Here is a story of convergence to the mean, not reversion.
The chart and graphics below show the Gold price (in USD) trading sideways for 2 years while the 200 week moving average has risen $300 or improved by more than 20%.
It has converged towards the oscillating price of Gold which has spent a couple years digesting and consolidating.
I’m preparing for a further 4% swoon from its current $1,706, down to around the $1,640 mark.
Gold priced in USD remains in a downtrend. It’s currently trading at US$1,721
USD Gold would register a weekly oversold reading somewhere between $1,675 – $1,642, which is approximately a further 3% lower today than the current price.
However, my trend analysis for Gold priced in EUR and AUD shows then developing into a new but early ‘daily’ upward trend.
It is early but work watching, as today, Aussie listed gold producers had a positive trading day. Head fakes do occur and there are gaps to be filled in these stocks, so it remains poised but interesting.
In a continuation of my Alcoa post earlier today, Newmont Mining’s stock price is now dancing at ‘extremes’ not seen for some time.
The first chart below is an illustration of the various times that Newmont’s stock price has traded at high levels of percentage above its 200 weekly moving average.
Other than the shocks of the respective 1981 interest rate hikes and the 1987 stockmarket crash, Newmont Mining’s stock price doesn’t necessarily spend time up in this stratosphere.
My case is not a one-way street.
Note the highlighted ellipse in the chart surrounding 2003 and 2005.
Newmont trades at 101% above its 200 WMA in the last part of 2003, then attempts a mean reversion to then rise back to the same stock price, YET the percentage reading is ‘only’ 57%.
This is because the 200 WMA ‘rolls up’ quickly to catch up with the parabolic move seen through 2003.
The 200 WMA will move higher, while NEM stock price declines.
This is the convergence that I mention in the previous Alcoa post.
So, I’l look for Newmont’s stock to work its way back to the $64-$68 mark in the coming 9-13 months.
The second chart compares Newmont to the Gold price (in USD).
Similar to Alcoa, it’s plausible that Newmont uses its well priced equity to make some acquisitions or raise some capital itself.
The chart below shows the S&P 500 (SPX) overlaid with the Copper/Gold (HG/GC) Ratio on a daily basis over the past 15 years.
The latter ratio is a good indicator of the economy’s health and sometimes a predictor of interest rate direction.
I find this chart helpful when pondering my asset allocation to equities and how much broader risk I am comfortable taking, especially at the later end of an advance, bull market or rally.
I like seeing how the SPX reacts when the HG/GC breaks above or below its trend lines.
Today’s reading of 0.002396 is calculated by dividing the Copper price of $4.32 into Gold’s $1,803.
At this moment, while the HG/GC’s is trading above its trend line (and a reading of 0.00222) it is suggesting that the S&P 500 advance remains intact……..
This seems quite perverse to many, as pundits reiterate their calls of an overvalued, ‘bubble-esque’ equities market.
In some recent posts I challenge the norm and perhaps the consensus call for a notable decline.
The S&P 500 can continue trading at the historical higher end of its historical stretch above its 200 Week Moving Average, just like the late 1990’s.
and the way the S&P 500 relates to the U.S. 10 year bond yield or more pointedly, the spread between the 10 year and 2 year yield is another important indicator to watch.
Investing is a highly nuanced past time or business.
Often markets move to where they can do the most damage….and going up can cause as much damage as going down, in circumstances such as ‘missing out’ or underperforming other fund managers if you’ve been holding a lot of cash.
P/E ratios are not the only thing to look at.
One scenario of a 0.00222 reading is Copper falling to $4.10 and Gold rising to $1,850. Just something to play around with.
The watching the direction (not necessarily its value) of the Copper/Gold Ratio helps me reading the health of the economy.
And it has been healthy….
It’s particularly correlated with the direction of the U.S. Government 10 Year Bond Yield. More on that in the next post.
The chart below shows us the 6 moments when the Copper/Gold Ratio has registered an Overbought reading over the past 20 years.
Such occurrences correlate to and increase the probability of lower prices in the S&P 500 Index or at the very least see it trade sideways for the coming months. This also coincides with my thesis in my recent newsletter.
What this chart tells you is that probability does not suggest ‘going long’ or making any meaningful capital deployment into equities at this juncture.
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