Weekly Market Wrap: 8 March 2013 – Stocks & the dollar surge while gold and oil suffer

This regular column reviews several different markets including: stocks, commodities, currencies and precious metals. This week focuses on six major stock markets, the US dollar, gold, the HUI gold stock index, and Brent crude.

Stocks

Six major stock markets

The chart below shows, the Dow Jones Industrial Average (black line), the Toronto Stock Exchange (pink line), the French CAC 40 (grey line), the German DAX (green line), the Japanese Nikkei (brown line), and the FTSE 100 index (orange line).

All six markets continue to march higher with the exception of the Toronto Stock Exchange which, thanks to its heaving weighting to resource companies, is struggling to find upside momentum.

The Dow is at all-time highs, while the FTSE has managed to close above 6,400 for the first time in 5 years.

A 1 year (daily) chart of six major stock markets (Click on the chart for a larger version)

A 1 year (daily) chart of six major stock markets (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Although global stock markets have performed extremely well so far this year, it is important that investors realize that this is not a market that’s being driven by strong fundamentals. Rather it is being driven by ultra-loose monetary policy.

Commodities

Brent crude

Energy analysts and economists breathed a sigh of relief last month as the price of Brent crude retreated from $119.17 to $111.15, a fall of 6.7%. Brent crude has replaced WTI as the global oil benchmark, and as noted previously, when this vital commodity pushes north of $120 it begins to impact global economic activity.

A 1 year (daily) chart of Brent crude (Click on the chart for a larger version)

A 1 year (daily) chart of Brent crude (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Although the price of Brent crude has retreated for the time being, a new report from the OECD is predicting that it will reach $190 a barrel by the year 2020.

The report examines how oil consumption in various countries has responded to changes in GDP and changes in the oil price over the past 20 years. The OECD then uses this data to model future consumption patterns. One of their findings is that over the past 20 years, oil demand in India, China and Indonesia has grown almost one for one with income.

Given that the bulk of future economic growth is expected to come from emerging economies, this research has significant implications for future oil demand.

Precious metals

Gold

Since breaking down out of its downtrend channel in late February gold has risen and is now back inside the trend lines. As mentioned at the time, gold became extremely oversold and was therefore due for a rally.

Buying in the physical market continues to be strong, however it is too early to say whether gold has made a final low, and gold is likely to remain range bound between $1,523 and $1,800 until a new catalyst emerges.

A 6 month (daily) chart of Gold (Click on the chart for a larger version)

A 6 month (daily) chart of Gold (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Major support for gold is around $1,523 and it’s important from a technical perspective that this is not violated.

Gold stocks: Have gold stocks finally bottomed?

The chart below shows the HUI Gold Bugs index, which tracks the value of 15 of the largest and most widely held public gold producers, names such as Goldcorp, Barrick and Newmont.

Since peaking at the same time as the gold price in September 2011, the HUI index has declined by 45%, and as a result of this powerful decline, the index is extremely oversold. In fact, as the relative strength index or RSI (circled) shows, the HUI has only been this oversold once in this bull market and that was at the depths of the 2008 credit crunch.

The HUI has now retraced 61.8% of the advance from the 2008 low as is now at an important inflection point

A 15 year (daily) chart of gold (Click on the chart for a larger version)

A 15 year (daily) chart of gold (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

It is logical that we will see a bounce off this key Fibonacci number that would also coincide with a rally from extreme oversold conditions.

Currencies

US Dollar

The US dollar, as measured by the US dollar index, broke out of a descending triangle pattern in early February and has since made a strong advance.

The RSI indicator (circled), shows that the dollar is now overbought, while the stochastic oscillator (also circled), shows that momentum may now be turning to the downside.

A 1 year (daily) chart of the US dollar index (Click on the chart for a larger version)

A 1 year (daily) chart of the US dollar index (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Historically gold has had a high negative correlation (-0.85) with the US dollar, therefore the dollar’s recent rally helps explain the recent weakness in gold.

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