After declining over 35% from the 2020 peaks, the global equity markets found a temporary base, and, in the current technical pullback, have recouped over one-third of total losses. Traders and investors alike have formed differing opinions on whether the equities have bottomed out as they pulled back over the past couple of days. The following two charts answer this question and also provides some additional insights.
In the above Relative Rotation Graph, we compare equities, represented by iShares Core S&P Total US Stock Market ETF (Symbol: ITOT) and Gold. We compare these two components against the Vanguard Balanced Index Fund (Symbol: VBINX). While the Gold is moving steadily higher in the leading quadrant while building on its relative momentum, the equities are seen languishing in the weakening quadrant with no signs of any momentum picking up. This implies that the equities have not bottomed out, despite rallying from the recent lows and recouping one-third of total losses.
This reading is also corroborated by examining the relationship between these equities and Gold:
The above chart shows the Relative Strength Line (RS Line) between Gold (XAUUSD) and the S&P 500 Index (SPX). Not only the RS Line has flattened itself over the past couple of months, but it has broken out to reverse its declining trajectory. As a matter of confirmation, GOLD is set to outperform the equities strongly over the coming weeks and months.
To sum up the technical view, it is safe to presume that what we are witnessing right now is nothing but a sharp bear market rally. It would make more sense protecting profits than chasing the moves on the upside. Gold, on the other hand, offers a relatively more profitable buying opportunity in the intermediate-term.
Milan Vaishnav, CMT, MSTA
Consulting Technical Analyst,
