We’ve got multiple fundamental indications today, and … Nothing happened on the markets. It’s still important, though.
The reason is that the data that we got today was positive. U.S. GDP grew more than expected, while the PPI (which often leads CPI) was not only below expectations but actually negative. The initial jobless claims were exactly as before and just as expected.
So, a growing economy and lower-than-expected inflation – great combination, right?
Then why are stocks not rallying anymore?
Why is copper declining?
I’ll tell you why.
The market buys on rumor and sells on fact. And it seems that whatever bullish thing was supposed to happen has already happened in the markets. We’ve got positive news regarding U.S.-China tariffs and now we saw good economic indicators. The reaction to the former was visible but not particularly sizable - compared to the previous move higher in stocks, and today the market is even slightly lower.
The emotional rebound might have ended, and the markets are starting to look at the big picture instead of being swayed by short-term news and headlines.
Like I said before, stocks declined just a little, but what matters is that they haven’t rallied. This might (!) be the end of the rally in my view.
I received a question if this is the moment where it would be a good idea to open a short position in stocks (after all, we did profit on the rally’s easy part, so why not profit on the decline) right now. I’d say that given where the market is relative to its support / resistance levels, I’d wait for stocks to move back below the late-March high before considering this. Ideally, also below the lowest of the rising support lines that I added on the above chart.
This would still be relatively close to the current levels, but the risk associated with a short position in stocks would be much lower.
Besides, I continue to think that shorting FCX (perhaps though put options in some cases) provides a much more favorable risk to return ratio compared to simply shorting the stock market.
After all, the FCX to S&P 500 ratio is after its very accurate turning point and it’s currently supporting much lower FCX values.
Just as stocks are verifying their breakout, the same is taking place in the USD Index.
Both breakouts are holding up well so far, but the USD Index’s support level is much lower. In my view, the USD Index is likely to soar substantially while stocks turn south, but the above technical reason is just a minor reason for that – the more important reason is long-term technical picture for both and the fundamental situation behind both markets, in particular tariffs. The latter are bullish for the USD while they are negative for world trade and world stock markets.
Speaking of USD Index’s long-term indications, please note that this is the fourth consecutive week when the USD is rallying.
Let’s examine what it meant in both most similar cases that I marked on the above chart (vertical, green lines and ellipses on the RSI indicator).
Back in 2008, the fourth weekly rally meant that the biggest part of the rally in the USDX and the biggest part of the declines in precious metals and mining stocks are underway.
Back in 2018, both meant that the final price extremes were already at the bottom of the USD Index and at the top of gold and silver.
What does it mean right now? Most likely, the final price extremes are already in, and once stocks turn south again, I think we’ll move toward the previous kind of interpretation and the really big moves.
Meanwhile, gold, silver, and mining stocks moved up a bit today (gold after hitting its rising support line very similar to the one that I mentioned in my Gold Price Forecast for May article about two weeks ago), and looks like a regular breather. I hope that you read it and that you found it valuable at that time.
Quoting from that article:
“The next stop is at about $3,150 – the rising, short-term support line. We’re likely to get some sort of rebound from there, but I wouldn’t bet the farm on this scenario. The rebound might be small or (more likely) short-lived or both.”
Thank you for reading my today’s analysis.
It's readers like you who make this work meaningful. Whether you're a long-time follower or just discovering my analysis today, I'm genuinely grateful for your attention and interest in these market developments. While I save my most detailed projections (like the near-term target for the GDXJ) and specific trading ideas and opinions for subscribers, I remain committed to providing valuable insights in these free analyses as well.
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Thank you again.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief