Sunday, December 26, 2010

MTU Weekend Ed. - Multi-asset Outlook II (12/23/10 Close)

Multi-Asset Outlook (12/10/10) gives a summary assessment of a number of markets priced in USD based on each market’s own wave structure. The week’s analysis offers a perspective on relative performance in 2011.

A key dynamic that allows us to make interesting inferences is gold priced in stocks. Chart 1 shows a 15-year history of the ratio of Dow to Gold. From a EWP perspective, a decade-long five wave decline in the INDU/GOLD ratio ended at its 2009 low of 7.03. A multi-year rebound has been in progress since then, with a likely target around 15 to 20.

Regarding the wave structure of the proposed rebound, we now have enough waves in place to venture an educated guess – a regular upward flat or a double zigzag for the initial rebound. There have already been some nice fib relationships since the 2009 low (Chart 2). C of (A) is around 0.618 of A of (A), C of (B) is 1.382 of A of (B) and (B)-down is 0.726 of (A)-up.

If the larger wave count is correct, stocks are likely to outperform gold meaningfully in 2011, with the dollar and bonds being directional (see below).

In a reflationary/inflationary bull market, stocks could turn out to be a better hedge than gold. The dollar is likely to underperform both stocks and gold. In addition, the young bear market in bonds likely continues.

In a deflationary bear market, gold could fall faster than stocks. The major beneficiary is likely the dollar, outperforming both stocks and gold. Bonds are likely to rally, at least initially in the form of a wave 2 of (3) retrace even if the assessment that a multi-decade bear market in bonds already being in progress is correct (see The Bond Mania (8/20/10)).