In 1947, this indicator started to rise… and the stock market jumped 265% over the following 18 years.
In 1983, this indicator started to rise again… and the stock market rallied 360% over the following 18 years.
In 2011, the indicator started its latest rise. The market has gained 95% since then.
If history is a guide, the market still has plenty of room left to run.
What’s the indicator?
Debt.
Each of the rallies I mentioned above was spurred by people borrowing money.
That might sound counterintuitive to most people… But as debt rises, so does the stock market.
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When people take out loans or use credit cards, their debt makes its way into the economy as new spending.
This new spending increases companies’ profits. And those profits boost stock prices.
On the other hand, when people pay down debt, they stop spending. Business profits decline. And fewer dollars are available to invest.
Let me show you…
Borrowing Is Good for the Stock Market
The chart below compares the consumer credit-to-GDP ratio to the inflation-adjusted Dow Jones Index.
As you can see, when people borrow more, the market goes up (the shaded green areas).
Conversely, when people borrow less, the market drops. The last two major bear markets (from 1965–81 and 2000–09) coincided with lower debt levels.
As long as debt continues to grow, the stock market should rise along with it. And as the chart shows, we’re seeing increasing debt.
At the Daily, we’ll keep a close eye on this indicator. If it turns, that’s a warning sign for the market.
But until then, continue buying stocks.
Regards,
Nick Rokke, CFA
Analyst, The Palm Beach Daily
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CHART WATCH
Gold Sector Fake-Out?
By Jeff Clark, editor, Delta Report
If we’ve learned anything over the past few months, it’s that the market will do what it needs to in order to frustrate the most participants.
Last Friday, that meant knocking the legs out from under the gold bulls.
The chart below shows the GDX/gold ratio.
Gold stocks perform best when this chart is moving higher.
That’s why the breakout from two weeks ago held such promise. After consolidating for three months, it sure looked like the gold sector was ready to bust higher.
But the breakout turned into a “fake-out.” The line is back inside the consolidating triangle. It’s testing the support line of the pattern.
This is where the gold sector has to make a stand. If this line can bounce from here and recover much of Friday’s decline, then we’ll be back in bull mode.
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But if this line breaks to the downside instead, then it’s going to take a few weeks of back-and-forth, choppy action before the gold sector sets up for another rally attempt.
I prefer to err on the side of caution. So I’d advise to wait another day or two and see how this chart plays out before adding more gold stock exposure.
—Jeff Clark
P.S. If you’d like to receive my free daily market insights, Jeff Clark’s Market Minute, click here and I’ll automatically add you to my list. You’ll also receive a link to my “Guide to Option Trading” just for signing up. This free report will teach you how to trade options the right way… and dramatically boost your overall returns.
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