Markets getting back to normal??

Gold prices are now rising relative to every currency and commodity. Gold is expensive in terms of energy, metals and other major currency. With the last elliott wave count in gold giving out the possibility that gold prices are entering a period of weakness and may test $700. However, in the short term it has completed a corrective pattern and is set to rise. I would update the count itself in the next post.

Now it looks like the money that has been thrown into the world markets by all central banks is doing a great good to the commodity markets. All currencies are falling relative to commodity markets especially the metals and precious metals indices. This is good news for the central bankers. The bad news is that stock markets are losing steam and some technical studies are turning bearish. But they have not given a clear sell as yet. Take a look at the following graphs -

Gold
Gold prices have come out of a strong flag pattern. The price study shows strong rise in volatility and with the trend up we can see gold benefiting strongly to the upside if stocks break down. With USD weakening, gold is getting the benefit.

S&P 500

Time and again I have seen seeming double top turn to double bottom. So wait for SPX to break below 875 to confirm a sell. But be cautious. Bands are signalling a sell.

Various other indices have given strong divergence. One important case in point is the US homebuilders ETF. It is forming a H&S on the neckline of an inverted H&S which will give an above average move is it breaks down.

XHB - Homebuilders ETF

Various risk gauge are turning positive. In the last one year there has been a serious discrepancy in the movement of certain markets in relation to the other. The USD and gold were moving in tandem, bond and stocks very moving opposite, USD and stocks were moving in opposite direction. These long term correlations were exact inverse of what they are in a normal market scenario. This was primarily due to the deflation expectation in the market. See this article from Marketwatch

A number of indicators are now showing that markets are getting out of this expectation and deflation expectation is actually abating. Certain markets like gold, metals and energy have started pricing in some inflationary expectation. This sounds very comforting but with rising unemployment and thawed consumer debt market, this could well turn out to be another nightmare.

The scenario that can now playout is a strong rally in commodities can lead to a rise in inflation. If this is combined with some money into the hands of consumer it could well buy some more time for debt implosion. Still its a mess that Central bankers have chosen to get into. If this fails then deflation spiral would be deep and would take years to go away. Markets are signalling some expectation of things improving but a reversal in stock prices would be the key to watch.

It is quite dramatic to observe the socio economic patterns as they turn out. The latest rally in stocks is actually helping companies to raise money, debt. It is not the other way round. So if stock prices fall again it would be just the test that is required to gauge the strength of economic improvement being witnessed. Bull markets don't emerge when we do less badly, they emerge when we can't do anything.

May would be interesting.

Comments are welcome.