All Eyes Will Stay On the Fed
Last week, SPDR S&P 500 (NYSE: SPY) gained 2.75% as traders once again cheered the Fed's easy money policy. This week, monetary policy should remain in focus as Bernanke makes his semi-annual visit to Capitol Hill. During the past month, the chairman's words have sparked a sell-off (in mid-June) and a recovery (last week) in stock prices. It is unlikely he will add any new information about policy in his testimony, but his words will be scrutinized.
A 30-minute chart of SPY shows the impact Bernanke had on prices last week. A speech after the close on Wednesday, where the chairman said that monetary policy would remain "accommodative" for the "foreseeable future," pushed stocks up by more than 1% the next morning.
Stepping back to look at the weekly chart, we can see that SPY has become overbought.
However, an 8% pullback may have set the stage for a new bull run. The 2-period Relative Strength Index (RSI), a very short-term measure of market conditions, is above 90. While traders often expect a pullback after prices become overbought, testing shows that there is a greater-than-average chance of gains over the next six months.
The table below shows how SPY has performed since 2001 on average and how it performs after becoming overbought.
In the past, on average, gains are greater after the market becomes overbought as the price trend accelerates. Whether or not that will happen this time depends on the Fed.
One of the strongest index funds in the market right now is the iShares Russell Midcap Growth Index (NYSE: IWP). The Income Trader Volatility (ITV) indicator signaled a buy in IWP at the end of last week.
ITV also signaled a buy in SPY last week.
Junior Gold Miners Now 80% Below All-Time Highs
SPDR Gold Shares (NYSE: GLD) gained 5.11% last week. It's too early to tell whether this is the start of a recovery in gold prices. After large price declines, prices often spend weeks forming a consolidation pattern that serves as a bottom.
In the precious metals sector, junior mining companies have suffered the most. Junior miners are generally exploration companies working to find gold rather than operating mines. Many junior miners have little, if any, revenue. In a bull market they can be among the biggest winners, but in bear markets they are likely to lose more than companies that have revenue.
An 80% decline is rarely seen. Homebuilder stocks offer a recent example of this kind of decline, and they remain significantly below their highs more than four years after bottoming.
I say all of this to illustrate the fact that miners are not a buy simply because they have fallen and are oversold. Many individual companies are likely to fail at this point. Company financials will have a greater impact on their survival than gold prices will.
Gold does look set to rally, at least briefly, and iShares Silver Trust (NYSE: SLV) appears to be the most interesting trade in the metals sector.
SLV could rally significantly as it has done in the past when a bullish divergence in the Bollinger Percent B indictor develops. This divergence forms when prices make a lower low but the indicator does not.
This article originally appeared on ProfitableTrading.com:
Market Outlook: 2 Index Funds and This Metal Are on Buy Signals