The S&P 500 is a perfect reflection of how markets are doing. It is trading near all-time highs, but, having been unable to go past 2100 points, it doesn’t move beyond the trading range where it has been kept so far.
In a way, gold and oil are in similar situations. While gold has strongly moved into the 1200-1300 trading range, it didn’t break its resistance to stay above it.
And oil, despite the extremely bullish market sentiment, never made it to $50, staying always shy (so far) of this important psychological frontier.
In this scenario, there are two views:
- One holds that the S&P 500, gold and oil are consolidating at these levels before staging a break to the upside, in order to continue their recent uptrends
- The other one holds that this consolidation hasn’t been met with any catalyst to send these assets higher, and that fundamentals will drive all these three assets lower
At Ridge Capital Markets, we are closer to the second view, although we would not necessarily include gold in that equation. Here’s why:
We believe that the S&P 500 is treading on weak grounds. It has been pushed to extremes without earnings justifying it, or without any bullish economic factor supporting it. And, even with the Fed being more dovish than hawkish (well, more or less, because that seems to change at every new Fed-based statement), we simply do not see any reason for the S&P to spike higher. On the contrary, more bad news from China and about the weakening global economy should push it lower.
This is why we keep our bearish calls and see the S&P 500 ultimately heading towards 1800 – so we would recommend traders to short the S&P for a profitable move.
Oil has been going upwards based solely on hopes and market sentiment – up until recently. With the fires in Alberta having side-effects that affected Canadian production, with Nigeria suddenly seeing its production unexpectedly disrupted, and with the building crisis in Venezuela, the global crude oil production levels have become affected by these factors – that no OPEC meeting was able to replace.
Still, we haven’t seen oil reaching the crucial psychological barrier of $50, much less going past it. Plus, at the end of the day, these are only temporary disruptions, and it should also be noted that the cure for high prices are high prices. If oil stays at these levels, and even if it goes beyond $50, the US shale industry will come back online in no time, because it can profitably produce oil at these prices.
Plus, Saudi Arabia is likely to go on defending its market share, by flooding the market with its oil. Russia and Iran won’t stay far behind it. So we see all this as ultimately bearish for oil, which means that we maintain our recommendation for traders to stay short oil currencies, such as the CAD, the RUB or the MXN – and we add to our short positions in every short-term oil recovery, because we don’t see it lasting.
Gold, on the other hand, may act differently. While deflationary pressures are being far stronger than inflationary forces, the truth is that the increasing publicly admitted loss of confidence in central banks is bullish for gold. And so is the war on cash and the threat of increasingly negative interest rates by the central banks of the world.
Gold is the asset that, while we believe it is possible to see it suffering with a shock from China, has real chances of doing extremely well if things go seriously wrong.
As the loose-er monetary experiments of central banks become ever more creative, expanding the monetary base of countries, as public debt keeps growing, and as wealth taxes, cash bans, bail-ins and other desperate measures become more likely, gold can perfectly find the grounds to reach new year highs. This is why we encourage traders to stay out of gold short bets.
All in all, we are facing markets pushed to extreme valuations which contrast with extreme world and economic events, and also with potentially very dangerous financial breakdowns. So going with the flow and chasing bullish momentum while trading on levels that can revert at any time seems an unwise strategy to us. We’d rather go just as extreme and place bets on corrections that cannot be delayed for much longer.