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Hindenburg, Titanic, and Gold

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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 markets 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 500 may 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.

To sum up, the U.S. stock market sent some bearish signals. The doomsayers called for an approaching crash. If that happens, the price of gold will go up. Surely, investors should have some gold in their portfolios just as a diversifier and a hedge against stock market turmoil. Indeed, we have not seen a correction for some time, so it would be not surprising at all. However, a correction is not the same as a crash. The Feds tightening may cause some problems, but the Morgan Stanley equity-risk indicator is still in neutral territory. Actually, several economic indicators support strong economic growth in Q4 so, the current macroeconomic situation does not support the view of an imminent stock market crash and does not look like an excellent environment for gold to shine. But we will observe the markets carefully. Stay tuned!

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Thank you.

Arkadiusz Sieron, Ph.D.
Sunshine Profits Gold News Monitor and Market Overview Editor

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About the author

Arkadiusz Sieron is a certified Investment Adviser. He is a long-time precious metals market enthusiast, currently a Ph.D. candidate, dissertation on the redistributive effects of monetary inflation (Cantillon effects). Arkadiusz is a free market advocate who believes in the power of peaceful and voluntary cooperation of people. He is an economist and board member at the Polish Mises Institute think tank. He is also a Laureate of the 6th International Vernon Smith Prize. Arkadiusz is the author of Sunshine Profits’ monthly Market Overview report and daily Gold News Monitors, in which he keeps subscribers up-to-date regarding key fundamental developments affecting the gold market and helps them prepare for the major changes.

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