Time To Sell Stocks And Buy Gold?

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 |  Includes: DIA, GLD, QQQ, SLV, SPY
by: Damir Tokic

These are the facts about the economic forecast, as implied by the Federal Funds futures: 1) the Fed is expected to increase the short-term interest rates in January or February 2016 (see figure 1), and 2) the bearish view is currently at the worst level over the last 12 months (see figure 2).

Why should investors care?

First, there is no end in sight for the financial crisis from 2008. The Fed is unlikely to end the zero interest rate policy for the next three years, perhaps in January or February 2016. March 2016 is currently the last month traded for Federal Funds futures with implied rate of 0.56%.

Figure 1: Federal Funds Futures (100 - Price = Implied Federal Funds Rate)

Month

Price

Apr 2013

99.8525

May 2013

99.875

Jun 2013

99.875

Jul 2013

99.875

Aug 2013

99.875

Sep 2013

99.875

Oct 2013

99.875

Nov 2013

99.87

Dec 2013

99.87

Jan 2014

99.87

Feb 2014

99.87

Mar 2014

99.865

Apr 2014

99.865

May 2014

99.86

Jun 2014

99.855

Jul 2014

99.85

Aug 2014

99.84

Sep 2014

99.835

Oct 2014

99.83

Nov 2014

99.815

Dec 2014

99.805

Jan 2015

99.795

Feb 2015

99.775

Mar 2015

99.76

Apr 2015

99.745

May 2015

99.72

Jun 2015

99.71

Jul 2015

99.685

Aug 2015

99.655

Sep 2015

99.635

Oct 2015

99.61

Nov 2015

99.57

Dec 2015

99.545

Jan 2016

99.52

Feb 2016

99.47

Mar 2016

99.44

Click to enlarge

Second, the forecast keeps getting more bearish. For example, the May 2016 contract implied the Fed rate around 0.60% in June 2012 as the most optimistic and 0.30% in December 2012 as the most pessimistic in 2012. The forecast improved to 0.52% by January 2013, and consequently worsened to the current 0.28%. That is the most pessimistic figure for the May 2016 contract ever.

Figure 2: Federal Funds Futures -- May 2015 Contract

Click to enlarge image.

Click to enlarge

What is the most intriguing is that the stock market (NYSEARCA:SPY) continued to rise in 2013, apparently welcoming the Fed's "never-ending boost," while gold (NYSEARCA:GLD) nearly crashed. Time to reconsider fundamentals?

Fundamentally, given the signals embedded in Federal Funds futures, the stock market (QQQ, DIA) is front-running the eventual economic recovery by at least two years. That means it is very likely to have a deep correction, if not a crash, once the economic reality is exposed. Also, rotation out of risk-on assets in an environment on negative real interest rates, such as precious metals (NYSEARCA:SLV), is premature by at least two years.

Thus, we recommend using the rising stock market to take some profits and reallocate back to gold.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.