How Long Can The S&P 500, Precious Metals and Bonds Rally?

In the fine print of most investment advertisements or in the softly spoken disclaimer at the end of a commercial, we generally read or hear the phrase “past results are not indicative of future performance”. While those exact words may not be written or uttered, something along those lines is found on almost any piece of investment literature or in investment product commercials.

In the 2nd half of 2009 all the way through 2010 a variety of asset classes performed quite well.

Investors who purchased stocks, gold or silver, and bonds anytime in 2009 were handsomely rewarded in 2010 if they held their positions. How long will these assets continue to perform well? How long can gold pump out double digit returns before suffering a bad year? How high can stocks climb when uncertainty seemingly surrounds the marketplace? Price action is never wrong, but history reminds us that a particular asset class does not outperform all other asset classes consistently over long periods of time. Trees do not grow to the sky.

Since 2009 stocks, precious metals, and bonds have all had tremendous performance records. Most economists point to actions by the Federal Reserve as the primary reason because these interventions lowered interest rates to extremely low levels which caused investors to take more risk for better returns. High levels of liquidity paired with low interest rates moved nearly every asset class higher, with stocks and precious metals earning outstanding year over year returns.

With 2011 just starting, will stocks, bonds, and precious metals continue rallying? When looking at probabilities and statistics the odds are not favorable that all 3 asset classes will remain outstanding investments. In fact, it is possible and arguably likely that at least one of the asset classes if not more than one will face headwinds in 2011 and beyond. While Tuesday was only the second day of 2011, precious metals are under significant pressure and the fundamental picture for bonds and stocks is uncertain.

S&P 500

The Stock Market is overbought currently on nearly every time frame. Some pundits are calling for another outstanding year while others believe a correction is likely to unfold. I for one am totally unsure about the future, but what I am certain of is that I would be cautious at this current juncture in time. I would not be afraid to take profits and adjust stops to protect my trading and investment capital at these levels. Risk seems excruciatingly high and when we look at a longer term chart of the S&P 500 it is rather easy to surmise that a pullback may take place.

Precious Metals

If price action yesterday is any indication of what may be in store for gold and silver investors a nasty correction or pullback may be likely. I have been warning about the possibility of such an event and as usual have received countless emails and even some veiled threats. Gold may go up for years, but most assets do not trade straight up. Price ebbs and flows with the marketplace and buyers and sellers come together in the process of price discovery.

If this is the start of a correction in gold, a potentially outstanding purchasing opportunity is possible for patient traders and investors. While the gold bugs fill up my email inbox with hate mail, I wait patiently to enter at lower prices while they remain in denial. The daily charts of gold and silver futures below illustrate key support levels which would likely offer solid risk / reward entries.

Bonds

For most traders and investors that started their careers in the 1980′s, they have witnessed a bull market in bonds as yields went from double digits to the lowest interest rates in history over the past 20-30 years. New all time records could be set in the future, but strong fundamental headwinds exist. Overexposure to bonds could prove dangerous and diversification regarding duration, currency exposure, and geography remains paramount.

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