All aspects of the market could be on the verge of a major shakeup, and the greenback is the ultimate decision-maker here.
Things aren't quite the way they're "supposed to be" for the market, but odds are good that will change sooner than later. Namely, stocks are rising, but bonds as well as commodities -- especially gold -- are rising as well. Generally speaking one or two should always be rising at the expense of the other one or two of those asset categories. As was noted though, things should be changing soon.
The chart below tells the tale. In March and for the better part of April it looked like stocks were setting up a pullback... some "Sell in May" action. In fact, gold as well as bonds both started to rally then in anticipation of a flow of money from equities to at least one of the other two categories. A funny thing happened en route to a pullback from stocks, however. That is, the market never got there. For a myriad of reasons, traders turned bullish again at a point in time when they arguably shouldn't have. Gold and bonds both turned tail and started to move lower again.
Take a closer look at the last few days of the chart though. While stocks have been rising, so too have gold and bonds. This shouldn't be the case. Theoretically, bonds and gold should be drifting lower.
What's this telling us? More than anything else it quietly suggests traders don't actually have a lot of faith in the present rally from stocks, believing it's at best not going to move much higher, and at worst, end with the sizable pullback that didn't pan out in late April and early May.
Still, the sequencing may not be what you'd expect. That is to say, gold and bonds may not rally in response to a breakdown from equities. Rather, equities could end up breaking down in response to a firmly bullish move from gold. Either way, the line in the sand for gold is pretty well established.
The daily chart of gold futures isn't a tough one to interpret. Gold has moved above all of its key moving average lines as of last week, and this week appears to have found support at their convergence. The big hurdle from here is the Fibonacci retracement line at $1268.80.
If gold can clear that hurdle at $1268.80, it's home-free. A move above that mark would not only spark another bullish leg for gold, but would likely serve as convincing signal to all the recent stock bulls that somebody is clearly playing defense and it would be wise to lock in gains on equities sooner than later.
This is all largely a function of the dollar, of course. Though its freefall from last week has been slowed, it's hardly been stopped. In that gold is priced in U.S. dollars, when the greenback falls, gold rises. In turn, when gold rises, it can and often does siphon money away from other categories like stocks or bonds. While bonds are certainly not bulletproof here (with rate hikes in the works), stocks are even more vulnerable to profit-taking. Indeed, traders have already acknowledged they just don't see a lot of upside for stocks from here.
Should the U.S. Dollar Index break below the low of 96.8 hit earlier this week, that could be game-over for the dollar, and game-on for gold. In turn, that could start the profit-taking avalanche for stocks.
These are all big "ifs," of course. They're "ifs" worth keeping a close eye on though.