May 07, 2010
We highlighted potential leadership developing in gold at month-end. Last Friday, the Gold ETF triggered a buy vs SPY in the Relative Strength application.
As of Tuesdays close,GLD had then moved to the top of our screener relative strength list. When volatility began surging in the equity markets, it should have become clear that US equities were going to drop in the screener rankings as high volatility is penalized in the model. The logical asset to assume new leadership was Gold (GLD) as it had already been moving up the rankings, as highlighted in our May outlook and as also being supported by the RS ‘app.’ This is a good example of reading ‘market generated information.’
While Gold (GLD) advanced this week, of course the best relative strength-based call was staying short international equities, particularly Europe. Europe has some serious problems to deal with and you can see the horrid relative performance of international stocks over the past few weeks. This is an example of an opportunity that was available to globally focused investors and invisible to those with only a domestic focus.
Summary: volatility has increased sharply in the equity markets, which makes equities LESS desirable to hold vs a fixed payment security like a short-term bond. Meanwhile, the Gold ETF (GLD) is rising in price, which makes it more attractive as its volatility is justified by its improving relative strength.
In a world of talking heads, rumors of computer errors and extreme emotion, it pays over the long-run to ground yourself with some strong reading of money flows that is statistically supported by backtested models.
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