Presuming a Perfect World

Uninterested in last week’s dampening growth data, (i.e. U.S. Import Prices, Producer Price Index, and University of Michigan Sentiment Index, etc.); the S&P 500 resumed its ascent – shattering all-time (nominal) record highs (set October, 2007) in the process. The S&P 500 closed the week +2.29% and presently stands +11.41% year-to-date – an astonishing +134.00% gain since those dark days in March, 2009!

Remarkably, the “risk-off rotation” (i.e. out of “cyclical stocks” into “safety” stocks) theme that we’ve been watching for weeks abruptly changed course last week – predominantly on Tuesday 4/9/13 as Materials (e.g. CLF, FCX), Technology (e.g. HPQ) and Financials (e.g. C, GS, MET, PRU, WFC) led the charge while leaving Telecom (e.g. PCS, VZ) and Utilities (e.g. DTE, SRE, TEG) lagging behind.

But alas, the high-octane beta chase was fleeting as the week concluded just as it commenced with investors, by and large, pouring back into the mega-cap safety stocks. On the week, Managed Care (e.g. CI), Media (e.g. VIAB), and Retail names (e.g. LTD, TJX) led the outperformance while Banks (e.g. MTB), Financials (e.g. COF), and Materials (e.g. VMC) continued to struggle.

Has the market lost its conviction for gold? Gold investors suffered through an absolute torrid week, with (GLD) plunging over 4.5% on Friday (4/12) alone bottoming out to levels not seen since mid-2011. Gold continues to experience both a classic and sustained “investor’s running for the exit” syndrome as witnessed by the most outflows of bullion from exchange-traded-funds (ETFs) in the near ten-year history of those products. Some think this correction was long overdue in that gold has and continues to trade at a very healthy premium to both cost support and historical norms. Other reasons might be the mishmash of reduced “event risk” in Europe, the potential of FOMC tapering, lack-luster jewelry demand, dwindling inflation fears, Indian tariffs stifling demand, selling of gold reserves, and the attractiveness of other precious metals such as palladium (e.g. PALL) relative to gold.

Personally, I sense the most recent price action in gold as nothing but an extension of what has been happening in equities for months now. And, like equities, gold’s path forward is tricky as old-fashion commonsense is being severely outweighed by pure market momentum. A force that is impossible to predict. It’s true that trends / market momentum can and do last longer than most of us can remain solvent however, markets simply cannot remain linear – going one way or another – forever. In reality, gold could finish the year at $1,000, $2,000 or anywhere in-between. The bigger concern should actually be how it finishes relative to the balance of your investments!

We will begin the new week having digested a slew of Chinese economic data that arrives on Sunday evening 4/14/13 (e.g. Industrial Production, Retail Sales, and GDP). The coming week will also bring earnings from many of the mega-cap “safety stocks” and, given the group’s stellar performance year-to-date, it will be deeply fascinating to see whether the market can sustain its strength on the back of this entire group. Pay close attention to the following company’s reporting this week: (KO, JNJ), Tuesday morning 4/16, (ABT), Wednesday morning 4/17, (PEP/VZ), Thursday morning 4/18, along with (KMB, MCD), Friday morning 4/19.

Larry Shover, SFG Alternatives