The irony probably isn’t lost on Wall Street. At a time when we are experiencing record heat waves across the country, one of the hottest indicators right now is the stock market. Despite very questionable fundamentals, and domestic and geopolitical tensions boiling over, the benchmark indices Dow Jones Industrial Average and the S&P 500 have managed to hit record highs. But towards the end of last week, the enthusiasm seemed to lose momentum. Did the bears finally wrest control of the markets, or is this merely a healthy correction in a broader bullish cycle?
The conventional wisdom is that the U.S. financial sector is the best house on the worst block. A cursory look at international indices would offer no counterargument. However, that is not to say that the best house won’t experience some of the troubles of being located in a bad neighborhood. In a globalized economy, it’s very difficult for any nation to operate in a vacuum.
That is evident even within the context of the stock market’s sudden jump to lofty skies. Although the gains are impressive, the technical nature of the markets suggests risks that mainstream investors may not be taking into account. Many are undoubtedly focused on the 8.5% jump between June 27 and July 22 of this year. However, the dip of June 27 means that the price action, in addition to charting higher highs, is also charting lower lows.
In mathematical terms, that’s a symmetrical rally. But symmetry in this context isn’t desirable — the magnitude to the upside is as steep as the magnitude to the downside. In fundamental terms, the markets are responding to the U.S. being the “best house.” However, the downside movements also means that the markets are responding to the “worst block” component.
Looking at the gold chart is instrumental from a contrast perspective. Yes, gold is down for the month as it started to correct some of the gains made in prior months. But the overall chart is decidedly asymmetrical. That is, despite the ups and downs, the dominant trend is unequivocally bullish. Therefore, precious metal investors have a lot more confidence that their market of choice will continue to press higher.
We also must consider that gold, silver, and other hard assets have tumbled since the great bull run that culminated in 2011. There’s an overload of bearishness that needs to be “corrected” to the upside. Given that many mainstream analysts are still bearish on gold and silver, it wouldn’t be surprising that this corrective pressure silences the naysayers.
But what about the Dow and the S&P index? Here, we’re looking at the opposite situation. We’ve just closed at all time record highs. Yet one could easily make the argument that global stability is at an all time low. Under ordinary circumstances, that would be net bearish for equities, and net bullish for assets outside the financial system.
Then again, we are seeing extraordinary events unfold before our very eyes. Perhaps the lesson here is expect anything and everything.