The Spike In Gold Is Not a Good Sign for the Stock Market

Gold gaining ground today has nothing to do with rising inflation expectations. On the contrary, it is quite the opposite. Spain’s 10 year  yield is climbing again. Swiss, German and U.S. Treasuries are rallying. There is only one explanation behind the rally in $GLD – it is currently playing the role of a “safe” asset in a “risk-off” environment.

The U.S. stock market is oversold on various measures, which doesn’t mean that it can’t become more oversold as nothing brings fear as fast declining prices. The silver lining of this correction is that we are entering earnings season with reduced expectations, which has usually been a good predisposition for positive surprises.

Even if there is a short-term bounce coming, we have entered a period of choppiness, where mean-reversion trades are likely to work better than breakouts.

$GLD rallying with $TLT is bearish for stocks. Once you see gold selling off along with the equity market, then we would be much closer to a “forced liquidation” period, which has historically provided great entries for long-term investors.

JPMorgan ($JPM) and Wells Fargo($WFC) report this Friday and the reaction to their earnings will reveal a lot about the near-term future of the stock market.