The chart says it all. I graphed the inflation-adjusted S&P 500, using January 1991 = 0 as the base. Data courtesy of Robert Shiller (available for download here).
If the descending triple-top does not speak for itself, also bear in mind that the level of the S&P 500 is being deflated by the government-reported CPI, which is calculated with all those wacky hedonic adjustments, so the extent to which equity valuations have failed to keep up with inflation is actually understated by the graph. After inflation, the buy-and-hold investor has a portfolio that’s equal to its 1997 value.
I’m always interested in how markets react to technical indicators. In previous posts (July 14 and January 8), I’ve described how, in this bull cycle, equity markets have displayed a tendency to react to classic “sell” indicators — as well as all negative news — with a bit of a lag, which is probably due to markets being a little juiced up on loose Fed policy.
Based on today’s price action, I’m wondering if the price of gold is overdue to react to its triple top from late 2010 through early 2011. Take a look at the GLD SPDR Gold Trust ETF over the past 6 months:
I’d say gold looks pretty triple-toppy between early November and early January. But investors forgive Gold’s neckline piercing as just a one night stand with risk — at least this time — and the bullish trend immediately resumes.
In the last 10 days, gold prices formed another almost/kind of-triple top, maybe a sloppy one, but failed to pierce the proverbial neckline (not yet, anyway — notice how investors knew right where the support level was today):
The point is that gold keeps flirting with a classic predictor of a correction, but shrugged it off earlier in 2011, similar to the way equity markets tried to do — at least for awhile. What many investors want to know is, does the recent price action suggest a good entry point for investors looking to initiate or add to long-term positions?
A 1-year chart of gold shows that it’s displayed a tendency to bounce off of previous lows and move sharply higher:
If gold bounces off previous support as it has done recently, $1,270-$1,280-ish looks like a safe entry point range for starting or adding to long-term positions. Keep an eye on short-term technicals to see if it will correct that low, however — markets have done a great job of shrugging off bad news in the last 2 years, and it’s not out of the question that we’ll rally on Friday off of Thursday’s price declines. If that happens, I recommend being patient and letting gold prices come back to you, just a little more at least.
One final point: it’s interesting to note that a price decline from recent highs would be pretty much right on the mark for a classic minimum correction threshold of -10%. I’d be a long-term buyer in the $1,270-$1,280 range.
Disclosure: Long GLD.