No, equities have not found a bottom: These charts prove it

After declining over 35 per cent from the 2020 peaks, global equity markets have found a temporary base, they have mostly recouped over one-third of the total losses and in ongoing technical pullback.

As stocks pulled back over the past couple of days, traders and investors floated different theories to speculate on whether equities have found a bottom.

Two charts answer this question, and provide some valuable insights.

In the above Relative Rotation Graph, we compared equities, represented by iShares Core S&P Total US Stock Market ETF and gold rate. We compared these two components against the Vanguard Balanced Index Fund. While gold is moving higher steadily in the leading quadrant building on its relative momentum, equities are actually languishing in the weakening quadrant, with no sign of the momentum picking up.

This implies equities have not bottomed out, despite rallying from the recent lows and recouping one-third of the total losses.

This reading can also be corroborated by examining the relationship between the two asset classes, i.e., equities and gold.

The above chart shows the relative strength line (RS Line) between gold (XAUUSD) and S&P 500 index (SPX). Not only has the RS Line flattened itself over the past couple of months, but it has also broken out to reverse its declining trajectory. As a matter of confirmation, gold is set to outperform equities strongly over the coming weeks and months.

To sum up the technical view, it is safe to presume that what we are witnessing right now are nothing but sharp bear market rallies. It would make more sense to protect profits than chase stock moves on the upside.

Gold, on the other hand, offers a relatively more profitable buying opportunity in the medium term.

(Milan Vaishnav, CMT, MSTA, is a Consulting Technical Analyst and founder of Gemstone Equity Research & Advisory Services, Vadodara. He can be reached at milan.vaishnav@equityresearch.asia)