Stocks Bullish, Gold Range-Bound

But US rates are not going to shoot up, despite the improving data...

 

WAYNE KAUFMAN is chief market analyst at Rockwell Securities. Here he talks to Mike Norman at Hard Assets Investor about the outlook for gold prices amid better global growth...

 

Hard Assets Investor: Half the year is now gone. We saw negative prints in GDP, gold positive, and some improvement in China, with copper prices perking up a little. What do you make of all this?

 

Wayne Kaufman: I think it's a slowly improving economy, certainly here in the States. China is doing better. And it has been a surprise. I was not expecting second quarter to be quite as strong for the equities markets. I've been expecting a real strong fourth quarter for the year, good first quarter, kind of flat second and third, real strong fourth, but we had this very strong second quarter. And when we have a first half of the year that is this strong, it does foreshadow a strong finish to the year, so I'm expecting the market to remain good.

 

HAI: Particularly curious in light of the fact that the US economy has been weak, with a negative 3% GDP in the first quarter. Yet stocks continue higher.

 

Wayne Kaufman: Yes, there is tremendous momentum. There have been a lot of statistics, like a tremendous amount, over 40 days in a row where the S&P didn't move greater than 1%. Very low volatility of that type also forecasts strength in the future. The No.1 characteristic of this market though, to a pure technician, has been the lack of sellers. Any time we've seen the pullback it's been because the buyers have gotten a little tired. We haven't seen any type of aggressive selling.

 

HAI: How do you measure that? Is that looking at volume?

 

Wayne Kaufman: The classic way of doing it is exactly what you said. When you get overbought and you start to pull back, if it's on lighter volume, then you see that there are no aggressive sellers. I keep a couple of other statistics, mostly stocks making four-week closing-price lows and 13-week closing-price lows, and I do 10-day averages of those, and these are very, very, very low levels, so there are just no real sellers. 

 

And it's not just a US phenomenon. We're seeing around the world that there just aren't sellers. So the concept that if investors around the world are not interested in selling, why would all of a sudden it happen here independent of that? So the odds are saying it's not going to happen.

 

HAI: A lot of people are saying this is just a big bubble. In my opinion it looks like the classic wall of worry that we're climbing.

 

Wayne Kaufman: I think you've got it right on the button. Valuations...why aren't we seeing sellers? Because on a historical basis, valuations are excellent. A lot of people are talking about price-to-sales being at high levels, and I look at all that stuff, but the most important thing to me is valuations based on the spread between bond yields and equity yields, and that spread has been going sideways if you chart it for a year and a half, so it's in a very, very stable range. 

 

So unless we see a big spike up in yields along with a lack of an increase in aggregate S&P earnings, then we're going to stay in that range, maybe we level off for a little while, earnings season is coming, so that will tell. And aggregate earnings estimates are moving up, so they're not even stagnating at this point; they're moving higher.

 

HAI: So valuations actually get better...

 

Wayne Kaufman: They get better or they will stay the same even if yields move up, but on a historical basis, they're still ultra-attractive. And going back to years before the crisis, we could be at 4% on the 10-year note and we would still be okay on historical valuations. 

 

So then what am I looking for? Well, a spike in interest rates on a short-term basis might hurt. We got over resistance at 2.6% on the 10-year note, 2.8% and a fraction is next resistance, a fast spike. That might shake some people up temporarily.

 

But will rates rise sharply? We've seen great jobs numbers and other good economic statistics. But I don't think it shoots up. The other thing would be a price in the spike of oil – $110 to $113 a barrel; that's a pretty key resistance level. It's possible we do go above it. It's how we go above it. And the fact is with the US doing so much of our own energy now, those prices benefit a lot of the companies and a lot of the workers here. So, it's a balancing act and we have to watch for sector rotation.

 

HAI: But the Obama administration just approved exporting our oil for the first time in 40 years. We hear a lot about energy independence and yet we want to sell it off. Does that make any sense?

 

Wayne Kaufman: Well, it might as long as you're not driving up the price too much over here. That's going to be an interesting thing, because there's a bunch of dynamics there, the quality of the oil, how it's able to be used by our refiners. Our refiners are now having to retool in order to use a lot of the fracking oil, because some of it has very high content of natural gas in it and it's catching fire, so they are finding they need to... it may be better to be exported. 

 

HAI: So now to sum it up, I guess, and it seems to me given the complacency that you mentioned, and low volatility, which I guess is a reflection of the complacency, and the fact that valuations are good and the fact that the economy, we had a bad first quarter, but we could come back, China looks like it might be getting a little bit better, some indications there, we could possibly really start to take off in the second half, and don't you think that would include many commodities and materials?

 

Wayne Kaufman: Great point, commodities and materials. We have just started to see money now flowing into them. Some of the bigger names like Freeport McMoRan, and copper and gold, that stock all of a sudden has started to move up, some of the other ones are starting to get...and gold you mentioned going sideways, I think that's accurate. Gold looks like it wants to trade just in that range, $1200 to $1400. I think the bottom is in, but it needs to really break $1400 to give a real bullish signal.

 

HAI: Always great perspective. Thank you, Wayne.