By Bryan Rich
July 18, 2016, 4:00pm EST
We left off last week taking a look at some key charts to watch. U.S. stocks closed just off of record highs, after printing five consecutive new record highs during the week. The last time that happened, in 1998, the S&P 500 went on to climb 50% over the next two years.
While U.S. stocks have technically broken out, both Japanese and German stocks look poised to follow. Japanese stocks were closed overnight for holiday, but open tonight positioned to break the year’s downtrend. And German stocks are quickly approaching the breakout of a declining trend too.
As we’ve discussed, stock performance in this environment is huge for preserving and/or building confidence. And the U.S. stock market is the global barometer for sentiment.
With that, if we look at the VIX (where uncertainty is most clearly expressed by market participants), that measure is looking tame — only three weeks following the big Brexit vote. And given the events in Turkey over the weekend, and the escalating global terrorism, the VIX (or the fear in markets) appears to be driven mainly, at this stage, by the prospects for financial crisis. Which is now pricing in little concern.
Lower fear and uncertainty doesn’t bode well for the gold rebound. You can see in the chart below, gold trades into the top of this declining trend channel. If Japanese and German stocks break out of the downtrend (i.e. bullish), gold will stay IN the downtrend (i.e. bearish).
The European Central Bank meets this week. Given that the UK’s central bank took a pass on more action last week, and given the ECB has already upped the ante on monetary stimulus earlier this year, we should expect Draghi and company to stand pat. But remember, the positive that may come from the Brexit vote is that it may finally get the politicians off of their hands on fiscal stimulus. It’s already brewing in Japan.
With Draghi taking the stage on Thursday for his post-meeting press conference, it would not be surprising for him to focus on the need for fiscal stimulus in Europe. Europe’s biggest threat is the anti-EU sentiment. Big spending packages in Europe could be the antidote.
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