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Recent messages showing the ongoing bull market in gold (and its miners) have stressed that a weaker dollar and historically low global interest rates have pushed the price of gold to the highest level in nearly nine years. Yesterday's message showed gold rising faster than the world's major foreign currencies which is another sign of strength for the yellow metal. All of those messages have noted that investors may also be favoring gold as a hedge against an uncertain stock market environment in the face of the COVID-19 pandemic. We'll deal with the changing relationship between gold and stocks in this message.

Chart 1 plots a relative strength ratio of the price of gold divided by the Dow Industrials over the last fifty years. [Because of its long history, the Dow is usually used in comparisons to the gold market.] The chart shows the rising ratio favoring gold during the hyper-inflationary 1970s when gold and other commodities soared; and a falling ratio during the two-decade long bull market in stocks between 1980 and 2000 which favored stocks over gold. The rising ratio between 2000 and 2008 swung back in favor of gold as the commodity rose during the so-called lost decade for stocks which included two major bear markets. The gold/Dow ratio peaked in 2011 and fell for the next seven years during the decade-long bull market in stocks. The bottom right of the chart, however, shows the ratio starting to rise over the last two years (see circle) which suggests that the long-term relationship between the two markets may be shifting back in favor of gold.

Chart 1

Chart 2 plots the same gold/Dow ratio over the last decade. It shows the ratio peaking during 2011 (along with price of gold) and falling until the second half of 2018. The rising ratio broke the major downtrend line near the end of 2018 and rose from the fourth quarter of that year until March of this year as gold rose faster than stocks. That period includes the sharp drop in stock prices during the fourth quarter of 2018 and the first quarter of this year. The ratio dipped again during the second quarter of this year as stock prices rose sharply. The flat horizontal line shows the ratio stalling near its early 2016 peak before pulling back. The overall look of the chart suggests that the gold/Dow ratio may be bottoming. And may suggest why investors are using the current pullback in the ratio to do some prospecting for gold. And its miners.

Chart 2

One of my recent charts showed gold miners rising faster than the metal itself which is normal during uptrends. Their stronger performance is also reflected in our next chart. The monthly bars in Chart 3 plot a ratio of the VanEck Vectors Gold Miners ETF (GDX) divided by the S&P 500. The chart shows two notable bottoms formed in the ratio between 2015 and 2018 following a four-year decline starting in 2011 when gold peaked. The ratio also reached a four-year high this month reflecting outperformance over the S&P 500. The ratio still needs to clear its 2016 peak to confirm that a bottom has been formed in the ratio. But the overall shape of the chart suggests a bottom is being formed. Which is more supporting evidence that investors are turning to gold assets as a hedge against the uncertainties of stocks in the midst of the global pandemic.

Chart 3

Editor's Note: This is an article that was originally published in John Murphy's Market Message on Friday, July 10th at 12:24pm ET.

I've received many questions recently on stocks experiencing overbought conditions, from stocks like Activision Blizzard (ATVI), which recently broke above RSI 70, to Amazon (AMZN), which has an RSI that has breached 80.

What does it mean to be overbought? Is that a sell signal? What do I look for next? Let's review some charts together.

ATVI is a great example of what I would call a plain vanilla overbought situation. The RSI has just creeped above 70, similar to what happened in September 2019 and May 2020. In both cases, the stock pulled back in the subsequent 2-3 weeks.

But note that the overall trend on Activision has been overwhelmingly positive. Even though the RSI overbought condition suggested a short-term top, both pullbacks then resolved higher as the price achieved new highs soon after.

What's key on the ATVI chart is how low the RSI reached after the overbought conditions. Note that, on pullbacks in price, the RSI never really got below the 40 level. This is a classic formation for a bull market phase, where the stock becomes overbought in upswings and never gets to the oversold level on pullbacks.

So, if and when Activision pulls back here and the RSI breaks back below 70, I would expect at least a brief pullback, and I would note where the RSI reaches as the price retraces.

With Amazon (AMZN), we have a different situation, as the RSI has become extremely overbought and is currently above 80.

When the RSI goes above 80 in an uptrend, I tend to call that a "good overbought," as the upside momentum is so strong that, even though you'd expect a brief pullback, I usually assume we'll see at least one more push higher. What's key here is what the RSI does on that next push higher, as it will often achieve a lower peak and form what's called a bearish divergence with price.

For examples of this, see the AMZN chart in February 2020 and April 2020, both of which saw the price achieve a higher close while the RSI sloped downwards. This suggested a weakening of momentum on the secondary rally and indicated an exhaustion of the uptrend.

Finally, we get to Tesla (TSLA) and a chart that truly defies expectations.

TSLA has become extremely overbought, with an RSI almost reaching the extremely uncommon 90 level. With a chart like this, I tend to switch to trend-following mode and assume the trend is higher until proven otherwise.

At some point, the price will retrace to some degree. Once that happens, we can see how the RSI evolves during a pullback. Until that time, you have to acknowledge that stocks can become overbought and remain overbought for extended periods of time. Oct 2019-Feb 2020 are a perfect illustration of this phenomenon.

So here we have three stocks in various degrees of overbought conditions. My first suggestion is to remember that becoming overbought is not a bad thing. "Overbought means up a lot" - and, overall, that is good! Warning signs should emerge when the RSI exits the overbought region, especially when a subsequent upswing in price is met with a lower upswing in RSI.

Until then, the trends remain positive.

RR#6,

Dave

David Keller, CMT

Chief Market Strategist

StockCharts.com

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

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