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Is A Correction For S&P 500 And Gold Looming?

By Monica KingsleyStock MarketsFeb 12, 2021 05:06PM ET
www.investing.com/analysis/is-a-correction-for-sp-500-and-gold-looming-200560541
Is A Correction For S&P 500 And Gold Looming?
By Monica Kingsley   |  Feb 12, 2021 05:06PM ET
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Stocks are clinging to the 3,900 level, and the bulls aren't yielding. Without much fanfare, both the sentiment readings and put/call ratio are at the greedy end of the spectrum again. How long can it last? And what shape could the upcoming correction take? Right now, the warning signs are mounting, yet the bears shouldn‘t put all their eggs into the correction basket, for it shapes to be a shallow one – one in time, rather than in price.

Gold's hardship is another cup of tea, standing in stark comparison to how well silver and platinum are doing. At the same time, the dollar hasn't really moved to the upside – there is no dollar breakout. If the greenback were to break to the upside, that would mean a dollar bull market, which I don't view as a proposition fittingly describing the reality. The world reserve currency will remain on the defensive this year. We saw not a retest, but a local top.

This has powerful implications for precious metals, where the only question is whether we get a weak corrective move to the downside or whether we can base in a narrow range, followed by another upleg (think spring). February isn't the strongest month for precious metals seasonally, but it isn't a disaster either.

One more note concerning the markets – in our print-and-spend-happy world, where the give or take $1.9-trillion stimulus will sooner or later come in one way or another, we better prepare on repricing downside risk in precious metals. Also, we better not to fixate on the premature bubble pop talk too closely. I have been stating repeatedly that things have to get really ridiculous first, and this just doesn‘t qualify yet in my view. All those serious correction calls have to wait – in tech and elsewhere, for we‘re going higher overall – like it or not.

Let‘s get right into the charts (all courtesy of www.stockcharts.com).

S&P 500 Outlook And Its Internals

SPX Daily.
SPX Daily.

Third day of hesitation, this time again with a thrust to the downside. Marginally increasing volume, which speaks of not too much conviction by either side yet. As the very short-term situation remains tense, my words from yesterday still apply today:

'(…) I think this corrective span has a bit further to run in time really. (…) the bears are just rocking the boat, that‘s all.'

SPX Daily.
SPX Daily.

The market breadth indicators are deteriorating, without stock prices actually following them down. Thus far, the correction is indeed shaping to be one in time and characterized by mostly sideways trading. Unless you look at the following chart.

VIX Daily.
VIX Daily.

Volatility has died down recently, yet a brief spike (not reaching anywhere high, just beating the 24 level) wouldn‘t be unimaginable to visit us by the nearest Wednesday. In all likelihood, it would be accompanied by lower stock prices. It is well worth watching.

Credit Markets And Tech

HYG-SHY Ratio.
HYG-SHY Ratio.

There is a growing discrepancy between high-yield corporate bonds (iShares iBoxx $ High Yield Corporate Bond ETF (NYSE:HYG) and its investment grade counterpart (iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSE:LQD). Both leading credit market ratios have been diverging not only since the end of January, but practically throughout 2021. The theme of rising yields is exerting pressure on the higher end of the debt market as the stock investment fever goes on.

XLK Daily.
XLK Daily.

No, this is not a bubble – not a parabolic one. The tech sector is gradually assuming leadership in the S&P 500 advance, accompanied by micro-rotations as value goes into favor and falls out of it, relatively speaking. Higher highs are coming, earnings are doing great and valuations aren't an issue still.

Summary

The stock market tremors aren‘t over, and the signs of deterioration keep creeping in. The bull run isn't in jeopardy, however, and there are no signals thus far pointing to an onset of a deeper correction right now.

Is A Correction For S&P 500 And Gold Looming?
 

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Is A Correction For S&P 500 And Gold Looming?

