The indexes are rising and the fears remain.
And that combination bodes well for further market gains.
It’s when we stop fretting about Ebola and Isis and Putin, and weak economic data from Japan and China and the Eurozone, and a too-strong dollar and an end to QE and what will be after the mid-term elections… that’s when we’ll start to worry.
As of today, however, those items form the necessary smokescreen for a continued rise in equities.
Which is not to say they aren’t genuinely worrisome items in and of themselves. No and no. We’re just pointing it out so you’ll see how the game works. That is, when the front page lacks a story of the Dow nearing or hitting new highs, when it’s dominated by all these other issues, the bull lives.
The Gold Bug: Failed Hopes
On the other side of the coin, of course, is the demise of those asset classes that get hammered by the opportunity cost of owning equities. And for this we have to look no further than the commodity sector in general, and gold in particular.
Gold, in fact, will be only one of the losers in a rising equity environment. But we’re focused on it today because of a report we came across yesterday that tied together Ebola, gold and mining stocks, and all of it from the gilded mouth of our dear friend and world-renowned contrarian precious metals market indicator, Eric Sprott.
The article was called An Ebola Armageddon Could Trigger a Rebirth in Gold and Silver Prices, it can be found here, and for those without the necessary time to peruse it, it’s essentially a desperate grab for a catalyst that might ignite the PMs and put an end to their three year bear market – but that ultimately won’t because a) as usual, buddy’s logic is arse-backwards and b) hope is not a winning investment strategy.
What we take from the piece, however, is that, again as usual, Sprotsky’s timing is impeccable, in that every time he opens his mouth to sell something – whether it’s a new fund or a new idea (like this cockamamie one) – the PMs immediately take a nosedive.
And so we’ll warn you that, taken along with the technicals, Dr. Sprotter’s tendentious foray into the world of epidemiology is proof enough for us that all gold holders should forthwith abandon all hope that the killer bug will offer any sort of price support to their favorite shiny metal.
Look at the Transports, Fool!
On a completely separate note, we have an interesting ‘Dow Theory’ development in the works at present – one that should bolster the equity bulls if it, indeed, bears out (har!har!).
Dow Theory matches the performance of the two old maidens of the index world, the Dow Industrials and Transports. In a series of articles written over a century ago, Charles Dow, founder of the Wall Street Journal, mapped out the relationships between the two indices that gave rise to this early form of technical analysis.
And it has done yeoman’s work ever since.
In brief, the theory states that one average must confirm the other’s new high to validate a primary trend ‘buy’ signal. Or, conversely, one average must confirm the other’s new low to validate a primary trend ‘sell’ signal.
Here are a couple of real life charts from earlier in the year to demonstrate –
The top is the industrials, whose most recent action was the formation of a lower high (red line). On the bottom are the transports, whose most recent action was the formation of a higher high (green line).
For a Dow Theory BUY signal to remain in force, the Industrials had to confirm the transports’ last high with a new high of their own at the red arrow.
By contrast, for a change in the primary trend to be effected, the transports and industrials would have had to drop below their last retracement lows at their respective blue arrows. That would have initiated a DOW Theory SELL signal.
Needless to say, the Industrials eventually caught up.
And where do we sit now?
Here are the two for the last six months –
The way we see it, the transports will be setting new highs within a week. They currently have a measly 2.5% gap to fill before they hit fresh highs and their placement above all their moving averages bodes extremely well for that happening in the near term.
As soon as the Dow catches up (for she’s certainly the laggard here), we’ll see massive buying, as the oldest technical system in the west flashes a BUY.
Many happy returns,
Matt McAbby, Senior Analyst, Normandy Research