Hello everyone,
I hope you’ve had a good week. We’ve been busy updating our new look website and reports in and amongst the market action. The economic situation is becoming increasingly interesting, and equity and commodity markets are beginning to reprice the new reality as another 3 million Americans filed for unemployment this week.
The picture looks bleak, yet buyers of the S&P 500 had seemingly looked beyond this fact - until now. With many of the world’s biggest investors challenging this by publicly airing their bearish outlooks this week, the market is finally showing signs that conviction in the old narrative (favouring liquidity over fundamental reality) may be fading.
Here you can see the negative setup presented by our Business Cycle Checklist.
And here is the counter-argument that bulls have been clinging on to; the monetary stimulus in play with each major Central Bank.
Irrespective of how this tug-of-war in stocks may be resolved, I mentioned how commodities are also pricing this in. Gold has been my main focus for several weeks, with our Checklist still presenting a positive outlook for the precious metal.
Beyond these current fundamentals, the narrative amongst investors is clear. The resumption of large scale stimulus and increasing government debt suggests that the value of money is being eroded, and investors are seeking protection in order to preserve their purchasing power. Furthermore, given the extreme magnitude of policy intervention, the consequential impact on inflation (whether you are in the ‘hyper inflation’ or ‘deflationary spiral’ camp) is likely to support gold. A so-called ‘goldilocks’ scenario where the economy 'muddles through' without a significant move in real yields is perhaps the only credible counter argument to owning gold.
Given the ongoing impact of the virus and uncertain outlook in terms of both severity and duration, I think it is unlikely that gold will come under pressure whilst our Checklist remains positive. Looking at the following chart for long term perspective, gold is on the verge of concluding a decade-long consolidation with a probable retest of the 2011 high. Should this happen, then technical analysts will point to the Fibonacci extension level around 2125 as an upside target.
Here’s how it looked on Wednesday when we put out the weekly Trading Club video, and I said that the consolidation around $1700 looked set to be resolved to the upside. Thursday saw the precious metal trade some $30 higher, and may well signal the start of a new leg higher.
Nonetheless, when all the eyes in the world are seemingly looking at the same thing, you need to really focus on the evolution in the fundamental data. Following yesterday’s Initial Jobless Claims, there are a number of key economic releases due later today before the weekend gets underway. Firstly, there is the JOLTS report which provides a gauge for US job openings and appears to be rolling over.
The University of Michigan Consumer Sentiment surveys are also due, with my focus being mainly on the ‘financial situation’ component along with a couple of other variants. This also has fallen off a cliff since the pandemic began, following the Conference Board’s equivalent survey.
Here’s the economic calendar from Bloomberg showing the release schedule and consensus estimates for each release. Be sure to keep an eye on these, as I will be!
Time will tell how the data plays out, but what is clear is that it has never been more important to have a proven trading process at your disposal.
If you would like to join us for our full analysis including new insights each week, or learn from the ground up with online tuition from Lex in our MDT online course, then head to lexvandam.com and take your financial knowledge to the next level right away!
Have a safe and pleasant weekend,
