Exchange-traded funds (ETFs) tracking most major stock market indexes are at or near all-time highs. The good news is that with such broad participation in the bull market, further gains are likely.
Stocks Just Keep Moving Up
SPDR S&P 500 (SPY) was up 2.35% for the week and set a new all-time high when it moved above $158.
Standard technical indicators are bullish, and in any market, the question is usually how far a trend can go. For SPY, the next target on the chart is at $162.35. This is based on the pullback we saw last summer. Price targets are established based on the idea that markets move with a sense of symmetry, as up moves mirror the depth of down moves.
Earnings season may determine whether the uptrend we see is sustainable. If companies can deliver profits, look for SPY to break $160 in the next month and $162 before the end of summer.
Recommended Trade Setup:
-- Maintain long position in SPY
-- Maintain stop-loss at $149
-- Maintain price target of $167 by the end of 2013; use pullbacks as buying opportunities
Wall Street Recognizes Bear Market in Gold
SPDR Gold Trust (GLD) plummeted 5.8% last week as gold officially entered bear market territory. GLD is now more than 22% below its 2011 highs. Most analysts agree that a 20% drop constitutes a bear market. I doubt this is the end of the selling, and I think we will see GLD fall further before there is a significant rally.
Analysts at Goldman Sachs (GS) turned bearish on gold and lowered their price targets to $1,450 an ounce by the end of this year, and $1,270 in 2014. Wall Street firms use sophisticated models to come up with their price targets, but a simple price chart provides roughly the same target.
Each share of GLD represents one-tenth of an ounce of gold. That means Goldman's target of $1,270 an ounce for gold is equivalent to $127 per share for GLD.
We can see in the chart that GLD broke support and completed a topping pattern last week. You could call it a triangle, but the name of the pattern is not as important as the target. GLD's breakdown sets up a potential move to $124, which is close to the target established by Goldman. This is a monthly chart, so it should take time for GLD to reach the target, making 2014 a reasonable time frame.
The news brought more bad news for the gold bulls. There were reports that Cyprus would be selling gold to raise money that could help it through its ongoing debt crisis. This put downward pressure on gold prices, since central bank selling would increase the supply of gold.
The news from Cyprus shows that gold is like any other commodity. When supply increases, prices fall. In a disaster, gold has some value, but if investors try to realize that value, their selling could lead to a price decline. Since gold is like any other commodity, it makes sense to be short gold now while the trend is down.
Nothing has changed my opinion that PowerShares DB Gold Short ETN (DGZ), an inverse fund that goes up when gold prices fall, is a buy. DGZ gained 5.85% last week. Traders should expect some volatility in the short run, but gains from DGZ in the long run.
Recommended Trade Setup:
-- Buy DGZ on dips below $12.75
-- Raise stop-loss to $12
-- Maintain price target at $14
This Week's News
Last week's news showed that inflation was low, but consumer sentiment and spending were lower than expected. These trends could be warning of an economic slowdown, but for now, traders' focus will likely be on earnings rather than the economic news.