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Market Outlook: Move on Gold's Buy Signal If This Happens

Michael J. Carr

Traders have been buying everything this month, and that could continue to push prices higher in stocks while fueling a turnaround in bonds and gold.

Headlines Hide the Good News in Earnings

Despite some headline grabbing disappointments, earnings season is actually off to a good start. About one-fifth of the companies in the S&P 500 index have reported earnings, and 66.4% have beaten estimates. Over the past four quarters, 64.6% of companies have beaten estimates on average. We are still weeks away from knowing what the number will ultimately be for this quarter, but it is a promising start.

Headlines have been focused on the companies that have come in below expectations. That list includes Intel (INTC), Microsoft (MSFT) and Google (GOOG). INTC fell 3.6% for the week, MSFT was down 11.97%, and GOOG was off 2.86%. These losses weighed down PowerShares QQQ (QQQ), which lost 0.94% last week.

Other than tech stocks, the broad market did well as SPDR S&P 500 (SPY) gained 0.99% last week. Investors have been buying about $1 billion worth of SPY a day so far this month. They have actually been buying almost all equity ETFs, with money flowing into funds four times faster than average.

The effect of this buying can be seen in the Dow Theory buy signal that was confirmed last week.

Dow Theory Market Outlook Chart

Dow Theory identifies the direction of the major trend in the stock market. In the late 1800s, Charles Dow developed the Dow Jones Industrial Average and the Dow Jones Transportation Average to track trends in the economy.

Dow understood that the economy grows when manufacturers are producing as much as possible. Economic growth translates to profits for the companies, and this can be seen in the performance of their stocks.

Getting manufactured goods to market requires that the transportation industry also be growing, and that would drive the stocks of the transport companies higher. When both the industrial and transportation indexes are moving in the same direction, a confirmed trend is in place and traders can become more aggressive.

Both the industrial average and the transportation average are at new highs, and that is the definition of a bull market according to Dow Theory.

Gold Gives a Buy Signal

SPDR Gold Shares (GLD) added 0.79% last week after jumping 5.11% the week before. Market Vectors Junior Gold Miners ETF (GDXJ) gained 3.34% as speculators returned to the market. Market Vectors Gold Miners ETF (GDX) did even better, gaining 6.11%.

The Traders Dynamic Index (TDI) signaled a buy in GDX at the end of last week.

GDX Market Outlook Chart

TDI combines the Relative Strength Index (RSI) and Bollinger Bands. A buy signal is given when RSI crosses above the midpoint of the Bollinger Bands. In the past, GDX has gained an average of 1.87% after this signal. This trade has only been a winner 56% of the time, but the gains have been significant. For comparison, in an average two-week period, GDX has gained only 0.11%.

One way to trade this signal would be to buy only if GDX confirms its strength and trades at a price above last week's high ($25.99). That entry improves the percentage of winning trades slightly, to 58.8%, and the average gain increases to 3.17%.

This Week's News

Earnings season picks up with a number of important reports coming this week.

Market Outlook News

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