Data &
Technology
Research
Reports
Report Solutions
Reports Library
Actionable
Strategies
Free
Resources
Simple Backtest Calculator
Simple Seasonality Calculator
The Kelly Criterion Calculator
Sentiment Geo Map
Public Research Reports
Free Webinar
Pricing
Company
About
Meet Our Team
In the News
Testimonials
Client Success Stories
Contact
Log inLoginSign up
< BACK TO ALL REPORTS

Daily Report : As metals soar, safe-haven correlations are breaking down

Jason Goepfert
2020-07-24
Gold has decoupled from other safe-haven assets like the yen. While that in itself hasn't meant much in the past, gold's recent run-up is reaching historic proportions. Other times it streaked like this, and optimism was as high as it is now, proved to be unsustainable for the metal.
View/Print a PDF version of this Report

Headlines


As metals soar, safe-haven correlations are breaking down: Gold has decoupled from other safe-haven assets like the yen. While that in itself hasn't meant much in the past, gold's recent run-up is reaching historic proportions. Other times it streaked like this, and optimism was as high as it is now, proved to be unsustainable for the metal.

Tech's back-to-back streak: One of the most widely-cited stats in recent days has been about tech's streak of more than two months without suffering back-to-back losses. That was snapped on Friday. Using a proxy for the sector back to 1926, this streak of 49 days ranks as the 2nd-longest of all time, next to one that went 52 days ending in March 2012. Once streaks longer than 30 days finally ended, it didn't mean much. Tech's returns going forward were almost perfectly in line with random. This kind of thing has proven to be maybe interesting, but not especially useful.

The latest Commitments of Traders report was released, covering positions through Tuesday: The 3-Year Min/Max Screen showed that "smart money" hedgers added to their multi-year extreme net long position in the U.S. dollar (while shorting more Swiss franc). They've also been heavily selling into the rally in copper but not to a multi-year extreme yet. Most other contracts saw hedgers slightly retreat from prior positions. In stocks, they added to their combined net long position in major equity indexes, to nearly $30 billion. This remains an extremely odd development from them given the magnitude and duration of the rally.

Bottom Line:

  • Weight of the evidence has been suggesting flat/lower stock prices short- to medium-term again; still suggesting higher prices long-term
  • Indicators show high optimism, with Dumb Money Confidence recently above 80% with signs of reckless speculation, historic buying pressure, then even more speculation during what appears to be an unhealthy market environment
  • Active Studies show a heavy positive skew over the medium- to long-term; breadth thrusts, recoveries, and trend changes have an almost unblemished record at preceding higher prices over a 6-12 month time frame
  • Signs of extremely skewed preference for tech stocks nearing exhaustion, especially relative to industrials and financials (here and here)
  • Indicators and studies for other markets are mixed with no strong conclusion, though it's not a great sign for Treasuries that hedgers are net short.

Smart / Dumb Money Confidence

Smart Money Confidence: 33% Dumb Money Confidence: 78%

Risk Levels

Stocks Short-Term

Stocks Medium-Term

Bonds

Crude Oil

Gold

Agriculture

Research

As metals soar, safe-haven correlations are breaking down

BOTTOM LINE
Gold has decoupled from other safe-haven assets like the yen. While that in itself hasn't meant much in the past, gold's recent run-up is reaching historic proportions. Other times it streaked like this, and optimism was as high as it is now, proved to be unsustainable for the metal.

FORECAST / TIMEFRAME
GLD -- Down, Short-Term

The correlation between two of the more reliable safe havens has been wobbling.

Normally, during times of duress, the price of gold and the exchange rate of the Japanese yen mostly move together. Lately, however, that has been breaking down, leading to the lowest 6-month correlation in five years.

This is often considered a sign that inflation is about to do "something". Depending on who you ask, this either means that inflation is about to spiral out of control...or not. People tend to get an almost religious zealotry about things like this.

Historically, it hasn't necessarily meant much in terms of the growth in the U.S. rate of inflation.

Looking at forward returns across major markets, they were good over the next 6-12 months in stocks and gold, while others were mostly mixed. The big standout was 10-year Treasury note futures. Over the next 2-3 months, they consistently declined as interest rates rose, even if the rate of inflation didn't consistently increase.

When this "something" was driving gold and not the yen, gold had a consistent tendency to rise from three months and beyond. The factors we outlined a month ago are still pretty much in place but a couple have reached points that are more troubling for the near-term.

Regarding its momentum, it only continues to build. The metal is on the cusp of rising more than 4% during a week it will close at an all-time high (using weekly closing prices of the XAU index from Bloomberg).

Most of this kind of rise occurred during the tremendous run-up in 1979-80. It triggered a handful of times during the run in the 2000s, and those had much more of a tendency to give back short-term gains. Of the signals that triggered since 2008, all of them showed further gains over the next couple of weeks, but also all but one of them fell back in the months ahead.

Also troubling is that this is gold's 7th straight week of gains, the most in 9 years.

By the time it enjoyed this much momentum, it rarely led to further gains in the weeks and months ahead.

Outside of the late 1970's run-up, every single signal showed a loss over the next month. Only one of them showed a gain even three months later.

