(Please refer to TSI's Glossary for an explanation of terms used in the Market Update)

The US Stock Market

Stocks, bonds and oil

Bond prices have been rising steadily since late May, thus providing a solid floor under the stock market. Nothing disastrous is likely to befall the stock market when long-term market interest rates are falling. However, a further sharp rise in the price of energy has the capacity to remove that floor by forcing bond prices down. As has been the case for most of this year, oil price strength poses the greatest single threat to the stock market.

Current Market Situation

We had expected an upwards push in the early part of last week and then another move down to re-test support. The market was following this script quite nicely until Friday, when a broad-based rally swept across the NYSE. The NASDAQ indices also managed to gain ground on Friday, although breadth on the NASDAQ was far less impressive than the NYSE's 2:1 advance/decline ratio. Friday's performance was strong enough to suggest that some follow-through buying will occur in the early part of next week, but we should then head back down.

The extent of any pullback during the coming week will have a significant impact on the market's performance over the next few months. The most bullish outcome would see the SPU holding 1460 on a closing basis. If 1460 holds then the scene would be set for a powerful rally during the final week of August and the first week of September (and probably a new all-time high by mid October). It is more likely, however, that a drop into the 1420-1440 range will occur. In such a case the ensuing rally would have less `oomph'. A third and decidedly bearish possibility would be a drop below long-term support at around 1390-1400. Such an occurrence would confirm the recovery from the May lows as being a bear market rally.

There is virtually zero chance that the Fed will hike rates at its August 22 meeting, an outcome that is already fully discounted in the financial markets. However, we suspect that the Fed may issue a `neutral' statement following the meeting, that is, they will confirm that interest rates are on hold pending further economic data. This type of statement is not priced into the markets.

In summary, our expectation is that a rally will get underway around the time of the FOMC meeting (either just before or just after) and that the strength of the rally will be determined by how far the market falls between now and then. In the event that a significant pullback does not occur prior to the FOMC meeting then any post-meeting upside will be minimal.

This week's important economic/market events

Gold and Gold Stocks

Current Market Situation

The latest Commitments of Traders (COT) figures show that large speculators are now heavily net-short COMEX gold futures and commercial interests are correspondingly net-long. It is positive that speculators have been able to increase their short position by a substantial amount (around 30,000 contracts) over the past 2 weeks without driving the gold price below its May nadir. Despite the gloomy atmosphere in the gold market it is clear that buying interest is strong in the 270-280 range.

A firm Dollar continues to put downward pressure on the gold price. The Dollar is overbought and the COT shows that large speculators are substantially net short the Yen, the Pound, the Canadian Dollar and the Swiss Franc (that is, they are expecting a continuation of Dollar strength). Sentiment towards the Dollar is overwhelmingly bullish, so it seems that almost no-one is anticipating any Dollar weakness. Such unbridled optimism is often a set-up for a near-term decline, yet the Dollar continues to grind higher. It is clear that investment capital is pouring into the US at such a frenetic pace that all other considerations are being swamped.

It is possible that the gold price will bounce over the next 1-2 weeks based purely on short-covering and a slight re-balancing of the excessively bearish sentiment that pervades this market. However, a meaningful drop in the Dollar is needed to turn a quick rebound into something more interesting.

It is worth noting that the `smart money' appears to be growing interested in the stocks of gold mining companies. Investors' Intelligence reported on Friday that Fidelity's "50" fund has shot Barrick Gold into the fund as their number one holding. They also added Newmont Mining as number 4.

Previous Market Updates

7th August
31st July
24th July
17th July
10th July