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Comments (10)
peter kumar
peter kumar Feb 14, 2021 11:19PM ET
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I want to buy physical gold, maybe 25oz or so. not to sell but just to hold, as a hedge in case the market tanks due to all this money printing.
Nate Johnson
Nate Johnson Feb 14, 2021 11:19PM ET
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The cost of transporting and storing that 25 oz plus the downward pressure on gold price means you would take a good loss in the next year or so on your investment. Opportunity cost in economics tells us you can invest that money somewhere else and earn a higher rate of return. Then in a year or 2 from now when the price of gold goes down you can decide if you still want to spend 50,000 usd on something you won't ever use. Because at that point you will be getting a better return on your investment.
Monica Kingsley
Monica Kingsley Feb 14, 2021 11:19PM ET
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While you wouldn't take a loss in the next year in my view, I don't see the market as tanking really (no, not yet really) - think instead about many asset classes going up in price. PMs and stocks included.
Monica Kingsley
Monica Kingsley Feb 14, 2021 11:19PM ET
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and hello again Peter!
Roberta Garrett
Roberta Garrett Feb 14, 2021 5:49PM ET
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Thanks for the article and charts. Interested in knowing more about the mention of growing discrepancy between HYG and LQD. What does this divergence mean for the bonds individually? Assuming they normally move in tandem? And have you seen this behavior before in these assets?
Monica Kingsley
Monica Kingsley Feb 14, 2021 5:49PM ET
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Most of the time, the two move in the same direction. Before the corona crash, the high yield ones were leading the investment grade ones for countless quarters. From the Mar 2020 bottom, the investment grade ones were in the pool position. And since the end of Dec 2020, the high yield ones are leading again, but investment grade ones aren't going up anymore, but down the way long-term Treasuries do. One more sign of the euphoric stage in stocks we're in.
yifan xie
yifan xie Feb 14, 2021 5:49PM ET
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Monica Kingsley  thanks for explaining this rationale here, I have been following your posts for a while, and always find them to be insightful.
Monica Kingsley
Monica Kingsley Feb 14, 2021 5:49PM ET
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yifan xie Thank you very much, the above post is solely about stocks. My goal is to keep helping the people as much as I can. Apart from daily analysing stocks and precious metals at length, I'll be also talking oil more often. Frequent subject of interest. I'll also share today's analysis, regardless of today being a federal holiday. Thank you again!
George Pichurov
George Pichurov Feb 14, 2021 3:07AM ET
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Btw., what is the dictionary definition of high yield? Speakin' 'bout bonds. I was trying to figure it out from price data (inverse to yield), so where shall we benchmark it? 1%? 2%? 0.5%? 0.025%?
Monica Kingsley
Monica Kingsley Feb 14, 2021 3:07AM ET
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The dictionary definition has been changing since the early 1980s in one direction rather really. What can I say...
George Pichurov
George Pichurov Feb 14, 2021 1:17AM ET
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Earnings doing great...like Boeing perhaps, that alone sent stonks spiraling 200 points down, a week ago. I can 'bear'ly imagine when other lousy zombie companies join suit.
Monica Kingsley
Monica Kingsley Feb 14, 2021 1:17AM ET
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Hi George, I talk earnings in the section about tech = I talk tech earnings clearly. Boeing is a different class.
Robert Flores
Robert Flores Feb 14, 2021 1:17AM ET
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Weeks, even months, we will see a big correction or even crash before years end I feel, maybe oct, like 2018 one
Monica Kingsley
Monica Kingsley Feb 14, 2021 1:17AM ET
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Robert Flores Hard to call which month, now in Feb, but it's not knocking on the door, definitely not.
Paul Barron
Paul Barron Feb 14, 2021 1:17AM ET
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Monica Kingsley i like this. I need 3-4 weeks
Chris Maz
ChristoM Feb 13, 2021 6:40PM ET
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Great to have you back Monica.  Seems everyone is calling top but even with all the warning signs this could go on for weeks.
Monica Kingsley
Monica Kingsley Feb 13, 2021 6:40PM ET
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Hello dear Christo again! I am back, with own site, independence, talking stocks, precious metals, and as will be the case, often oil too. This bull has indeed further to run!
Xiomi Mi
Xiomi Mi Feb 13, 2021 12:30PM ET
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nice curative article Monica!
Monica Kingsley
Monica Kingsley Feb 13, 2021 12:30PM ET
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Thank you very much, keep coming back for more, and have a nice Sunday!
Richard Clinton
Richard Clinton Feb 13, 2021 11:05AM ET
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Thank you Monica!
Monica Kingsley
Monica Kingsley Feb 13, 2021 11:05AM ET
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Thank you dear Richard, always pleasure to see you and hear you. Gold is bidding its time, but the table is set.
Yousef Aldwairi
Yousef Aldwairi Feb 12, 2021 6:42PM ET
