Alternative investments such as gold and silver bullion are stuck in a bear market that is still intact. So says Toronto-based Brian Hoffman, CPA, CA, a member of the Canadian Society of Technical Analysts and a regular contributor to Investor’s Digest of Canada who warns investors in the precious metals to beware a sucker’s rally.
I’ll pick up where I left off back in the spring — with the market outlook for precious metals, that is, gold and silver. In May, I not only said that gold and silver bullion appeared to be bearish, but that they were likely to move lower over the summer.
In July, gold fell through US$1,130 an ounce — a key support level — coming to rest at roughly US$1,075. Meanwhile, silver, which largely trades in tandem with its Midas friend, followed suit.
Gold’s next key support level is US$1,000. Should the metal breach this psychological level, it could tumble to $850, or even lower. But, given the volume of gold traded in July, the sell-off showed signs of capitulation that could mark a low point — at least temporarily.
And although gold prices quickly bounced back to roughly US$1,130 an ounce by mid-August, that previous support level has now become upside resistance.
To improve its technical outlook over the long term, gold needs a rally to US$1,430. But since that figure is so far above the metal’s current price, gold first needs to top $1,230 to improve its short-term outlook.
Since August and September tend to be the best time for precious metals, both gold and silver could soon start recovering some ground. But this could nonetheless prove to be a sucker’s rally since the bear market is still intact.
Of course, one thing that might send both metals soaring is the realization just how perilous sovereign debt now is.
Yes, this problem has so far been limited to small economies like that of Greece. But several powerhouse nations in Europe, along with the U.S., aren’t without their own debt challenges.
Metals may shine; Canadian stocks too—at least temporarily
So, when the day finally arrives for highly-indebted countries to pay the piper, gold and silver may shine like never before.
Stocks on North America’s broader markets face their own challenges. Indeed, after the leaves start falling this autumn, stocks may follow course and be hit with a correction.
But, as the rest of 2015 unfolds, the S&P/TSX Composite Index may actually move higher. That’s because, the shares of companies in both energy and financial services — the index’s biggest components — could bounce off oversold levels.
In the meantime, I encourage investors to continue monitoring iShares CDN S&P/TSX Capped Financials Index Fund (TSX─XFN), an exchange-traded fund that tracks Canada’s insurance companies and its big banks. Should this fund breach $29 a unit, a broad range of Canadian stocks could be in trouble.
Trouble on the horizon?
Elsewhere, the S&P/TSX Composite will likely test support around 13,600 later this year.
This is especially true since crude oil breached US$42 a barrel in August — something I warned about in my previous article when petroleum faced heavy resistance around US$60.
I then wrote that I expected oil to revisit its March low and that a breach of US$42 a barrel could send petroleum into a free fall, even pulling it down to US$30. Indeed, the free fall may have already begun.
But enough about oil and precious metals. What’s happening with U.S. stocks?
Well, for one thing, they’re now having a tough time. Indeed, the S&P 500 Index, a bellwether if there ever was one, has run into heavy resistance around 2,130.
And although any pullbacks have been minor, the index’s technical outlook over the short term continues to weaken.
Of course, a correction of roughly 10 to 15 per cent would improve the technical outlook for U.S. stocks, provided it isn’t drowned out by a noisy bear.
Key support levels to watch with the S&P 500 are 2,000, 1,900 and, then, 1,820. A breach of all three could tumble the index into the 1,600-1,700 range.
If that occurs, U.S. stocks will have fallen about 20 to 25 per cent from their current level, putting them in bear market territory.
At that point, the long-term trend could turn down from its multi-year upward trajectory.
Investor’s Digest of Canada, MPL Communications Inc.
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Investor's Digest of Canada •10/6/15 •