By Nigam Arora
On Monday, there was news of terror and assassination. To most investors, it would have been logical for stocks to fall and gold to go up. Instead stocks went up and gold fell. Why did this happen?
Here are the five real reasons that explain what is happening.
Taxes are likely to be lower in 2017. There is no point in selling now.
Money managers are in the mode of performance chase, willing to buy even the tiniest dip.
Mom and pop are getting excited about Dow 20,000 and sending money to their favorite mutual funds.
This is historically a period of strong seasonality.
Liquidity has dropped making it easier for trading desks to push the market higher.
Now let’s look at charts of stocks and gold.
The annotated chart linked below is of the DJIA futures. The reason I am using a futures chart instead of charts of popular ETFs such as S&P 500 ETF (PSE:SPY) , Nasdaq 100 ETF (NAS:QQQ) or Russell 2000 ETF (PSE:IWM) is that the futures are more sensitive to the news and often move before ETFs move.
The chart shows the timing of the news and how the “volume upside/downside” (VUD) indicator behaved. The VUD indicator is an extremely sensitive measure of the true buying demand in real time. VUD stayed green throughout indicating that the true demand to buy did not wane on the bad news even when prices dipped. VUD is derived from tick data.
It is worth noting that the intensity of the true buying demand was significantly less than on Dec. 7 when the performance chase by the money managers started. Compare the VUD indicator from the chart above to the chart below.
You will notice that intensity of VUD has lessened. This is in line with the previous conclusion that this buying panic may last until Dow 20,000 and to year end before fading.
The annotated chart linked below is of gold futures, but similar action can be seen on charts of popular ETFs SPDR Gold Trust (PSE:GLD) , iShares Silver Trust (PSE:SLV) , VanEck Vectors Gold Miners ETF (PSE:GDX) and leveraged ETFs (PSE:NUGT) and (PSE:DUST) .
The VUD indicator is an extremely sensitive measure of the true buying demand in real time. The VUD indicator shows very little buying in the face of bad news that should have caused aggressive buying. For this reason, the drop in gold price later was projected. The projection later came true.
It is also important to look at the longer-term gold chart for additional insights.
What to do now
Consider continuing to hold existing positions, but also make sure that you have enough cash to buy if market dips early next year. If you are not holding enough cash, consider taking advantage of the strength to raise some cash.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article and/or may take positions in securities described in this article any time.