Also worth noting is that sentiment has become stretched again. The Optimism Index on gold just popped above 80, which the Backtest Engine shows has led to weak short- to medium-term returns. This is a change from the last note when it wasn't quite high enough to precede average negative returns or a win rate below 50%.

The run in both silver and gold has been impressive, and perhaps there are structural forces that will continue to push them higher, no matter historical precedent or stretched sentiment. That's always a bet on "this time is different", which we're loathe to do because it rarely is. Especially on a short- to medium-term time frame, the risk on gold (and silver) has risen to a high level.


Active Studies

Click here to view the Active Research the site.
Time FrameBullishBearish
Short-Term01
Medium-Term810
Long-Term441

Indicators at Extremes

Click here to view on the site (% Extremes and "Excess" tabs on the dashboard).
% Showing Pessimism: 8%
Bullish for Stocks

Inverse ETF Volume
S&P 500 Down Pressure
VIX
AAII Bull Ratio
Mutual Fund Flow (no ETFs)
% Showing Optimism: 32%
Bearish for Stocks

Smart Money / Dumb Money Confidence Spread
Intermediate Term Optimism Index (Optix)
Smart Money Confidence
Short-term Optimism Index (Optix)
Dumb Money Confidence
% Showing Excess Optimism
AIM (Advisor and Investor Model)
NYSE High/Low Ratio
SPY Liquidity Premium
Rydex Ratio
Rydex Money Market %
Fidelity Funds Breadth
SKEW Index
Equity Put/Call Ratio De-Trended
NAAIM Exposure Index
ROBO Put/Call Ratio
Options Speculation Index
Retail Money Market Ratio
NYSE Available Cash
Mutual Fund Cash Level

Portfolio

PositionWeight %Added / ReducedDate
Stocks29.8Reduced 9.1%2020-06-11
Bonds0.0Reduced 6.7%2020-02-28
Commodities5.2Added 2.4%
2020-02-28
Precious Metals0.0Reduced 3.6%2020-02-28
Special Situations0.0Reduced 31.9%2020-03-17
Cash65.0
Updates (Changes made today are underlined)

In the first months of the year, we saw manic trading activity. From big jumps in specific stocks to historic highs in retail trading activity to record highs in household confidence to almost unbelievable confidence among options traders.

All of that came amid a market where the average stock couldn't keep up with their indexes. There were signs of waning momentum in stocks underlying the major averages, which started triggering technical warning signs in late January. 

After stocks bottomed on the 23rd, they enjoyed a historic buying thrust and retraced a larger amount of the decline than "just a bear market rally" tends to. Those thrusts are the most encouraging sign we've seen in years. Through early June, we were still seeing thrusts that have led to recoveries in longer-term breadth metrics.

The longer-term prospects for stocks (6-12 months) still look decent given the above. On a short- to medium-term basis, it was getting harder to make that case. Dumb Money Confidence spiked and there were multiple signs of a historic level of speculation. This is likely the lowest I will go given what I still consider to be compelling positives over a longer time frame. There is not a slam-dunk case to be made for either direction, so it will seem like a mistake whether stocks keep dropping (why didn't I sell more?) or if they turn and head higher (why did I let short-term concerns prevail?). After nearly three decades of trading, I've learned to let go of the idea of perfection.


RETURN YTD: -4.4%

2019: 12.6%, 2018: 0.6%, 2017: 3.8%, 2016: 17.1%, 2015: 9.2%, 2014: 14.5%, 2013: 2.2%, 2012: 10.8%, 2011: 16.5%, 2010: 15.3%, 2009: 23.9%, 2008: 16.2%, 2007: 7.8%

Phase Table

Click here to view the Phase Table on the site.

Ranks

Click here to view on the site (Ranks tab on the Dashboard).

Sentiment Around The World

Click here to view on the site.

Optimism Index Thumbnails

Sector ETF's - 10-Day Moving Average
Country ETF's - 10-Day Moving Average
Bond ETF's - 10-Day Moving Average
Currency ETF's - 5-Day Moving Average
Commodity ETF's - 5-Day Moving Average

Sorry, you don't have access to this report

Upgrade your subscription plan to get access
Go to Dasboard
DATA &
TECHnologies
IndicatorEdge
‍
BackTestEdge
‍
Other Tools
‍
DataEdge API
RESEARCH
reports
Research Solution
‍
Reports Library
‍
actionable
Strategies
Trading Strategies
‍
Smart Stock Scanner
‍
FREE
RESOUrCES
Simple Backtest
Calculator
Simple Seasonality
Calculator
The Kelly Criterion
Calculator
Sentiment Geo Map
‍
Public Research Reports
‍
Free Webinar
COMPANY
‍
About
‍
Meet our Team
‍
In the News
‍
Testimonials
‍
Client Success Stories
Pricing
Bundle pricing
‍
Announcements
‍
FAQ
© 2024 Sundial Capital Research Inc. All rights reserved.
Setsail Marketing
TermsPrivacyAffiliate Program
Risk Disclosure: Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones’ financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.

Hypothetical Performance Disclosure: Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. for example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results.

Testimonial Disclosure: Testimonials appearing on this website may not be representative of other clients or customers and is not a guarantee of future performance or success.