STOCKS HAVE WORST JANUARY IN HISTORY -- CORPORATE BONDS GAIN GROUND AS TREASURIES DROP -- GOLD CONTINUES TO SHINE

GOING FOR THE GOLD ... With stocks falling again this week, and Treasury bond prices tumbling, investors turned to gold as a safe haven. Chart 1 shows bullion closing jumping $22 on Friday to end at $928 which puts it right up against its October intra-day peak at $936. On a closing basis, Friday was the highest gold close in six months. Chart 2 shows a line chart of the streetTracks Gold Trust (GLD) which also had the highest close since last July. Both markets are challenging resistance lines extending back to last March. Chart 3 shows that Silver iShares (SLV) are also rising (on heavy volume), but remain below their 200-day average. Chart 4 shows the Market Vectors Gold Miners ETF (GDX) meeting some resistance at its 200-day average. Gold appears to the best bet among those three precious metal alternatives.

Chart 1

Chart 2

Chart 3

Chart 4

GOLD OUTPERFORMS STOCKS ... There's been a lot of attention given to the fact that gold has been rising in the face of a strong U.S. Dollar which is somewhat unusual. I believe that the gold rally is hinting that the dollar rally is running out of steam. Gold, however, has something else going for it which is a weak stock market. Gold usually shines when stocks are in trouble. Chart 6 is a relative strength ratio of gold divided by the S&P 500 over the last year three decades (plotted on a log scale), and shows that the gold/stock ratio fell in the two decades after 1980 as stocks became the strongest asset class. The ratio bottomed during 2000 (when stocks peaked) and broke the 20-year resistance line during 2002. The asset allocation pendulum has favored gold over stocks since then. Chart 6 shows the gold/stock ratio now trading at the highest level since 1990. So don't get too bogged down worrying about the dollar. Keep your eyes on the direction of stocks as well to determine the direction of gold.

Chart 5

GOLD RALLIES VERSUS TREASURIES ... Another factor favoring gold is the recent plunge in Treasury bond prices. Since November, Treasuries and gold prices rose together (and yields plunged) on fears of deflation. Since the start of the new year, however, Treasury bond prices have been slipping on fears that the huge government bailout could push bond yields higher. Chart 6 plots a ratio of gold divided by the 20-Year T-Bond ETF (TLT) since mid-year. The falling ratio favored bonds over gold during those six months. With bond prices falling during January, however, the gold/bond ratio has swung upward in favor of gold.

Chart 6

CORPORATE BONDS CONTINUE TO GAIN GROUND ... Investment grade corporate bonds have also been gaining ground on Treasuries during January which I've pointed out before (on January 17 and 19). Hourly prices in Chart 7 compare the investment grade corporate bond ETF (LQD) to the 20-Year Bond ETF (green line) for the last two months. You can see that Treasuries have slipped badly while corporates have held up much better. That fixed income rotation away from Treasuries in favor of corporate bonds can be seen in the LQD/TLT ratio in Chart 8. After falling since midyear, the upturn in the ratio over the last month shows the investors are moving money out of Treasury bonds and into investment grade corporate bonds.

Chart 7

Chart 8

S&P 500 HAS WORST JANUARY IN HISTORY ... The performance lines in Chart 9 show that January was a bad month for stocks. In fact, it was the worst January in history. The S&P 500 lost -8.5%, while the Dow and Nasdaq fell -8.8% and -6.3% respectively. The January Barometer is based on the theory that "as January goes, so goes the year". According to the Stock Trader's Alamanac, the January Barometer predicts the year's direction with a 74% batting average. There's no guarantee it will be right this year, but it's not a good omen. The market's chart isn't encouraging either. The daily bars in Chart 10 show the S&P 500 ending the week well below its 50-day moving average after falling 2% on Friday on rising volume. Although the November/January trading range is still intact, the S&P 500 appears headed for a test of the lower end of that range. It would have to exceed Wednesday's high at 877 to repair this week's trend damage.

Chart 9

Chart 10