Silver and gold say global growth (still) stinks

San Francisco (Nov 7)  Intermarket analysis is a branch of technical analysis which attempts to see if a consistent message is being said across and within asset classes and sector movement. Generally speaking, from a broad macro perspective, markets move largely off of growth and inflation expectations which drive earnings potential and industrial activity. Analyzing various markets at once can also help investors and traders potentially identify regime changes when it comes to market volatility, something documented in the summary version of our Dow Award winning paper.

With that said, the world finds itself in a bit of a bizarre situation. The Federal Reserve, arguably the biggest and baddest central bank in the world, has ended quantitative easing (QE) and is hoping to soon raise interest rates. On the surface, this might seem like the thing global investors are waiting for given how important U.S. economic growth is to the global landscape. Against that backdrop are the central banks of Japan and Europe, which are trying to figure out how to inject even more stimulus into their respective economies.

This seems bullish, but is only positive if such stimulus filters through to their economies instead of just their stocks. If central banks are destined to succeed at juicing growth and inflation expectations, one should expect cyclical sectors to perform well.

The industrials sector, for example, would likely become an overweight position in our equity sector ATAC Beta Rotation Fund BROTX, -0.41%  when our risk trigger gives the all-clear to rotate out of defensive areas because of the market responding to better growth and inflation prospects. But for that sector to sustainably lead, there needs to be a feeling that global growth starts picking up.

One way of seeing the market's perception for that growth is to look at silver and gold relative to each other. Silver is often considered "poor man's gold," given that trend-wise, it acts similarly to gold. The main difference between the two, however, relates to Silver's sensitivity to industrial activity relative to gold which does not have as many commercial uses.

Take a look below at the price ratio of the iShares Silver Trust ETF SLV, +1.53%  relative to the SPDR Gold Trust ETF GLD, +2.21% As a reminder, a rising price ratio means the numerator/SLV is outperforming (up more/down less) the denominator/GLD. A falling ratio means underperformance.

While gold's price action has been weak, silver has been even weaker, as the far right of the ratio chart shows. This indicates that despite tremendous monetary action, industrial activity is still a bearish trade, regardless of central-bank actions. If global growth improves, the silver/gold ratio likely rises. However, the continued decline suggests that things may continue to worsen for global activity. U.S. stocks continue to ignore that, but at some point, that message may filter to equities more broadly.

In a globalized world, how exactly can the U.S. decouple forever from weakness in most other areas of the global investable landscape?

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Source: MarketWatch