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Fundamentals

Jerome Powell initiated an extremely aggressive policy campaign 15 months ago, which is considered one of the most assertive approaches in history. The implementation of these policies was met with significant challenges and resulted in a harsh bear market. However, the S&P 500 (SPX), a prominent stock market index, has not only managed to recover from the losses incurred during the past year but has also exceeded its previous levels.

To be precise, the S&P 500 has successfully erased all the losses it experienced since the Federal Reserve's first-rate hike in March 2022. Initially, the index dipped following the Fed's recent pause, but it ultimately closed higher at 4,372.59. On the day of the Fed's first-rate hike in this cycle, March 16, 2022, the S&P 500 closed at 4,357.86.

During the spring of the previous year, there were concerns regarding historic levels of inflation and the potential rise in borrowing costs. This led to a sell-off across various asset classes, a bear market, and numerous predictions of an impending recession. However, two key factors have enabled the stock market to overcome these challenges.

Firstly, strong corporate earnings have surpassed pessimistic expectations, defying downbeat outlooks. This unexpected resilience in earnings has contributed to a broad rally in stock prices. Notably, companies like Nvidia (NVDA) and Meta Platforms (META) have led the way with triple-digit returns in 2023, and smaller technology firms have also benefited from this positive momentum.

Secondly, the growing hype around artificial intelligence (AI) has played a significant role in the stock market's recovery. The enthusiasm surrounding AI has powered the broader rally, with investors optimistic about the potential of this technological advancement. The impressive performance of AI-focused companies has contributed to the overall positive sentiment in the market.

Furthermore, the cooling of inflation at a steady pace and the recent pause in the Fed's actions have instilled confidence in investors. They are anticipating better days ahead, even if Powell indicates the possibility of a few more interest rate hikes in the future. Historical trends also suggest that a pause in rate increases has often been followed by double-digit returns in the market, further supporting the positive outlook.

The Effect of Fed Funds Rate Hikes on Gold

The belief that increasing interest rates led to a decline in gold prices is commonly held, as higher rates make other investments like bonds more appealing. This theory suggests that money would flow out of gold and into higher-yielding options. However, there isn't sufficient evidence to support a consistent weakening of gold due to rate hikes or Treasury yields. Although there was some negative correlation in the 2000s, there have been numerous instances where gold and interest rates rose together, indicating that high rates don't necessarily cause gold prices to fall.

The relationship between gold prices and interest rates is uncertain and unstable because gold is traded globally and influenced by factors beyond the control of the Federal Reserve. Other factors, such as supply and demand dynamics in commodity markets, are likely to have a greater impact on gold's long-term performance.

Looking at historical data, there is no consistent correlation between interest rates and gold prices. During the 1970s, gold prices rose sharply while interest rates were high and rapidly increasing. Similarly, gold prices can rise alongside interest rates. In recent times, when the Federal Reserve began raising rates in 2022, gold prices did decline, potentially due to investors being attracted to higher rates on fixed-income investments. However, in 2023, gold prices started to recover, possibly influenced by expectations of lower interest rates and moderating inflation.

The price of gold is primarily driven by supply and demand, rather than interest rates. While changes in supply can impact gold prices, demand is the stronger component. Gold supply changes slowly, as it takes a considerable amount of time to convert a discovered deposit into a producing mine. Rising interest rates can be bullish for gold prices because they are typically bearish for stocks. When interest rates rise, investors tend to rebalance their portfolios, favoring bonds over stocks, which can lead to a decline in stock prices.

The U.S. dollar's value is often seen as an important driver for gold prices because gold is denominated in dollars. When the dollar weakens, consumers can buy more gold with the same amount of their currency, increasing demand and driving up gold prices. On the other hand, a stronger dollar makes gold more expensive, which can put downward pressure on gold prices.

In conclusion, while the belief that rising interest rates cause gold prices to decline is widespread, historical data doesn't support a significant correlation between the two. Gold prices are primarily influenced by factors like supply and demand, economic and political turmoil, central bank actions, and concerns about inflation. Other variables, such as equity prices, market volatility, and general supply and demand, have a more significant impact on gold prices.

Let's take a look at the weekly standard deviation report published in the Mean Reversion Trading Section of Investing Groups, and see what short-term trading opportunities we can identify.

GOLD: Weekly Standard Deviation Report

Jun. 18, 2023, 4:12 PM ET.

Summary

• The weekly trend momentum of 1964 is bullish.
• The weekly VC PMI of 1971 is bullish price momentum.
• A close below 1971 stop, negates this bullishness neutral.
• If long take profits, 1993 - 2014. If short, take profits 1943 - 1914.
• Next cycle due date is 6.30.23.

Weekly Trend Momentum:

The gold futures contract closed at 1971, and the market closing at the 9-day SMA 1971 confirms that the weekly trend momentum is bullish. This indicates a positive outlook for the short-term trend. However, it is important to note that a close below the 9 SMA would negate the weekly bullish trend and shift it to a neutral stance.

Weekly Price Momentum:

In terms of weekly price momentum, the market closed above the VC Weekly Price Momentum Indicator at 1964, confirming a bullish price momentum. This suggests an upward movement in prices for the short term. Nevertheless, a close below the VC PMI would invalidate the bullish trend and bring it back to a neutral position.

Weekly Price Indicator:

For traders looking to engage in short-term trading, it is advisable to consider taking profits on shorts during corrections at the Buy 1 and 2 levels of 1943 - 1914. On the other hand, going long on a weekly reversal stop could be a viable strategy. If you are already in a long position, it is recommended to use the 1914 level as a Stop Close Only and Good Till Cancelled order. Additionally, it would be prudent to book profits as we approach the Sell 1 and 2 levels of 1993 - 2014 throughout the week.

Cycle:

The next cycle due date is projected to be on 6.30.23. This information can be helpful in planning and executing trading strategies, as it provides a timeline for potential market shifts or turning points.

Strategy:

For those currently in a long position, consider taking profits in the range of 1993 - 2014. Conversely, if you are in a short position, it is recommended to take profits within the range of 1943 - 1913. Adhering to these profit-taking levels can help manage risk and capitalize on market movements.

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