Today's Market Observation  04.16.2009  Mon  Tue  Wed  Thu  Fri  Goldberg Archive

Dow to Gold Ratio - No Trends Broken

BY MARTIN GOLDBERG, CMT | april 16, 2009

The chart below is a long-term weekly line chart of the Dow Industrial to Gold ratio. With stocks rallying and gold swooning for the last six weeks, it is often easy to lose site of the big picture. The big picture suggests that the rally in stocks coupled with the correction in gold is just a counter trend move against the longer term and more important trend (bull market for gold relative to stocks). As you can see in the chart, whenever this ratio became too “extended” from its long-term trend as depicted by the 50-week moving average in a big way, there was always a snap back rally of stocks relative to gold toward the long-term trend. The last cause of the deviation of the ratio from its long-term trend was the crash of the stock market coupled with the relatively stable price of gold. The result was the biggest deviation of the ratio from its long-term trend. Accordingly, a snap back of the ratio was the most likely outcome, and the snap back is still in progress.

The current position of the ratio to its trend suggests that the short-term trend may continue (stocks up relative to gold), as it has been common for the ratio to touch the trend line or even to go above it.

The medium/long-term (3-year) chart of the Gold Bugs Index ($HUI) also suggests that a long term up trend in gold may take significant time to develop. Here you see a crash followed by a snap back recovery. In general, big and sustained moves come off of big and sustained bases. In the case of the gold stocks, a multi-year basing pattern (not shown in its entirety) produced a big move to the downside depicted as the left side of the “V.” The downside move even “went parabolic,” and then produced a sharp snapback rally to the upside. Yet for a sustained bullish move to occur from current levels of the HUI, more of a basing pattern would likely be needed.

It is also relevant that stocks will soon find themselves in a similar predicament in the intermediate term as gold stocks did in late January. The snap-back rally which is in progress may continue for some time, but in my view, a sustained bull market would probably need more time to base.

Note that such a view is irrelevant in the short term. It is also important to not get too comfortable with one’s opinion in the today’s markets. As can be seen from the left hand side of the chart above, the stock market went for several years without a correction of 10%. This was unprecedented action and there is no way to say that we cannot have unprecedented action of a different nature in the near term future. While tendencies suggest that the March bottom will require “testing,” one cannot rule out an extended “V” to the upside.

Today’s Market

If there were a time and a place for a rally correction to occur, it would be over the next week or so. As of this moment household name, great company, and Wall Street technology favorite of the last great stock market bubble is conducting its quarterly earnings conference call. Following their bullish press release, the stock is selling off a just bit after hours.

Today’s action was quite bullish, as the market opened neutral, meandered most of the day and finished strong with a surge of volume. This has been a consistent pattern over the course of the rally as bullish markets tend to be bought late in the day.

Gold and gold stocks sold off pretty hard today.

If there is a chart that appears to be more and more healthy over the long term, it is that of gasoline. With its long term (40-week) trend heading consistently higher, this appears to be an ETF, where long term investors may wish to consider buying dips.

Although public sentiment was horrible (John Stewart) in early March, such sentiment has shown manic tendencies in recent years. It seems to me that the pubic is buying into this rally, lock stock and barrel. Abbey Joseph Cohen Jeremy Siegel et al.

The volatility index has broken below the 40 barrier. Who is to say it won’t go back to 10? If the up tick rule is reinstated, and there isn’t a 10% correction in the S&P 500 in the next year (and there is now precedent for such market action), the volatility index would probably go back to 10 in my view. That would set up the public again for another round of losses.

Have a great evening.

 

Martin Goldberg

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