The stock market is gapping up this morning as a lot of people are betting that last week was just a temporary dip, but there are a lot of reasons to suspect that it is actually a topping phase being put in the markets. Watch the 13000 level on the Nasdaq this week as a close below that would confirm it. Last month had a bad ending to it, but if the markets do decline it will make for a wonderful buying opportunity when the selling ends.
In the last week of February the price of Bitcoin fell 20% off of its high by mid-week and fell even more this weekend. We saw a massive Bitcoin rally over the past few months that has now trapped many into completely worthless virtual currencies, but on Friday the price of gold also broke through its support level made on its previous February and November lows. That suggests that it is likely to fall a bit more as you can see from this chart.
That November and January/February support level on gold coincided with the 50% retracement level of the March low to August peak. It’s next support level is at the 2/3’s retracement point around $1700. If that were to break then support could be at $1650 or $1600. A fall towards $1650 would not be the end of the world in gold. Gold just needs to stabilize and build a bottom for a few weeks to rally again.
Moves in these markets have coincided with a rise in Treasury bond yields and decline in the value of corporate bonds. This is a dangerous thing when it happens for the overall stock market because falling corporate bonds mean that financing costs for corporations are going to go up.
The volatile action in Bitcoin last week and now gold is a huge warning sign for the US stock market, which is in danger of also breaking on major support, which is now 13,000 on the Nasdaq. Ironically the stock market just hit its second highest valuation in fundamental terms in its entire history just two weeks ago.
Now is the time to be very cautious on the markets, reduce risks, and be prepared to buy later when prices come down, people panic, and a real bargain buying time comes. Look, the stock market had a tremendous rally since the crash of last March, with just one 10% dip after Labor Day. There are times when it makes sense to take profits and take some money off the table so you’ll have some cash reserves to buy later.
In past stock market declines, which came with a drop in corporate bonds, gold actually fell ahead of the stock market and then bottomed before the stock market did. For instance this happened in the Fall of 2000, the Fall of 2008, and in 2018, which marked the last time people sold stocks over worries about rising yields.
That year is an instructive model to think about things now. If you look at what gold did when it broke support that year it had a sudden drop over a few days and then went through a major bottoming process util the end of September. It then turned up to rally from there.
That up and down action in gold in September of 2018 is how it typically forms a base bottom. Now let’s look at what the S&P 500 did that year and the JNK junk bond ETF.
As you can see the S&P 500 fell about 20% from the end of October to December of 2018 and did so as the JNK ETF dropped.
The point I am trying to emphasize here is that gold had a breakdown BEFORE the stock market began a serious correction and then bottomed BEFORE the stock market did.
I think we’re likely to see this same basic pattern repeat here over the next few months. Gold has probably seen the bulk of its price decline, but can fall a bit more here and then spend a several weeks stabilizing as the stock market goes into a deterioration. I wouldn’t be shocked if overall that is what happens with commodities and several foreign markets too.
Last week Bitcoin blew up and volatility came into gold. Now it is only starting to come into the stock market. We simply saw rampant massive speculation last year, with record margin debt, and now money can come out of everything for a period of time. The rise of the margin debt maniac always end up bringing market turmoil. When masses of people go on leverage you can get stock dips that turn into big correction events. When they end that creates an opportunity to buy at a real investment purchase point. Gold has been taking hit now, but look for it to bottom before the next major stock market bottom is actually made.
This is video three in my series titled Stock Trading 101, designed to help you jump start your investing and trading in the stock market. In this video I talked about different market cycles. Different types of trading and investing tactics work best depending on what market cycle you are in. There are times when speculators and short-term traders win and other times when it is simply best to be a buy and hold type of investor. The good news is that it isn’t hard to figure out what cycle a market is in and there are multiple markets and many individual stocks sectors you can choose from in order to trade or invest the way you like the best.
Grab my book Strategic Stock Trading.
I started something new and that is I am opening up my daily morning posts at the bottom for comments. My goal is to make this a water cooler type spot where we can talk about the markets together and share ideas. Check it out. If you got any questions or comments just scroll on down to the bottom of this post. It’s fun. If you are reading this on a mobile phone it might just be a little box that says leave a comment that you need to click to read the comments (I’m trying a wordpress plugin today that loads the pages faster on mobile phones as more and more people are using phones and apps to do everything).
-Mike
