foxex: Profit Takers

Chart Advisor | Focus on the Price

Monday, December 02, 2019

1. Stocks pull back by one percent

2. Market anticipates more European growth

3. Gold and silver poised to rally

Market Moves

The major stock market indexes retreated today in the most significant pull back in prices over the past two months. The S&P 500 (SPX), Nasdaq 100 (NDX), Dow Jones Industrial (DJX) and the Russell 2000 (RUT) all dropped by about one percent. It isn't surprising that investors, coming out of the long weekend, felt the need to take profits. However, market watchers may find it instructive to consider just what news might have triggered the selling. This could help to gauge whether the current price action is a temporary dip in prices or the beginning of a new downward trend.

Two particular communications appear to be at the crux of the market's moves. The first is that Christine Lagarde, the new president of the European Central Bank (ECB), speaking before members of the European Parliament's Economic and Monetary Affairs Committee, explained why her predecessors had such a difficult time reviving economic growth despite their best efforts. The problem, she explained is that, "The world economy outlook remains sluggish and uncertain. This lowers demand for euro area goods and services and also affects business sentiment and investment." As a solution she offered that the ECB could, "respond effectively even when growth is being dampened by external factors...by ensuring favourable financing conditions for all sectors of the economy and providing visibility on those conditions into the future." She expressed her belief that, "backed by a steady flow of credit on affordable terms, households and firms can consume and invest more."

When the new president of the ECB suggests that she really wants to help banks get a steady flow of credit going, you can't be surprised if investors get interested. On the other side of the Atlantic, a comment on Fox news regarding how President Trump will raise tariffs if no China deal occurs, sends U.S. stocks lower at the thought of the prospect. These two ideas in juxtaposition easily explain the market's atypical reaction in sending the euro significantly higher and simultaneously driving U.S. stocks significantly lower.

Market Anticipates More European Growth

Beginning with this hypothesis that the market may be interested in favoring those investments which benefit from more available capital in Europe, we can double check what we might find from companies that derive significant revenues from that region. The chart below shows an intraday comparison of such companies including DowDupont (DD), Deere & Co. (DE), Johnson and Johnson (JNJ), 3M Company (MMM), International Business Machines (IBM), and Google (GOOG). Unsurprisingly most of these companies performed better than their benchmark, the S&P 500 index as tracked by State Street's index-tracking ETF (SPY).

The Importance Of Diversification

8 Blue Chips Crushing S&P 500 as Global Profits Surge

Gold and Silver Poised to Rally

European influenced companies in the U.S. weren't the only investments that seemed to show countertrend movement to today's announcement. Staunch contrarian investors would likely be interested in looking at precious metals investments at this time. Both gold and silver prices closed mildly higher in today's trading session.

The chart below compares State Street's Gold Trust ETF (GLD) and iShares Silver Trust ETF (SLV) with four companies in this industry group including Hecla Mining Co. (HL), Eldorado Gold Corp. (EGO), Royal Gold Inc. (RGLD), Newmont Goldcorp (NEM), and Barrick Gold (ABX). The price action shows the lower priced stocks in this group beginning to surge higher. If S&P 500 prices continue to tumble it's a good bet these will continue to rise higher.

The Bottom Line

Stocks fell by one percent today as opinions that President Trump will raise tariffs seemed to inspire selling. Christine Lagarde's comments that the ECB should help banks extend credit even further helped attract money away from U.S. stocks and towards the Euro instead of the U.S. Dollar. Precious metals also seemed to benefit from this dynamic.