Over the past month I’ve opened up my playbook on some of the key charts, ratios and underlying triggers that are painting the picture for the upcoming rally in precious metals. While precious metals are always on my tactical trading screens, one must monitor the performance of U.S. equities and since the low on March 23rd I believe that they have run their course. The Federal Reserve and U.S. Treasury Department has done everything in their power to help back stop the economy, essentially creating trillions of dollars out of thin air and further prolonging the life of many zombie companies. Therefore, I believe that the S&P 500 is masked by the strength of a handful of names that once they are exposed to their weaknesses, we should see a precipitous fall in the S&P/Gold ratio.
While every situation might be different and many of you will proudly voice your opinions (virus vs. financial crisis, manipulators vs. short sellers) I come from an upbringing that works on the premise that history always repeats itself and there is nothing new on Wall Street. With so many business, industries and sectors negatively affected by the virus, I had to dig under the hood of the S&P 500 to see what kind of engine I am dealing with. What I had found is that five names account for more than 20% of the S&P’s market capitalization. These names are Amazon, Apple, Facebook, Google and Microsoft. I want to be clear that I have no problems with any of these companies and often use their products on a daily basis however the MARKET CONCENTRATION is higher today than at the height of the DOT COM Bubble. During that time Cisco, General Electric, Intel, Microsoft and Walmart accounted for 18.5% of the S&P market capitalization.
Remember that equity markets are their strongest when a broad range of companies show strength together and are at their weakest when it is just a concentrated few. The market feels like cracks are starting to form in the dam and once breached the flight out of equities and into the safety of gold should crash this ratio back to a 1:1 ratio like what we saw from early 2009 until 2013.
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From a trading perspective we have been using multiple strategies to try and take advantage of the expected long term price appreciation in the precious metals markets as well as the decline in U.S. equities. If you are unfamiliar with strategies involving futures or options, we at Blue Line Futures are here to help.
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Feel free to reach out to Phil with any questions or comments! Call/Text/Emal: 312-858-7303 / Phil@BlueLineFutures.Com
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