By Nigam Arora
Momentum investors, who are relentlessly pushing up stocks, are oblivious to the breakout in gold amid a relatively rare event. Because of that, prudent investors should pay attention.
Let’s explore the issue with the help of a chart.
Note the following:
• The chart shows the previous resistance line, which has now become the support line.
• The chart shows a technical breakout in gold. This is a positive for gold but negative for stocks.
• The chart shows the breakout occurred after two shallow pullbacks. This is a positive for gold.
• The chart shows that the breakout is occurring on four rare things coming together.
• Gold is priced in dollars. For this reason, when the dollar rises, gold falls. Lately the dollar is becoming stronger, but gold is jumping instead of sinking.
• Typically gold goes down when the stock market goes up, especially if there is an aggressive increase in the stock market, as has been happening lately. However, gold has broken out as the stock market has ascended.
• Gold typically goes up when there is a new safe-haven event, such as war. Here, gold did not break out on the emergence of the coronavirus crisis. However, now that the coronavirus scare has been subsiding, gold is moving up. Gold breaking out under these circumstances is rare.
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• The smart money (professionals) has not been buying gold until now, but it has jumped in with light buying. This behavior is rare, as the smart money typically buys on pullbacks.
• This breakout in gold is of major significance, as the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.62% is in a strong uptrend and investors’ portfolios concentrated in mega-caps such as Apple /zigman2/quotes/202934861/composite AAPL +0.67% , Amazon /zigman2/quotes/210331248/composite AMZN +0.87% , Facebook /zigman2/quotes/205064656/composite FB -0.85% and Alphabet /zigman2/quotes/205453964/composite GOOG -0.64% /zigman2/quotes/202490156/composite GOOGL -0.64% .
• Semiconductors have been the leading indicators of the stock market. Investors should keep a careful watch on semiconductor stocks such as AMD /zigman2/quotes/208144392/composite AMD +9.49% , Micron Technology /zigman2/quotes/205710729/composite MU +1.81% , Nvidia /zigman2/quotes/200467500/composite NVDA +1.98% and Intel /zigman2/quotes/203649727/composite INTC +1.72% . Semiconductors are overbought and vulnerable.
• Investors should also keep an eye on short-squeezes in stocks such as Virgin Galactic /zigman2/quotes/208333884/composite SPCE -13.74% , Tesla /zigman2/quotes/203558040/composite TSLA +0.13% , Enphase /zigman2/quotes/207948472/composite ENPH +12.64% and SolarEdge /zigman2/quotes/207754270/composite SEDG +13.02% .
• There are new concerns about the coronavirus and its impact on earnings. Investors should stay tuned to the news from China as well as to earnings-related announcements.
What does it all mean?
Stay cautiously bullish on stocks and consider adding gold, silver and precious-metals stocks on pullbacks in the broader market.
Among ETFs, consider watching iShares Silver Trust /zigman2/quotes/205744453/composite SLV +6.64% , VanEck Vectors Gold Miners ETF /zigman2/quotes/206399889/composite GDX +4.56% and VanEck Vectors Junior Gold Miners ETF /zigman2/quotes/204075079/composite GDXJ +4.92% .
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. <INTERNAL-PAGE URL="/author/nigam-arora">Nigam Arora</INTERNAL-PAGE> is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.