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Is the Stock Market Rally Doomed?

A resurgent Nasdaq Composite took the lead this week, pushing to new 2019 highs and erasing almost all its December meltdown losses.

The tech-heavy Nasdaq jumped another 1.4% yesterday and is now on track to log its sixth-straight week of gains. The S&P 500 wasn’t that far behind, climbing just shy of 1% on the day.

Meanwhile, the Dow finished just barely in the red due in part to an earnings miss from DowDuPont and poor showings from the big banks. More importantly, Thursday was the Dow’s second day flirting with its flat 200-day moving average. The Dow is the first of the major averages to make it back to its 200-day — and many investors are watching to see how the blue chips will react to resistance following January’s comeback rally.

INDU

To put the last four months in better context, the Dow would still need to climb more than 7% to recapture its all-time highs set in October 2018. Following the painful fourth-quarter meltdown, many analysts and investors can’t seem to envision a scenario where the averages challenge their highs anytime soon.

In fact, a move lower from here following January’s snapback rally feels very much like the consensus opinion right now.

Barron’s perfectly captures this idea in one simple headline: Everyone is so bearish, the stock market looks bullish.

Indeed, bearish sentiment is spiking just as the major averages are embarking on a serious comeback run. The latest American Association of Individual Investors survey is hitting extreme bearish levels, showing a bull-bear gap of -20% in favor of the bears, Barron’s reports. The last time the gap was worse occurred a decade ago during the financial crisis.

“Historically, when the spread breaks below -10%, the S&P 500 has been positive 83% of the time over the next 12 months, with gains averaging 11.5%,” Barron’s notes, citing a RBC Capital Markets report.

These numbers match up well with our 2019 stock market roadmap. To recap, I split the year into two parts. The first portion features negative headlines about the trade war, political bickering, and an economic slowdown that will contribute to wild stock market swings.

But when the worst-case scenarios don’t materialize and the last seller turns out the lights, a new rally will begin, leading to a strong finish for stocks.

So far, so good. Heck, we might even get that new rally much sooner than I anticipated.

Yet while stocks continue to recover, shell-shocked investors are turning to gold.

As stocks struggled to gain any positive momentum at all during the holidays, investors started buying gold again.

In early January, we saw gold creeping back toward $1,300. It finally broke above this mark last week. Now, gold has extended its gains, topping $1,325 as we approach the end of the trading week.

GOLD

That’s a welcome change for gold bugs. Despite volatile conditions, gold failed to perform last year. After topping out at $1,360 per ounce during the winter correction one year ago, gold steadily trended lower before bottoming out in October after its spot price fell below $1,200 for the first time in more than a year.

That’s not exactly the type of action the gold bulls were looking for. But ever since the stock market started to fall apart at the beginning of the fourth quarter, gold and gold miners have perked up. Now they’re looking to extend their respective breakouts.

Also, while gold stabilized in the $1,200 range back in September, the VanEck Vectors Gold Miners ETF (NYSE:GDX) continued to find new lows. That’s not the case anymore, as I explained in early January. October’s breakout was a sloppy mess at first. But these volatile stocks are gaining the traction they need for a meaningful rally.

GDX has now finished in the green for eight straight trading days. I’ll keep my eyes peeled for attractive trades in the space heading into next week.

Sincerely,

Greg Guenthner

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Greg Guenthner

Greg Guenthner, CMT, is the editor of Rude Awakening PRO and Seven Figure Signals. He has been with Agora Financial/Seven Figure Publishing for 13 years. In 2018, Greg’s Rude Awakening PRO portfolio beat the S&P 500 by 14%.

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