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The steam has gone, Obviously gold and silver are the magic that government needs now to weigh their currency and and financial systems on, for sure, the pressure is accumulating over and the escape is to push gold to the downside, to equalize the economy, its only a matter of few months were we will all see gold going lower 1600 and you my dear Monica will be easing with your articles on each lower low gold hit to softnes your escape from your enitial bullish calls
Robert Flores
Robert Flores Feb 12, 2021 6:42PM ET
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We each have our viewpoints, in my view government actually needs gold higher, much higher so they can take some of its gold reserves and pat off a big chunk of debt- the fed can then start raising interests to tame inflation
Monica Kingsley
Monica Kingsley Feb 12, 2021 6:42PM ET
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I don't think the steam in PMs is gone, regardless of gold action in the now. I'm in the camp of expansive monetary and fiscal policies, real economy recovery, returning inflation and declining U.S. dollar driving the metals higher, not lower. The US doesn't have a monopoly on gold price formation - look at the gold loving nations, what they are doing... Also, the Fed's focus lies more with the yield curve than gold itself. And don't forget about job creation and climate change getting their attention...
Yousef Aldwairi
Yousef Aldwairi Feb 12, 2021 6:42PM ET
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You are correct with this statement but not allI am in the camp and I love gold as well but looking at the situation I have decided to get out of the market and get all in physical,Why? Because I know the Fed is lied and will continue so,Actually it has changed and they now have monopoly,1,Bankers in the government!!!!2,Yeallen in the government!!!!She want strong dollar and keep on prenting money, I just can't get it how it's possible without monopoly!!!!!! Not only on gold price I do not talk about usa only I am seeing this started also in my country bankers are inside the government,,,
Yousef Aldwairi
Yousef Aldwairi Feb 12, 2021 6:42PM ET
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That is valid point of view and exactly what I am thinking, but I also like to but myself on the other side and watch the fake economic data all I see they are doing the apposite,,,U will ask me why they will do it?Its confusing and I wonder why in the world they are doing it, but u look and answer me what is happening?!
Monica Kingsley
Monica Kingsley Feb 12, 2021 6:42PM ET
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Yousef Aldwairi So if you are in physical gold, and treat statements of strong dollar with suspicion, then we are in effect more in agreement than might be apparent...
Robert Flores
Robert Flores Feb 12, 2021 5:58PM ET
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Hi again Monica! Well if we look at the monthly chart stocks are very much parabolic- as far as gold is concerned I can call it now ‘cause I see it - it’s a consolidation triangle where we do get higher lows but also lower highs- hence the lack of clarity for direction. But from a fundamental perspective its clear enough - gold has been rocking for a couple of years now and will continue. right now its at the end of a pause handicaping silver and platinum to catch up-
Monica Kingsley
Monica Kingsley Feb 12, 2021 5:58PM ET
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Yes, short-term meandering and indecision in the yellow metal amid overwhelmingly positive outside markets beyond PGMs.
John Doe
ForexInsiders Feb 12, 2021 5:58PM ET
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Absolutely. And it's going to be wicked. DX has broken out of its Covid Wedge right on a supply zone seen a few years before. That includes an Inverted H&S that propelled price out of the wedge and so far a successful test of neckline. FOMC's meetings this week spelled out the cons without stimulus and even so, the liquidity of placement with stimulus with still induce a pullback as positions fill. Seasonality also points to Mid Feb through first week of March to be a corrective period before the bull breaks out on risk and all involved. CoT report also shows MM's dropping their short positions which means more down will come as their freed up liquidity is bought. Trust the process, follow the smart money. And make sure you account for a stop hunt.
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Monica Kingsley
Monica Kingsley Feb 12, 2021 5:58PM ET
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Robert Flores I absolutely agree, and earlier this week, called out the dollar dynamics. Just look at last week's reaction to unemployment claims on Thu, and non-farm payrolls on Fri. What went on next? Dollar local top in the making - with powerful implications for all risk-on assets, stocks, metals, commodities...
Monica Kingsley
Monica Kingsley Feb 12, 2021 5:58PM ET
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Forex Harbingers: I like your timing prognostications, and your interpretations. It fits with my seasonality assessments, publicly discussed too. Gold bulls have to be still patient, but the move is coming as surely as day.
Söyle bakalım Alican
Söyle bakalım Alican Feb 12, 2021 5:58PM ET
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Thanks. We have a saying. "patience is half of believing"
Monica Kingsley
Monica Kingsley Feb 12, 2021 5:58PM ET
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Söyle bakalım Alican I would compare it to a wave, or a tide. I prefer betting on the tide.
Paul Barron
Paul Barron Feb 12, 2021 5:58PM ET
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Monica Kingsley beauty again being a sea fearing man.
 
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