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Seasonality is bullish for gold but bearish for stocks. The outlook for gold is confirmed by more traditional indicators and could provide one of the best trading opportunities in the next few months.
Seasonals Favor Lower Prices
SPDR S&P 500 (NYSE: SPY) gained 1.26% last week and is now up 31.71% in 2013.
Seasonals indicate the market could be due for a pullback. There are seasonal trends in almost all markets, and these indicators work with varying degrees of effectiveness. Traders should not base buy and sell decisions solely on seasonals, but they are a factor to consider.
While the idea of seasonal tendencies might not be widely followed, they can be profitable as the popular "sell in May and go away" rule often is.
The chart below shows the seasonal pattern for SPY. This indicator uses all of the available history and shows how the ETF has done, on average, on any given day. If history repeats, the year-end rally in the stock market could stall as seasonals point toward a flat market with some downside risks for the next three months.
Seasonals are known in advance, and the chart shows how closely SPY has tracked this indicator over the past three months.
A more bearish pattern can be seen in small-cap stocks. The next chart shows iShares Russell 2000 (NYSE: IWM) with the seasonal pattern for the next three months.
The broad stock market has not had a pullback of 10% or more in over a year. A pullback would be normal after an extended run, and seasonals are one indicator showing that the pullback could begin at any time.
Gold Finally Has Bullish Signals
SPDR Gold Shares (NYSE: GLD) gained 1.02% last week. The rally in GLD started right on the schedule predicted by the seasonal tendency.
Again, seasonals should not be used as the only reason to buy or sell, but GLD is deeply oversold and could be ready for a rebound. More traditional indicators like the stochastics, shown below, are also bullish on GLD.
For now, GLD remains in a long-term downtrend, and these are short-term buy signals. After a loss of more than 27% this year, a small up move could create optimism among gold bugs. If that happens, the up move could push prices toward resistance near $140, a potential gain of almost 20%. The recent low of $114.50 could serve as a tight stop-loss for traders.
This Week's News
The holiday-shortened week will include several important economic reports:
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