Investigate Before You Invest in Gold

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On Friday, stocks rallied again, ending the month of August on a high note and establishing it as the second strongest month for stocks this year. The S&P 500 closed the month with a total gain of 3.8%.

And even though volume for the first four sessions of the week was the lowest of the year, with a four-day average of just 487.3 million shares on the NYSE, Friday’s primary volume jumped to 679 million shares, which is close to average volume for the year. All 10 of the S&P’s sectors gained with technology, health care and financials leading.

Biotech stocks were strong with the iShares Nasdaq Biotechnology (IBB) up 0.9% for the day and 10.3% for the month of August. Health care ended the month with a gain of 4.5%. The yield on the 10-year U.S. Treasury note rose to 2.34%.

Personal income increased 0.2% compared with an estimated 0.3%, while personal spending fell 0.1% in July versus an expected gain of 0.1%. The Chicago PMI for August rose to 55.6 while 54.8 was expected. Finally, the Reuters/University of Michigan consumer sentiment index for August was revised upward to 82.5 versus an expected 80.2.

At Friday’s close, the Dow Jones Industrial Average gained 19 points at 17,098, the S&P 500 rose 7 points to 2,003, the Nasdaq jumped 23 points to 4,580, and the Russell 2000 led, rising 8 points to 1,174.

For the week, the Dow rose 0.6%, the S&P 500 gained 0.8%, the Nasdaq was up 0.9%, and the Russell 2000 rose 1.2%.

SPX Chart
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In August, the premium between the closing price of the S&P 500 and its 17-month moving average rose to 11.8% versus 9.3% in July. This indicates that the bull market is very much intact but also could be telling us that the S&P 500 is slightly overpriced and due for a mild correction. Note that June’s premium was the highest of the year at 12.5% and led to July’s mild correction.

With the S&P 500 at an all-time high, some have suggested that it may be time to swap some assets for gold. But we should study the reaction of gold to the stock market before making a decision — i.e., investigate before you invest.

SPX vs Gold Chart
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I decided to compare the performance of the S&P 500 and SPDR Gold Shares (GLD). By taking the monthly closings of each from the bear market of 2007-2008 to the present rather than actual daily highs and lows is, I believe, a more realistic comparison. This is admittedly not a perfect comparison since the daily highs and lows are more extreme in both directions. However, this method makes some allowance for the lack of perfect market timing.

The bear market began at the October 2007 monthly close of 1,549 (actual daily low of 1,490) and ended in March 2009 at a monthly closing of 735 (actual daily close of 667). Our method produced a total bear market decline of 53%.

There are multiple possible strategies, but we will consider just three:

1. An investor buys GLD at the October 2007 monthly close of $78.62 and holds it to the present for a gain of 58%. The S&P 500 only gained 29% during this time. In other words, gold outperformed stocks from the beginning of the 2007-2008 bear market to the present.

2. An investor buys GLD at the March 2010 close of $108.95, near the bottom of the first stock market correction, and holds until now. His gain would only be 14% compared to about 71% for stocks.

3. Since March 2009, there have been three corrections: April to July 2010, May to October 2011, and April to May 2012. If an investor attempted to trade by selling all of his stocks and buying GLD, he would have been ahead, providing of course that he had almost perfectly traded from stocks to gold and back to stocks, which is highly unlikely.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/daily-stock-market-news-gold-investigate-invest/.

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