Updates on the U.S. Stock market and Gold (7/11/2016)

With the S&P 500 closing at record highs on Monday, I now think there is an 80% chance that the pullback which began in April is over. I expect that by the end of this bull market, we will see the Dow over 20,000, the S&P over 2300, the NASDAQ Composite over 5400, and the NASDAQ-100 over 5000.

Given that I consider the U.S. markets to be in the 5th wave of an Elliott Wave bull market, those targets are using a Wave 5 = Wave 1 relationship, point basis. I think those targets are conservative on the Dow and S&P given that, for the calculations, I assumed that Wave 1 ended in April 2010 (as opposed to the significantly higher high in May 2011). The reason I used the 2010 terminus across the board was that I am using the NASDAQ-100 for my primary Elliott Wave count, and for that index, I consider Wave 1 to have ended in 2010 instead of 2011.

For the calculations, I assumed that Wave 5 began at the Feb. 2016 lows.


I last commented on gold in November 2014. At that time, I thought that a major rally was imminent, within a secular bear market. It turns out my timing was off as gold drifted lower for another year. However, gold did begin a sustained rally in late-2015 which is still underway. Below is a chart of the SPDR Gold Trust (GLD).gold july 11 2016

I still think that gold is in a secular bear market, due both to Elliott Wave theory and economic/market factors. Gold had a pretty clear 5-wave pattern down from the 2011 peak to the 2015 low. Elliott Wave theory does not expect a stand-alone five wave decline to complete a bear market. Thus, it makes sense to look at the current rally as a B-wave. As for how high this rally will go, I have the 50% retracement level as well as the Fibonacci  38.2% and 61.8% levels labeled on the chart above. Gold is only 2.8% below the 38.2% target now.

I think the dramatic gold surge from 2008-2011 was driven by investors seeking protection from hyperinflation, which many thought was imminent due to central banks across the world loosening monetary policy to unprecedented degrees. However, gold started declining as hyperinflation did not materialize, and the global economy started to stabilize.

As mentioned earlier, I think the U.S. stock market is in the 5th Wave of the current bull market. Typically, in 5th waves, the economic news is decisively positive and investor sentiment is very enthusiastic. I am not sure how much those characteristics can be manifested this time around. Nevertheless, I expect that as this 5th wave unfolds, we will at least see the current cloud of anxiety subside, and economic growth should continue firming up after having essentially flatlined in 2015. I also think that European stock markets are on the verge of entering a powerful bull market phase, so I would expect European economies to get stronger as well and rely less on monetary stimulus in the coming years. These factors will likely push gold to new lows.




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