September 2, 2003
Catalyst Drive
Fear not -- September is here, and something is likely to happen soon.
The Dow and S&P 500 have risen for six months in a row, and the Nasdaq has not posted a losing month in seven. You would think that this type of bear market rally would mean that stock prices are ready for a pull back, especially since September is historically the worst month for stocks. However, until something disappoints investors – be it an earnings warning or two, a weaker than expected economic report, or some currency/bond market mayhem to go along with the recent precious metals rally – pinpointing what catalyst will push equities lower next is difficult.
Gold’s Strange Surge
Because the gold market is a tiny market compared to equities and bonds a small amount of fund buying can dramatically move prices higher or lower. Remember that there are two sides to this story; funds can push the price of gold higher, but only if they are smart and prepared to play the inevitable smash lower.
Point being, the recent speculative surge in precious metals needs to sink its teeth into something tangible to hold at current levels or rally further. To be sure, if something doesn’t happen soon - be it a weakening dollar, bond/equity market troubles, positive central bank announcements concerning future gold auctions, etc. – gold will replicate its pre-Iraq plunge.
As for gold stocks, which historical tend to inversely mirror the broader stock markets, many issues remain in a mania type rally wherein any price is considered cheap so long as the price of gold doesn’t collapse. This isn’t to say that gold stocks are destined to collapse. On the contrary, since the price of gold bent after its pre-Iraq rally but didn’t break, this could be just be the beginning of a mania in gold stocks – as investor’s become increasingly confident owning a particular type of stock they aim to hold/buy price dips rather than dump. However, that gold stocks typically mirror financial sensitive stocks inversely is worth elaborating on.
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As the above chart demonstrates, in recent years when the Philadelphia Gold Index trended lower the Philadelphia Bank Index trended higher. A better look at this relationship is seen when flipping the BKX inversely for the same time frame.
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Given that the sole area of interest in the above chart is contained within the green box, a final, closer look will suffice.
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Suffice it to say, and for what will undoubtedly go down in history as a brief period, bank stocks and gold stocks have been declining and rallying in tandem in 2003. Given that the POG has broken free from its dollar relationship and gold stocks have stopped taking orders from financials, the word ‘strange’ is applicable...
In short, while either bank or gold stocks are likely to encounter selling pressures in the near-term (while the other rallies or goes flat), as stated, pinpointing catalysts in this market is difficult. All that can be said is that with gold rallying back near its pre-Iraq levels this suggests that there is the increased likelihood that something is about to go seriously wrong
This Week
-- A raft of economic reports – including today’s ISM number – will influence trade this week. The blockbuster report comes out on Friday (jobs).
-- While the Erdman’s, Roach’s, and many others take to the task of explaining why China will not revalue, what they fail to mention is what the U.S. and other nations may do to try and force China’s hand. The China revaluation issue threatens to become an important theme for the financial market because of The Hashimoto Factor.
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