With the broad equity markets finally showing signs of life, there appears to be little that the mainstream business media would like to discuss other than the perennial chase for economic recovery. Reuters flashed the headline “Wall St. closes up, registers third week of gains” — as if to justify optimism by emphasizing the mathematically obvious. Yes, the Dow Jones Industrial Average is up nearly 8.5% since bottoming on August 24 during this year’s mini-global panic. But the question is, does it have the firepower to sustain the rally?
There are some indications that the markets are favoring the equity apologists. Shares of General Electric Co. (NYSE:GE) gained 3.4% following a better than expected earnings performance last Friday, resulting in a $29.98 share price that is a multi-year record. On the other end of the industrial scale was popular toymaker Mattel, Inc. (NASDAQ:MAT), which jumped 6% in the markets to close 11 cents under $24 — making it the biggest percentage-move leader for the day in the benchmark S&P 500 index. What made Mattel’s robust gain all the more impressive was that it occurred after an earnings miss.
Despite the optimism inherent in the aforementioned numbers, it still doesn’t tell us a whole lot about the underlying economy. Both GE and MAT are largely secular companies — problems in the economy won’t stop people’s dependence on energy and parents will always strive to buy toys for their children, albeit at a reduced magnitude (hence MAT’s earnings miss). More instructive is the devastating pre-earnings revision by Wal-Mart Stores, Inc. (NYSE:WMT), which clearly shows the real impact of the current recession that few in Washington, D.C. will acknowledge.
But the real sign that something is up could very well be the silver bullion market. For the month of October, silver is up nearly 11% even though it took a bit of a tumble on Friday. This is a 25% difference in magnitude in favor of silver, yet the velocity is also more than twice greater than that of the Dow Jones. In scientific terms, silver handily beats the Dow in both time and space — funny then, that the mainstream has virtually ignored this meteoric rise.
Technically, silver is currently positioned better than the Dow in several key metrics. First, silver’s spot price places it above its 50 and 200 day moving averages. In contrast, the Dow is sandwiched between the 50 DMA below and the 200 DMA above. Second, although the difference between the two moving averages for the Dow is a tighter spread than in the silver market, it’s increasing in distance for the equity index despite those three weeks of gains. On the other hand, silver’s moving average gap is steadily narrowing — a positive sign of increasing momentum and sentiment.
It’s important to note that the equity markets still haven’t broken out of their bearish consolidation phase — year-to-date, the Dow is still below break-even. This means it’s in a desperate fight to stay alive. For silver, the opposite is true — it just needs to show up to secure victory.