Gold and Treasuries Contradict Stocks

US stocks bounced back last week, despite continuing fears related to North Korea’s nuclear weapons programs and actions. The S&P500 jumped almost 1.4% by Friday’s close. Volume on the other hand did not go up—so this rise in price looked more like it came from short covering than it did from a rush of new money or investors into the stock markets. That said, volatility did ease down, which confirms the rise in prices.

With last week’s stock market rise, the technical picture did change somewhat. On the daily charts, the weakness that we’ve seen in August has been reduced; now, with prices back well above the 50 day moving average, traders can start looking for the traditional buy-the-dip opportunities…..pursuing the same strategy that’s been working for many years already. On the other hand, the weekly charts have not returned to a bullish phase. And because these charts are often more meaningful that the shorter-term daily charts, traders must still be careful going long stocks until, or unless, the weekly charts confirm the daily charts.

Back on Main Street, the US economic picture took a turn for the worse last week. International trade, retail inventories, wholesale inventories, Case Shiller home prices, pending home sales, personal spending, construction spending and consumer sentiment all disappointed. Even worse, the US payrolls report for August was a disaster—fewer jobs were created; the unemployment rate rose; average hourly earnings, and the average workweek both missed expectations. On the positive side of the ledger, consumer confidence, 2nd quarter GDP, Chicago PMI and ISM manufacturing all beat expectations. Still, after a couple of weeks of mixed results, the majority of results last week were decidedly negative.

So as US stocks return back near their all-time highs, two important asset classes are moving the other way—they’re both sending bearish signals while stocks rally. First, US Treasury prices have been creeping higher for many weeks now; this has sent the yield on the 10 year Treasury back down to the lows of the year. At the same time, the price of gold has risen over $100 per ounce in the last six weeks; in fact, gold has risen so much in 2017 that’s its beating the Dow Jones Industrial Average.

Both of these developments contradict the high stock prices in the US. When Treasury prices and gold prices spike, it usually means that investors are worried about risk assets and are selling them to free up capital to hide in Treasuries and gold.

So this contradiction must be resolved—clearly, either Treasury prices and gold prices need to come back down, substantially, or US equity prices need to do the same, drop off meaningfully.

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