According to Bloomberg, the Fed stimulus helped in pushing the S&P 500 up as much as 153% from its March 2009 low, as better-than-estimated corporate earnings also fueled equity gains. Of the 483 companies in the S&P 500 that have reported quarterly earnings this period, 71% surpassed profit estimates.
On Wednesday, the S&P 500 fell 0.6% to the lowest level since July 8 as minutes from the Federal Reserve’s July meeting showed officials support stimulus cuts this year if the economy improves. In this way, the Standard & Poor’s 500 Index extended its decline to 3.9% since closing at its latest record on August 2.
Despite this decline, yesterday, U.S. stocks rose on data showing improvement in global manufacturing and the American labor market. The S&P 500 index gained 0.9% and climbed to 1,656.96.
Will they keep rallying? Let's take a closer look at the charts to find out what the current situation in the general stock market is (charts courtesy of http://stockcharts.com).
Click to enlarge.
On this week‘s long-term S&P 500 chart we see that the situation hasn’t changed much.
The correction is still shallow from the long-term perspective, and the S&P 500 Index reached the rising support line based on the November 2012 and January 2013 lows (in terms of weekly closing prices).
Please note that there is another rising support line based on the November 2012 -January 2013 lows (on an intraday basis), which may stop a correction even if the current support doesn’t hold. Therefore, the downside seems limited.
Before we examine the Broker-Dealer Index chart to see what the financial sector is doing, let’s take a look at the DIA ETF chart, which is another proxy for the general stock market.
Earlier this week, the DIA ETF moved lower, and the RSI based on it moved below 30 - almost to the 26 level. Since the beginning of 2008, there have been exactly 7 cases when we saw something similar. In 4 of them, this meant that an important bottom had just been formed. In the remaining 3 cases, a major bottom was formed in a short time anyway.
The short-term implications are bullish and the medium-term ones are very bullish.
We turn now to the financial sector, which in the past used to lead the rest of the general stock market.
On the above chart, we see that the recent decline took the financials to the previously broken resistance level of 130. Despite this fact, the financials still remain above this level, which also corresponds to the 2011 top, and the outlook hasn’t changed here.
The breakout above the level of 130 has not been invalidated, which will likely lead to further growth in the financial sector and the general stock market.
Once we know the current situation in the general stock market, let’s see how it may translate into the precious metals market. Let’s take a look at the Correlation Matrix.
The Correlation Matrix is a tool, which we have developed to analyze the impact of the currency markets and the general stock market upon the precious metals sector (namely: gold correlations and silver correlations).
What’s very interesting is that the correlation between silver and the stock market is strongly negative. It’s negative in the short and medium term. This is so interesting because, theoretically, silver used to be positively correlated with the stock market most of the time, which you can see in the very long-term, 1500-day column. This was because of silver’s industrial uses. With the bullish outlook for the stock market suggesting higher values, it seems that the outlook for silver is quite negative for short and medium term.
It seems that we will need to see silver moving higher regardless of what the stock market is doing before we can say that another huge upleg is in the cards for the white metal.
Summing up, the outlook for the general stock market is very bullish in the medium term and more bullish than not in the short term. As we previously mentioned, the S&P 500 Index reached one of the rising support lines and even if stocks drop below it the next one may stop a correction. Therefore, the downside seems limited. Another bullish factor is the RSI indicator based on the DIA ETF, which moved below the 30 level.
Even though the very long-term correlation between silver and the general stock market is positive, it seems that the above has negative implications for the white metal for the short and medium term (even though based on past price patterns, we could see some short-term strenght in silver).