. Moreover, with the cyclical basket home to some of the S&P 500’s most expensive stocks outside of the technology sector, an unwinding of the excess could have a profound impact on the USD Index, and therefore, the performance of the PMs.

As further evidence, with investors throwing caution to the wind, the S&P 500 is running low on capital.

Please see below:

Source: Bank of America

To explain, the dark blue line above tracks the S&P 500, while the gold line above tracks the net free credit balances held in investors’ cash and margin accounts (data from FINRA). In a nutshell: it’s the amount of purchasing power (cash and debt) that investors can use to buy more stocks. If you analyze the relationship, you can see that historical lows in investors’ net free credit balances often coincide with historical peaks in the S&P 500. More importantly, though, if you analyze the right side of the chart, you can see that investors’ net free credit balances are easily at an all-time low. As a result, with the bulls all in and little dry powder available to accelerate the momentum, the S&P 500’s pain could turn into the USD Index’s gain.

Volatile Times Ahead

Finally, with the Cboe Volatility Index (VIX) – which measures the expected volatility in the S&P 500 over the next 30 days – surging by more than 12% on Aug. 26, seasonal signals imply that uncertainty could reign supreme over the next few months.

Please see below:

To explain, the blue bars above track the average value for the VIX during each month of the year. If you analyze the arrow in the middle, you can see that VIX spikes often occur in August, September and October. And with this year’s edition coinciding with the Fed’s taper timeline and investors’ all-time high exposure to stocks, the U.S. dollar could be in high demand if (when) volatility erupts.

In conclusion, the PMs suffered another pullback on Aug. 26 and their medium-term downtrends remain intact. And while Powell’s presser may result in ‘PMs up, USD Index down’, the short-term sugars highs often have very short shelf lives. Moreover, with the Fed’s taper timeline poised to reach its climax in the coming months and the uproar likely to upend the S&P 500, the USD Index’s medium-term fundamentals remain robust. As a result, the PMs are unlikely to find a true bottom until these developments subside.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim targets for gold and mining stocks that could be reached in the next few weeks. We invite you to subscribe now and read today’s issue right away.

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Przemyslaw Radomski, CFA
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I previously wrote that gold had likely topped even if the USD Index was to decline a bit more. And, well, gold declined regardless of the USD’s small decline. What does this tell us? It says that the medium-term decline in the precious metals sector remains on schedule, and what we witnessed recently was nothing more than a counter-trend pause.

Let’s start today’s journey through charts with the USD Index and a quote from the previous analyses.

I previously commented on the above chart in the following way:

The USD Index invalidated the breakout to new 2021 highs, but it didn't invalidate the previous inverse head-and-shoulders pattern, so the downside seems very limited.

There’s a rising short-term support line based on the June and July lows that currently “says” that the USD Index is unlikely to fall below ~92.75. At the moment of writing these words, the USD Index is trading at about 93.07, so it’s very close to above-mentioned level.

And even if the USDX declines below it, there’s support at about 92.5 provided by the neck level of the previously confirmed inverse head-and-shoulders pattern. This means that the USDX is unlikely to decline below this level, and this in turn means that the downside seems to be limited to about 0.6 index point. That’s not a lot.

Remember when the USD Index previously invalidated the breakout above the inverse H&S pattern? I wrote then that it could decline to the nearest support level provided – then – by the 38.2% Fibonacci retracement. Now the nearest support is provided by the rising support line at about 92.75.

This doesn’t mean that gold will necessarily rally from here or that the rally will be substantial. On the lower part of the above chart, you can see that gold moved to its declining resistance line, which means that it could decline right away.

The USD Index didn’t move to the above-mentioned rising support line, but it was very close to it. The USD Index has been relatively flat so far today, but gold is already down, so it seems that even if the USD Index bottoms slightly lower, it might not take gold to new short-term highs.

Now I’m Not Doing It!

Based on today’s pre-market trading, it seems that we can view the rising support line as having been reached, and thus we can expect the upswing to continue.

Please note that the USD Index was down yesterday by 0.07, which is not a lot, but enough to make gold rally… if gold wanted to rally, that is.

But gold didn’t really want to rally, so it didn’t. Gold appears to have completed its counter-trend upswing, and it seems that it’s ready for another downswing.

Moreover, gold was down yesterday, and it’s down in today’s pre-market trading as well.

On Tuesday, based on Monday’s rally, I wrote the following:

The combination of the resistance line being reached with the fact that gold did that right on its reversal day indicated by the triangle’s vertex makes it even more likely that gold will reverse its course shortly.

We can see the same thing – gold moving to its resistance line – also when we look at its performance through its most popular proxy – the GLD ETF.

In this case, we can compare where gold rallied to where the mining stocks (the GDX ETF) rallied. And while the GLD moved to its declining resistance line, the GDX ETF was not even close to its analogous dashed declining resistance line. 

Instead, the GDX ETF moved back to its previously broken neckline of the head and shoulders pattern and closed slightly below it.

This is more important than comparing the GDX’s closing price to its previous yearly low — it closed slightly above it.

