Todd Harrison: What Gold Is Telling Us About the Future of Stocks
The yellow metal is already discounting the Federal Reserve taper
It's FOMC day -- the event formerly known as an "interest rate decision" day -- as the tape scrapes toward 2:00 p.m. EST. It's S's over N's, at least for now, as the high-beta realm acts sloppy. I half-joked to my team that tech is down with Bitcoin, but that is tongue in cheek; I will say that I posted "Bitcoin = tulips with a South Seas kicker" on Twitter, and there still seems to be a fair amount of hope hidden in the digital currency.
The catalyst du jour, of course, is whether or not the Federal Reserve will opt to taper its asset-purchase experiment. About one in three economists expect to see a snip, but that's a different conversation than how money managers are set up.
Smart money (aka Michael Sedacca) is confident that tapering is already built into the (interest rate) curve, but conventional wisdom continues to hold the notion that "taper is bad; no taper is good."
Adding spice to the mix is the seasonal psychology. With eight sessions left in 2013, folks are in one of two camps: looking to get paid (and protect those gains) or looking to catch up (and notch incremental performance). That will remain the game into year-end, at which point risk appetites likely loosen up to start the New Year. I continue to sense that 2014 will bring a substantive downside gut check, but that's a discussion for another time.
If I had to choose a chart that illustrates my best-guess forward assumptions, it would be the one below.
Looking back the last five years, the rising tide of liquidity lifted all boats; that, I think we can all agree on. You will note how gold has already reflected the inevitable taper while stocks have paid no mind to the yellow-metal grind. Equity bulls will argue that "fear" traded out of the metal, which explains the price discrepancy. Maybe, but I don't buy it; I believe gold is writing the stock script and we would be wise to pay attention.
Again, with a handful of sessions left in the year, psychology could trump our other metrics (structural, technical, fundamental) so take this with a grain of salt. It will be a tale of two tapes today, with 2:00 p.m. serving as the toggle. Remember, the first move is typically the false move (after the FOMC announcement), so take a deep breath, put limits on your orders, and don't let the definition of an investment be a trade gone awry.
Good luck today.
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at email@example.com.
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