Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

What Would Further Stock Market Growth Mean to Silver?

By

Interestingly, the correlation between silver and the stock market is strongly negative.

PrintPRINT
According to Bloomberg, the Fed stimulus helped in pushing the S&P 500 (INDEXSP:.INX) up as much as 153% from its March 2009 low, as better-than-estimated corporate earnings also fueled equity gains. Of the 483 companies in the S&P 500 that have reported quarterly earnings this period, 71% surpassed profit estimates.

On Wednesday, the S&P 500 fell 0.6% to the lowest level since July 8 as minutes from the Federal Reserve's July meeting showed officials support stimulus cuts this year if the economy improves. In this way, the Standard & Poor's 500 Index extended its decline to 3.9% since closing at its latest record on August 2.

Despite this decline, yesterday, US stocks rose on data showing improvement in global manufacturing and the American labor market. The S&P 500 index gained 0.9% and climbed to 1,656.96.

Will they keep rallying? Let's take a closer look at the charts to find out what the current situation in the general stock market is (charts courtesy of http://stockcharts.com).


Click to enlarge

On this week's long-term S&P 500 chart we see that the situation hasn't changed much.

The correction is still shallow from the long-term perspective, and the S&P 500 Index reached the rising support line based on the November 2012 and January 2013 lows (in terms of weekly closing prices).

Please note that there is another rising support line based on the November 2012-January 2013 lows (on an intraday basis), which may stop a correction even if the current support doesn't hold. Therefore, the downside seems limited.

Before we examine the Broker-Dealer Index (INDEXNYSEGIS:XBD) chart to see what the financial sector is doing, let's take a look at the chart of the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) which is another proxy for the general stock market.



Earlier this week, the DIA ETF moved lower, and the RSI based on it moved below 30 -- almost to the 26 level. Since the beginning of 2008, there have been exactly seven cases when we saw something similar. In four of them, this meant that an important bottom had just been formed. In the remaining three cases, a major bottom was formed in a short time anyway.

The short-term implications are bullish and the medium-term ones are very bullish.

We turn now to the financial sector, which in the past used to lead the rest of the general stock market.



On the above chart, we see that the recent decline took the financials to the previously broken resistance level of 130. Despite this fact, the financials still remain above this level, which also corresponds to the 2011 top, and the outlook hasn't changed here.

The breakout above the level of 130 has not been invalidated, which will likely lead to further growth in the financial sector and the general stock market.

Once we know the current situation in the general stock market, let's see how it may translate into the precious metals market. Let's take a look at the Correlation Matrix.



The Correlation Matrix is a tool which my firm has developed to analyze the impact of the currency markets and the general stock market upon the precious metals sector (namely: gold correlations and silver correlations).

What's very interesting is that the correlation between silver and the stock market is strongly negative. It's negative in the short and medium term. This is so interesting because, theoretically, silver used to be positively correlated with the stock market most of the time, which you can see in the very long-term, 1500-day column. This was because of silver's industrial uses. With the bullish outlook for the stock market suggesting higher values, it seems that the outlook for silver is quite negative for short and medium term.

It seems that we will need to see silver moving higher regardless of what the stock market is doing before we can say that another huge upleg is in the cards for the white metal.

Summing up, the outlook for the general stock market is very bullish in the medium term and more bullish than not in the short term. As we previously mentioned, the S&P 500 Index reached one of the rising support lines and even if stocks drop below it the next one may stop a correction. Therefore, the downside seems limited. Another bullish factor is the RSI indicator based on the DIA ETF, which moved below the 30 level.

Even though the very long-term correlation between silver and the general stock market is positive, it seems that the above has negative implications for the white metal for the short and medium term (even though based on past price patterns, we could see some short-term strength in silver).

For the full version of this essay and more, visit Sunshine Profits' website.

Twitter: @SunshineProfits
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
PrintPRINT

Busy? Subscribe to our free newsletter!

Submit
 

WHAT'S POPULAR IN THE VILLE