Bucking conventional wisdom, as it is wont to do, the stock market did not begin this week with a continuation of the declines of the previous two. Rather, stock proxies opened Monday's session with strong gains and built on them as the day progressed, ending at intraday heights. The Dow Jones Industrial Average rose 2.3% to 8627.40, the S&P 500 gained 2.4% to 910.40, and the Nasdaq Composite jumped 2.8% to 1400.30 Notably, the S&P 500 rallied after briefly breaching its 50-day moving average of around 890 on Friday. This was particularly significant for those who've been
following the similarities between the post-Oct. 9 rally and the advance in 2001's fourth quarter. "Last year the S&P's decline stopped right at its 50-day moving average on Dec. 14, before rallying about 4.4% into the first week of January," observed RealMoneyPro.com contributor Charles Norton. "Friday, Dec. 13, the index found support at its 50-day moving average and has rallied, thus far." The market's advance was impressive but was marred by the absence of strong volume. Just under 1.2 billion shares were exchanged on the Big Board, where gainers led decliners 22 to 9. Similarly, a hair under 1.2 billion shares traded in Nasdaq activity, where gainers led 11 to 6. Additionally, the stock market advanced despite another surge in crude prices, which will ultimately hamper the global economy. The price of crude rose 5.8% to $30.10 per barrel, its highest level since Oct. 2, amid ongoing and intensifying unrest in Venezuela. Meanwhile, gold continued its recent ascent, rising 1.1% to $337.60 per ounce. Most participants believe the stock market will struggle to make much headway if either gold or oil is rising sharply, much less both. That was the gist of a post Monday by Jim Cramer, who mused: "If this is how the stock market reacts when gold and oil are going nuts to the upside, what will happen if they actually start going down?!?"
Cramer also speculated about the potential for a "crash in gold" if the dollar were to strengthen, and that prompted my reply in the RealMoney.com Columnist Conversation that I'd like to revive here.
fundamental backdrop is more supportive of a longer-term continuation of gold's strength and the dollar's weakness, rather than a reversal of those trends. A few months back, I bought shares in the ( TGLDX) Tocqueville Gold fund, and my only regret is not putting my money where my mouth is even sooner. I'm also still long the ( RYTPX) Rydex Tempest 500 fund as a long-term hedge against weakness in U.S. equities.
Still, a short-term setback for gold and strength for the dollar seem likely, purely on the basis of technical conditions, one reason why I still think the next few weeks are likely to be favorable for equities, with Monday perhaps being the onset of such a move.