Let’s turn now to the financial sector, which in the past used to lead the rest of the general stock market. As we wrote in previous essay on the general stock market on October 15: (…) since the support created by the 2011 high is relatively close, we will likely not see another major decline.
On the above chart, we clearly see that, in spite of the last week’s downward move, the financial stocks didn’t invalidate the breakout above the level of 130. These positive circumstances triggered an upward move this week, which took the financials to slightly below the September high.
Consequently, the medium-term outlook remains bullish. Please note that the financial stocks proved once again to be a reliable indicator in estimating whether the trend is about to change or not.
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 our Correlation Matrix – a tool designed to measure, present and provide interpretations of correlations between various parts of the precious metals sector and key markets that impact it – specifically, at the USD Index and the general stock market.
In the previous week, the correlations have turned upside down in the short-term (30-days) column. The most interesting thing about these coefficients is what actually caused them to reverse. In the case of the USD Index – it was the fact that metals managed to decline even when the dollar declined (bearish implications). In the case of the general stock market, it was the fact that metals managed to decline along with a decline in stocks.
The bullish invalidation of the breakdown in stocks and this week’s breakout are so important because of the significant and negative correlation with gold and silver. Naturally, the bullish action in the stock market is bearish for the precious metals sector.
Recently (mainly on Thursday), we have seen some strength in precious metals and mining stocks, but this was not enough to change the most important correlations. In the case of gold, silver and the general stock market, the correlations remain strongly negative. Although the correlation between miners and the S&P500 is weaker, mining stocks are not likely to move anywhere without metals moving in the same direction, so the negative impact of the stock market’s rally should also be seen in case of mining stocks – if not directly, then most likely indirectly, and if not immediately, then eventually. On a side note, correlation does not imply causation by itself, we estimate the direction of the relationship (for instance that the general stock market impacts mining stocks, not the other way around) based on fundamental information and our experience.
Summing up, the long-term, medium-term and short-term outlook for the stock market remains bullish which is a bearish factor for the precious metals market.