Over the last three months, the S&P 500 SPX has underperformed gold futures (GC00) (GCJ25) by minus 24%, the widest margin since March 2022, a period that was marked by stock-market stress and demand for safe-haven assets, wrote Dean Christians, senior research analyst at SentimenTrader, in a recent note.
As the S&P 500 declined and gold futures climbed, that widened the three-month rate spread between the two "typically uncorrelated asset classes" to its "most significant gap in over two years," Christians said. A spread reading below minus 24% has only occurred 5% of the time since 1970.
An analysis of the two asset classes can help determine whether the current pullback in stocks is a "routine correction within a bull market or the start of a more meaningful shift toward a bear market," Christians said.
Historically, such divergences have reflected "heightened trader pessimism and often signaled a bottoming process and subsequent relief rally in stocks over the next few months," he said.
Whenever the three-month rate-of-change spread between the S&P 500 and gold futures has dropped below minus 24%, the key benchmark equity index "displayed a slightly unfavorable outlook over the subsequent few weeks, suggesting a choppy bottoming process," he said.
Once the dust settled, the large-cap index has rallied 65% of the time over the following two months, "with a return that approached significance relative to random performance," Christians said.
Gold, after a minus 24% spread change relative to stocks, is likely to face pressure over the first few months, suggesting that traders are "less inclined to maintain positions in a safe-haven asset like gold," he said.
Should stocks stage a rebound, gold, a safe-haven asset, could "face near-term pressure and consolidate within its long-term uptrend," he said.