It seems that everybody's hanging on the Fed's every word.
S&P 500 Index
(INDEXSP:.INX) climbed above the closing record of 1,669.16 reached
May 21 and closed at its record high (1,675.02) as Ben Bernanke
backed sustained monetary stimulus.
The index has advanced for six straight days, the longest winning
streak since March 11, and is heading toward its biggest weekly
gain since Jan. 4. In this way, the S&P 500 erased losses since
Bernanke first suggested the Fed might curb stimulus this year.
Without a doubt, the US Federal Reserve stimulus has helped fuel a
rally in financial markets which spread across stocks and bonds to
oil and metals. Many investors have jumped to rallying stocks and
dumped holdings in gold-linked exchange traded funds.
"The story in stocks for this year is about confidence replacing
uncertainty and anxiety," Hank Smith, a chief investment officer at
Radnor, said. "It's really more about an improvement in sentiment.
That's being a big driver for equity returns and we are still a
long ways away from worrying about there being too much optimism or
Could these events trigger another rally? Will the S&P 500
index climb decisively above the May 21 top? Before we answer these
questions, let's find out what happened during the last several
days and check the current situation in stocks. Let's start with
the long-term S&P 500 chart (charts courtesy of
Click to enlarge
On the above chart we see that stocks moved back above the rising
support line, which means that the breakdown below this line was
invalidated. The recent decline was likely nothing more than
another correction and the outlook is still bullish.
Now, let's check if the short-time outlook is also bullish.
During the past week, the S&P 500 Index has continued its
rally. On Monday, we finally had a breakout above the declining
resistance line based on the May and June tops. The following days
brought further rallies. Another bullish factor was the breakout
above the November-May upward trend line. The price climbed up over
the area of the June 18 local top, and as we had previously
mentioned, the S&P 500 index reached the May 21 closing record
of 1,669.16 and closed at its record high yesterday. The next
resistance level is at the May 22 high.
Let us move on to the financial sector, which often leads the
general stock market, for more clues regarding the future moves of
the S&P 500 -- we'll use the
(INDEXNYSEGIS:XBD) as a proxy here.
In this week's Broker-Dealer index chart we see that the financials
broke above the resistance level at 130. This could fuel further
gains in the stock market. Please keep in mind that the financial
sector used to lead the general stock market lower and higher so
the bullish sign here is also a bullish confirmation for other
stocks. However, the breakout has not been confirmed so far, so the
situation improved just slightly.
The situation for stocks in the long and short term is quite
bullish, and it seems that we could see further gains in the stock
Now that we know the current situation in the stock market and the
financial sector, we can take a look at the Correlation Matrix.
This is a tool my firm developed to analyze the impact of the
currency markets and the general stock market upon the precious
metals sector (namely, gold correlations and silver correlations).
The correlations between gold and the general stock market reminded
us of a question regarding whether we felt gold was starting to
trade along with the stock market. This may seem to be true this
week, but we doubt this will last. The very short-term coefficients
are basically non-existent, the short-term are positive but weak,
and the medium-term ones are negative and stronger than the
short-term positive ones. The situation overall is mixed, but the
negative correlations prevail in our view. It seems that if stocks
rally in the medium term (which is likely), this will probably have
a negative impact on precious metals, not only on gold but also on
silver and the mining stocks (note an analogous situation in the
silver / S&P and
(INDEXNYSEGIS:HUI) / S&P rows).
Summing up, the situation in the general stock market improved this
week. The short and long term outlook is quite bullish, and it
seems that we could see further gains in the stock market. For
those looking for bullish implications, it might seem that gold
started to trade along with the stock market last week, but we
doubt this will last. It seems that the impact that the stock
market has on gold, silver and mining stocks is still bearish.
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