The stock market flashes gloomy signals. What does it mean for the gold market?
Last week, some analysts pointed out the ominous behavior of the U.S. stock market. On Tuesday, the number of companies traded on the NYSE setting new 52-week lows surpassed the number hitting new highs. Moreover, the market sent two other bearish signals: the Hindenburg Omen and Titanic Syndrome.
The former is a technical indicator that is based on the number of stocks that formed a new 52-week high, and that reached a 52-week low, relative to the total number of issues that trade on the market. The idea is that a high number of both highs and lows implies a significant probability of a major correction, as investors are uncertain about the market’s future direction. On Tuesday, the number of both highs and lows totaled more than 3 percent of advances plus declines, high enough to trigger a Hindenburg signal.
According to the Business Insider, the latter is “a sell signal triggered when NYSE 52-week lows outnumber 52-week highs within seven days of an all-time high in equities.” These signals seem scary – should we worry about the U.S. stock market?
Well, there are definitely some reasons for anxiety. The three indicators analyzed above have not occurred simultaneously since the memorable 2007. And there is, indeed, a growing dispersion of stock market returns – a few stocks drive the overall index. Just three companies – Facebook, Amazon and Apple – account for almost one-third of the gains in the S&P 500. Hence, the rally in the S&P 500may hide some weaknesses.
However, this is how a market-cap weighted index works: a few biggest companies account for the majority of gains. And you know, some analysts have been calling for a crash for years. But the stock market does not care and continues its rally. Another problem is that the Hindenburg Omen often sends false alerts. Sometimes there are also corrections which are not accompanied by that bearish signal. Last but not least, these indicators are long-term indicators, not necessarily short-term ones. So there may be a correction – actually, we will be surprised if it does not occur at some point – but it is not imminent.
