Gold Breakout and Bear Market in Stocks

Well, well, well…

US stocks tanked overnight, with falls led by the big tech companies. The NASDAQ plunged 2.75%, while the Dow and S&P 500 declined 1.9% and 2.2% respectively. Oil fell sharply too, but gold, that solid hedge against volatility and panic selling, rose US$15 To US$1,340 an ounce. More on that in a moment…

Let’s stick with the tech stocks for now. They fell hard, with the leaders like Amazon and Netflix down more than 5%. On the surface, this is strange. The apparent reason for the market falls was China’s retaliation to Trump’s steel and aluminium tariffs. Yesterday, China increased tariffs on a range of US food imports.

This doesn’t have much to do with tech stocks, yet they sold off the most.

What is going on with tech stocks?

Well, Donald Trump took to Twitter in the morning to have a go at Amazon and the lack of tax it pays compared to struggling rivals. Here’s the tweet:

Only fools, or worse, are saying that our money losing Post Office makes money with Amazon. THEY LOSE A FORTUNE, and this will be changed. Also, our fully tax paying retailers are closing stores all over the country…not a level playing field!

That’s not confidence inspiring if you’re a tech investor. And when you have reason to be nervous over a looming trade war with your largest trading partner, there are plenty of reasons to sell.

What’s changing in the market now is investor psychology. Tech stocks lead this bull market. If we’re in the midst of seeing this bull market morph into a bear, then tech stocks will lead the decline too.

The charts give us the best visual representation of this changing psychology. So let’s have a look at the NASDAQ chart:


Source: Optuma
[Click to enlarge]

As you can see, volatility has certainly picked up this year, but you can’t get too bearish just yet. After correcting sharply lower in February, the NASDAQ went on to make new highs in March. The current correction hasn’t made new lows, so you could argue that the upward trend is still in place.

The 100-day and 50-day moving averages, represented by the red and blue lines, support this view. You’d want to see the blue MA cross the red MA to the downside to increase the likelihood that the trend is changing.  

The one area of concern is the increased volatility. At major or intermediate tops, you often see increasing volatility as the bulls and the bears get into an arm wrestle. Bull markets don’t usually end with a click of the fingers. It takes time for people’s beliefs to change. In a bull market, investors can only see blue sky. In a bear market, it’s all grey.

But in between there is patchy cloud cover and rays of sunlight. This is the transition period. I’d say we’re in a transition period now. While I don’t think we’re heading into a major bear market, a lengthy period of consolidation and a 20–30% correction in the NASDAQ should not come as a surprise given the strong run over the past few years.

And stocks like Amazon, Netflix and Facebook, with their famed ‘network effect’, have fuelled that run. But now the tide is turning.

If I’m right about a bear market unfolding, watch for the next NASDAQ rally to fade before or around 7,400 and 7,600 points. If this happens, it will tell you that there are not enough bulls to push stocks to new highs, and that old bulls see the rally as an opportunity to get out at high prices. That’s what a change in investor psychology looks like.

Gold stocks to soar?

If you want to get into an asset in a bull market instead, take a look at gold. Since bottoming in late 2015, gold has been in a bull market. It’s just that most people haven’t noticed. Early bull markets are tough to identify, in the same way that early bear markets are tough to identify. That’s because investor psychology is slowly changing at these times, and most of us don’t recognise it.

Have a look at the gold price chart over the past few years:

Gold Futures - GCSpot (NYMEX Chart Daily. 03-04-2018

Source: Optuma
[Click to enlarge]

Given it’s done nothing since mid-2016, you’re probably thinking it’s a strange bull market. It is. The sell-off in the second half of 2016 was a mini bear market, and a new bull started in 2017. The price has been moving steadily higher ever since.

Overnight (not shown in the chart) the price moved up to US$1,340 an ounce. It’s close to breaking out. If a bear market unfolds in US stocks, the Fed will hold off on its interest rate tightening path…and gold would soar.

Here’s how to play the coming breakout in gold prices.

Greg Canavan,
Editor, Crisis & Opportunity

Greg Canavan is a Feature Editor at Money Morning and Head of Research at Fat Tail Investment Research.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Crisis & Opportunity. As the name suggests, Greg sees opportunity in a crisis. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines traditional valuation techniques with charting analysis.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the basic, costly mistakes that most private investors do every time they buy a stock.

To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Money Morning here.

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