A COMPARISON OF GOLD AND STOCKS -- GOLD HAS BEEN THE STRONGER ASSET SINCE 2000 -- NOT ALL FUNDAMENTALS ARE BULLISH -- SHORT-TERM MARKET REBOUND CONTINUES -- BUT DAILY AND WEEKLY INDICATORS AREN'T IN SYNC

SHORT-TERM VIEW... I've received a large number of questions as to how gold holds up when stocks fall. What makes a firm answer to that difficult is that gold and stocks often trend together over the short run. Gold has also shown a tendency to correct along with stocks during market pullbacks. On a longer-term basis, however, they usually trend in opposite directions. Chart 1 shows that gold corrected with the S&P 500 (green line) during the February 2007 correction and then recovered with stocks. From that point until July, however, stocks rose more than gold (as shown by the gold/S&P ratio). Since the start of July, gold has done better than stocks on a relative strength basis. That would seem to suggest that gold could start to do better than stocks if the market were to go into a serious downside correction (or a bear market).

Chart 1

LONG-TERM COMPARISON... Chart 2 plots a comparison of gold and the S&P 500 since 1980. The 1970s saw soaring gold prices while stocks did poorly. Gold peaked in 1980, which paved the way for a major stock market bottom in 1982. From 1980 to 2000, gold fell while stocks rose. That was a reverse of the 1970s. Gold started its major uptrend in 2000 just as the stock market was entering a major bear trend. Once again, their inverse relationship was evident. From 2003 to the present, both markets rose together (more on that later). On Tuesday, I showed previous market downturns starting around this time of the year. The three most notable were 1994, 1990, and 1987. A relevant question is how gold reacted in each case. In all cases, gold and stocks maintained a generally inverse relationship. Gold showed a tendency to rally the year before the market peaked (1986, 1989, and 1993). Stocks turned down the years after (1987, 1990, and 1994). In all three cases, gold either fell right after stocks peaked (1987 and 1990) or traded sideways (1994). More importantly, gold turned down when stocks turned back up in 1988, 1991, and 1995. What makes that comparison less relevant to today is that gold was in a major downtrend at the time. That's no longer the case.

Chart 2

GOLD IS NOW THE STRONGER ASSET... In comparing the performance of any two asset classes, there's nothing better than a relative strength ratio. Chart 3 is a ratio of gold divided by the S&P 500 from 1980 to the present. The chart is plotted on a logarithmic scale which is better for long-term trend comparisons. The falling ratio from 1980 to the start of 2000 shows that stocks were the preferred asset class by far. The ratio bottomed in 2000, however, and broke its two-decade downtrend line in 2002. The ratio has now been rising for seven years. In other words, gold has been the stronger asset class since 2000. And there's no chart signs of gold's outperformance over stocks ending anytime soon. Chart 4 shows the same gold/stock ratio since 2000. The rising trendline shows that gold's seven years of stronger performance is still intact. The arrows in Chart 4 show that gold and stocks have taken turns in leadership during those seven years. Gold did better than stocks from 2000 through 2002 as stocks fell and gold rose. Stocks did better from early 2003 to mid-2005 during the first phase of their new bull market. Gold did better from mid-2005 to mid-2006 as the market rally slowed. Stocks did better from mid-2006 to this July as the uptrend resumed. The last gold up arrow shows that it's now gold's turn to show some upside leadership. Let's not forget the dollar. If the stock market were to go into a serious decline, pressure would mount on the Fed to lower interest rates. That could hurt the dollar, which is usually bullish for gold.

Chart 3

Chart 4

NOT ALL FUNDAMENTALS ARE BULLISH... I keep hearing on radio and TV that the "fundamentals" are still bullish. I can't help but wondering exactly what fundamentals they're referring to. Most use earnings. That's okay. Problem is that current earnings are based on what happened in the past. They don't tell us anything about the future. Doesn't possible fallout from housing (and subprime) come under the heading of "fundamentals" as well? The next two charts are my version of fundamental analysis. Chart 5 shows the S&P Retail Index having fallen below its March low. Its relative strength ratio (blue line) looks even worse. It's been falling since March. I've always believed that the performance of retail stocks tells us something about prospects for consumer spending. [Aren't the "earnings" of retailers dependent on consumer spending?] Which brings us back to housing. The brown line in Chart 6 is the PHLX Housing (homebuilders) Index (HGX). The red line is the ratio of retailers to the S&P 500. If they look alike to you, that's the point I'm trying to make. From 2003 to the middle of 2005, both lines rose together. That was during the time when consumers where using their homes as ATM machines, which was good for the economy. Notice that the 2005 peak in retailers' performance coincided exactly with the homebuilding peak (see circle). They've been falling together since then. So here are my questions. Aren't retailers being hurt by the housing slowdown? Doesn't that hint at a slowdown in consumer spending? And isn't consumer spending two-thirds of the U.S. economy. Why aren't those "fundamentals" being discussed on radio and TV.

Chart 5

Chart 6

DAILY AND WEEKLY INDICATORS AREN'T IN SYNC... Yesterday's late market rebound from an important support level has launched a short-term rally attempt. Chart 8 shows the S&P 500 scoring an "upside reversal day" yesterday right at its 200-day moving average (red line) and its February peak. [An upside reversal day occurs when a market violates the previous day's low and then closes higher]. The daily stochastic lines (below chart) also show the S&P in oversold territory (below 20) for the first time since early March. That puts it in a short-term oversold condition. That has also prevented any more serious chart pattern (at least for the time being). The S&P gained another .44% today. Unfortunately, today's volume was on the light side. Advancers beat decliners on the NYSE by a 2 to 1 ratio and 16 to 13 on the Nasdaq. Good, but not enough to reverse last week's 10 to 1 losses. Yesterday's lower low forced me to redraw my Fibonacci retracement lines over the S&P (horizontal lines). They should represent potential resistance barriers above the market. While the daily stochastic lines are improving, the weekly lines aren't. Chart 8 shows that the weekly stochastic lines are still falling and are still well above the lows reached at previous market bottoms. The best buy signals take place when the daily and weekly indicators are turning up together. Since weekly charts usually trump daily ones, I'm putting more faith in the weeklies at this point. That suggests that the current rebound is probably just an interruption in an ongoing downside correction as opposed to the beginning of a new uptrend.

Chart 7

Chart 8