Here’s the chart I described above:

As you can see, that’s more or less what happened. Gold reversed course at the turning point and the declining resistance line, while mining stocks simply verified the breakdown below their April – August head and shoulders pattern. What’s more, the GLD ETF already broke below its rising red support line. That’s almost as bearish as it gets. Almost, because the breakdown in gold is not yet confirmed. Still, since gold underperformed the USDX in the last few days, it seems that the breakdown is valid.

Silver moved a bit lower recently, but it’s still relatively close to its most recent short-term high. It didn’t invalidate the breakdown below its previous 2021 lows, but I would like to warn you that silver might attempt to stage a fake breakout before sliding. We saw this kind of performance in early August, and we can (but don’t have to) see it once again. So, if silver rallies here while gold and miners don’t, it will most likely not be a bullish signal but rather a bearish confirmation.

All in all, it seems that the precious metals sector is ready for another sizable decline.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim targets for gold and mining stocks that could be reached in the next few weeks. We invite you to subscribe now and read today’s issue right away.

Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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There are many factors affecting gold prices on a daily basis, but… how can GameStop stock be one of them?

Given today’s pre-market slide in gold, it seems that the triangle-vertex-based turning point worked once again. Declines are likely next.

In yesterday’s analysis, I explained why the situation remains very similar to what happened in 2013, and that remains up-to-date. On top of that, two interesting things happened yesterday: one quite obvious and one less obvious.

White Metal Outperformance

The more obvious one was that silver outperformed gold on a short-term basis.

While miners and gold were almost flat yesterday, silver’s daily upswing was notable. Nothing to write home about, but it was visibly bigger than what we saw in gold and miners. These moments – when silver outperforms on a very short-term basis – tend to take place right before the prices of the precious metals and mining stocks decline.

Remember the early-August breakout in silver that turned out to be a fakeout? Silver broke above new highs while gold didn’t, so it outperformed on a very short-term basis. And just as lower prices followed then, lower prices are likely to follow soon (not necessarily immediately, though).

Have You Heard About GameStop?

The less obvious indication of a turnaround in gold came from the… GameStop stock price.

Yesterday’s sizable price spike is something that we saw several times this year. I’m not taking into account the January rally, as it was a specific forum-activity-based upswing that seems to be of one-of-a-kind nature. Except for yesterday’s price spike, there were also four other similar spikes. Let’s check if there was any kind of regularity on the gold market at the same time.

It turns out that in all four cases when the GameStop stock price spiked, gold was topping. Does it make any sense, and can one, therefore, count on this being repeated?

Actually, it does make sense. The assets are not really directly related, but they are related in terms of people’s emotions. The GameStop trade was quite an emotional one, people were jumping on board based on fear of missing out regardless of anything else. And nothing really changed since that time. The current valuations of the stock seem to be based on the same emotional aspect along with people’s ability to finance the purchases, perhaps based on leveraged stimulus-based funds. Consequently, the price spikes in GameStop might be a barometer for a specific type of emotionally driven purchases. And if the market is emotional in one specific way, it could impact more (all?) assets in one way or another. In the case of gold, it seems that when emotions (as indicated by GameStop stock) spiked, gold was topping.

Actually, it could be the case that the reason why silver outperforms gold on a short-term basis is related to the above. Silver is a smaller market, and it’s much more popular among individual investors than among institutions. No wonder that emotions play a part here, as the former are generally more emotional than the latter.

Having said that, let’s take a look at gold.

The yellow metal moved lower today, close to its triangle-vertex-based reversal. Consequently, the top might be in based on just that indication, and there are plenty more coming from other markets.

The USD Index, for example.

The Dollar’s Behavior

Yesterday, I commented on the above chart in the following way:

The USD Index invalidated the breakout to new 2021 highs, but it didn't invalidate the previous inverse head-and-shoulders pattern, so the downside seems very limited.

There’s a rising short-term support line based on the June and July lows that currently “says” that the USD Index is unlikely to fall below ~92.75. At the moment of writing these words, the USD Index is trading at about 93.07, so it’s very close to above-mentioned level.

And even if the USDX declines below it, there’s support at about 92.5 provided by the neck level of the previously confirmed inverse head-and-shoulders pattern. This means that the USDX is unlikely to decline below this level, and this in turn means that the downside seems to be limited to about 0.6 index point. That’s not a lot.

Remember when the USD Index previously invalidated the breakout above the inverse H&S pattern? I wrote then that it could decline to the nearest support level provided – then – by the 38.2% Fibonacci retracement. Now the nearest support is provided by the rising support line at about 92.75.

This doesn’t mean that gold will necessarily rally from here or that the rally will be substantial. On the lower part of the above chart, you can see that gold moved to its declining resistance line, which means that it could decline right away.

The USD Index didn’t move to the above-mentioned rising support line, but it was very close to it. The USD Index has been relatively flat so far today, but gold is already down, so it seems that even if the USD Index bottoms slightly lower, it might not take gold to new short-term highs.

All in all, it seems that the precious metals sector is ready for another sizable decline.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim targets for gold and mining stocks that could be reached in the next few weeks. We invite you to subscribe now and read today’s issue right away.

Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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