Stocks, Gold Fly In July: What Has More Upside Now?
ETFs scaled historic new summits in July as the stock market rebounded from its June swoon much faster than when it fell. The market gained traction after Federal Reserve Chairman Ben Bernanke said the central bank has no preset timeline for cutting back on economic stimulus and that its near-zero-interest-rate policy will remain for the foreseeable future.
SPDR S&P 500 ( SPY ) popped 5% to nearly 170 -- an all-time high -- after dipping 2% in June. S&P companies, up 18% year to date, will grow earnings by about 5% in the next 12 months and the index will reach 1,740 (roughly $174.00 a share for SPY) by mid-2014, Russell Investments projects.
On the other hand, weak breadth indicators, the Supply Management Price Index reading below 50, low liquidity and margin debt roaring to a 10-year high suggests investors should brace for a correction, says Brad Lamensdorf, founder of the Lamensdorf Market Timing newsletter.
"Margin debt is at a record high," he wrote in his July issue. "An abrupt sell-off can trigger margin calls and beget more selling."
SPDR Gold Shares ( GLD ) rebounded from a three-year low, rallying 7% to 127.90 in July and snapping a three-month losing streak. Down 21% year to date, it pared the collapse from its historic high of 185.85 from September 2011 to 31%.
GLD could rise to 135 to 140 a share before resuming its downtrend, says Patrick Hejlik, CEO of Fourth Quadrant Asset Management . He recommends short selling to profit from falling prices.
"Disinflation, higher real (interest) rates, a stronger dollar and slowing economies will continue to pressure the metal," Hejlik, said in an email. He believes gold will bottom at its average cost of production at $1,000 an ounce.
Charles Biderman, CEO of TrimTabs Investment Research , has funneled a quarter of his assets into one-ounce gold bars on expectations that the U.S., Europe and Japan will continue to engage in quantitative easing to debase their currencies and support their economies.
Bullish Case For Gold
Gold bottomed at $1,200 an ounce (about 120 for GLD) and will continue higher thanks to heavy demand for bullion and jewelry in emerging markets and as short-sellers, betting on falling prices, close their positions by buying gold futures, he said.
IShares MSCI EAFE Index ( EFA ), tracking developed foreign markets, advanced 5% in July and 6% year to date.
Russell upgraded European stocks from underweight to neutral following the second-quarter correction. It recommends buying Japan and Europe over the U.S. because of their low valuations.
"Japanese equities are trading at just 1.3 times book value. Reflation and yen devaluation are positive catalysts for EPS growth," Russell wrote in an outlook. "The Japanese economy is responding to policy stimulus, and business confidence surveys are signaling optimism."
The eurozone recession will likely end in the third quarter although growth will continue to be weak coupled with high unemployment and no lending growth, according to Russell.
IShares MSCI Emerging Markets Index ( EEM ) added 1% in July -- one of just two months this year in which it closed with a gain. It's tumbled 12% year to date in the face of plunging commodity prices, currency depreciation against the dollar and China's credit crunch and economic slowdown.
What's more, anti-government protests erupted nationwide in Brazil, Bulgaria, Egypt and Turkey.
"A lot of the bad news is now priced in and emerging markets offer good medium-term value," Russell wrote. "Attractive valuations, good earnings prospects, the impacts of stimulus measures and stronger exports should eventually deliver outperformance."
Emerging markets are trading at a 20% discount to developed markets and 5% below their 10-year average, Russell wrote. But from a bearish view, emerging markets tend to lag developed markets when the dollar strengthens because it prompts banks to tighten lending and central banks to sell foreign reserves to maintain their currency pegs to the dollar, Russell noted.
Biderman recommends shorting both foreign developed and emerging markets on the expectations that they'll sell off harder when the Fed tapers quantitative easing.
"Unless the economy grows faster, I don't see how the market can keep going up when the Fed does stop (QE)," he said.