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US pushes to new recovery highs

Lesley Beath  |  23 Jan 2013Text size  Decrease  Increase  |  

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The views expressed in this report are those of Lesley Beath and may differ from Morningstar's views.

 

Disclaimer: To the extent that any content in this report constitutes advice, it is general advice that has been prepared by Lesley Beath without taking into account the particular investment objectives, financial situation and particular needs of any individual investors. If necessary, you should consult with a licensed investment adviser or dealer in securities such as a stockbroker before making an investment decision. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.


Overview

The S&P 500 managed to push to new recovery highs last week, joining its European counterparts. The Dow sits right on its key barrier.

The VIX continued to weaken, breaking decisively below support last Friday. It is now at the 12.4 level. This break below the 12-14 support is noteworthy, as that level has marked significant turning points in the equity market in February, April and July 2011, April 2010, May 2008, October 2007, March 2002, August 2000 and July 1998.

As noted last week, and on a number of occasions prior, there is a lower level of support at 10-11 and the VIX spent quite some time there in the early to mid-1990s, and more recently between 2005 and 2007, as the US recovered from the 2000-03 bear market.

So, does this clear break below recent support imply the US market is moving into an environment reminiscent of 2005-07?

That is a hard question, but the recent breakout in a number of the beleaguered European equity markets prompts me to think that even though we are unlikely to move into that euphoric type of environment, markets may continue to surprise on the upside over the next few months.

That thought will gain more credence if the US T-Bond/S&P 500 ratio breaks below support, as noted last week.

The chart below highlights the support of the March/April 2012 lows - a break below there would suggest the US equity market has the ability to surge significantly higher in the short term. But let's not jump the gun, let's wait for confirmation.

 

 chart

(click image to enlarge)

 

Not much more to say on the equity markets this week, so let's take a look at gold. The gold price has been in correction mode since September 2011 - a lengthy correction by any standards.

It has been on the improve since mid-2012, but after an initial surge into October, it has pulled back sharply, causing a high degree of frustration for the bulls. The rally off the mid-2012 lows pushed price above the 2011 downtrend, but it could not move above the resistance of the March 2012 highs.

I suggested back in early November that gold could move lower towards the $1660 - $1630 level, which represented support from the 200DMA, the uptrend from the mid-2012 lows and a Fibonacci 61.8 per cent retracement of the 2012 advance.

That downside target has now been met and I continue to believe that from a medium-term perspective, gold remains positive. The pullback over the past months has left gold quite unloved, which, from a contrarian viewpoint, is positive.

We may not see a sharp rebound quickly but there is enough evidence to suggest we could be near the low point of the year.

The ratio chart of gold versus the S&P 500 remains weak, and as I have said on a number of occasions, gold may not power ahead while this ratio is trending lower. But a gradual improvement in gold is on the cards, even though it may underperform equities in the short term.