Removing the inflationary effects of the Fed's dollar printing, stocks are now sitting at the lows reached after the swoon in early September. By looking at the relative performance of the S&P 500 to gold futures, investors are nearing something of a decision point.

 

One of two things can happen from here. Gold, which blasted to a new high of $1,044 on Wednesday, could continue to outpace stocks. Or we could see gold cool off and stocks start posting some real, inflation-adjusted gains.

 

My guess is the September lows for the stock-to-gold ratio will serve as critical support for another move higher. Why? Well the two big movements in the gold-adjusted S&P 500 occurred between April and May (first-quarter earnings season) and July and August (second-quarter earnings).

 

Analyst estimates for the third quarter as they stand now don't adequately account for the healing that has occurred in the global economy over the last three months. Thomson Reuters puts the current Q3 earnings growth rate for the S&P 500 at -24.8%. This is slightly worse than the -20% estimated earnings growth rate that prevailed back in July and August and the -17.2% analysts expected back in April -- so expectations have come down quite a bit. This is a good thing since lowered expectations are easier to beat.

 

 

Take a look at the chart above. During both the Q1 and Q2 earnings seasons, positive surprises during the first two weeks forced analysts to positively revise their earnings estimates. Credit Suisse analysts expect a similar trend to develop over the next few weeks. With Aluminum giant Alcoa (AA) kicking things off Wednesday night with a surprise return to profitability, earnings upgrades should provide the impetus needed to get the adjusted S&P 500 moving again.

 

My positions

 

My portfolio at Wall Street Survivor is now up 25.3% for the month versus a 1.2% rise in the S&P 500. My largest gainer is the DB Double Long Base Metal ETF (BDD), which is up 16.4% since I added it on Monday.

 

Disclosure: The author does not own or control a position in any of the funds or companies mentioned.

 

Anthony Mirhaydari is a researcher for the Strategic Advantage investment newsletter. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.

 

Related reading:

 

Federal Reserve restarts the money pump

 

Why stocks look oversold

 

Is there hope for the labor market?

 

A new bull market -- in Treasury bonds?