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Stocks, Bonds, Dollar, Gold, and Commodities Outlook

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A look at what economic indicators are saying so far.

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Stocks: Market in Resistance

As you can see from the daily chart of the S&P 500 below, stocks started the New Year with a breakout to the upside. After a strong multiweek rally, my firm's Grail timing indicator is now in "extreme Divergence." This means the market is stretched like a rubber band ready for a snap back. The current Grail Divergence setup is the stretch before the snap back.

The last time the S&P 500 had a similar breakout was October 2010 that peaked on May 2 at 1370 ("sell in May and go away"). Right now, the S&P 500 is only 20 points from the resistance point at 1370. In other words, the upside left in the New Year rally is a tiny 1.5% from here.

As additional evidence to the Grail Divergence sell setup, we see other facts confirming a coming downside correction. Insider selling on the NYSE is 8-to-1, the most lopsided since last July. When the insiders started dumping last year, the market peaked at 1356 and promptly collapsed 20% to 1074. We are only six S&P 500 points away from the 1356 resistance point. Again, there is very little upside left for stocks in the near term.

In summary, the S&P 500 is nearing significant resistance between 1356 and 1370. Insiders, (the "smart money") are reducing their long exposures in this wall of resistance and so should you. It's time to hedge your portfolio by initiating some short positions. Expect the market to stall right here and experience a healthy 7% pullback to the 200-day moving average at 1253. Stay bullish on stocks and get ready to buy the coming dip.


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Bonds

Bonds are the biggest bubble on earth, blown up by the Federal Reserve's quantitative easing (aka money-printing) programs. Once the Fed stops buying sometime in 2012, bonds should collapse.

The 30-year Treasury bond is "painting up in full compression" preparing for what I call a "downside Geyser." Since stocks and bonds have an inverse relationship, bonds could have a small rally before the downside Geyser begins. I expect bonds to tank after the anticipated small 7% correction in stocks is over.


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Gold

Gold made a historic double-top high at 1929 last September. Gold then made a low at 1523, a 21% fall. This appears to be a healthy correction in a long bull market for Gold. This reason I believe this is because gold rallied above the critically important 50- and 200-day moving averages.

Right now, gold is bumping its head near the wall of resistance at 1750 to 1800. It wouldn't surprise me to see gold stall here correcting back toward the 50/200 DMAs.

I would lighten up on gold in the 1750-1800 resistance area but look to buy it back in support around 1670.


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Currencies

As you can see from the Grail chart below, the dollar is in a bullish uptrend. However, the dollar is also on a Grail sell signal. However, I do see some strength in the dollar, with the Grail beginning to round upward. This leads me to believe the dollar weakness is a healthy correction in a bull market. The dollar will show new signs of strength as a safe-haven currency on renewed fears about the European debt crisis. I would advise staying long the dollar in this US dollar bull market.


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Commodities

The Grail threw off a "divergence buy signal" on December 22 on the ProShares Commodity Index Fund (DBC). As you can see from the Grail chart below, DBC has moved up nearly 10% since then and is now painting momentum dots as it moves toward my $30 target (August 2011 high). Of course this rally has been primarily due to the weakness in the US dollar over that same timeframe. For now, I would advise you stay long DBC with a $27 sell stop. If the US dollar begins another powerful leg up, DBC will head considerably lower.


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If you'd be interested in receiving a weekly Grail Trading Report similar to the one above that also includes individual stocks about to move, let us know and we'll send details.

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No positions in stocks mentioned.
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