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Example of using the innovative G35 analysis method through S&P500 index

June 30, 2020

June 30, 2020

G35: asset valuation method through the example of S&P500Mikhail Hypov

**G35: Author’s method for valuation of stock indexes and shares. By

Michael Hypov**

My previous article was devoted to the history of gold pricing. We found out that [gold quotes][1] can be used for comparing the price of any asset to a price which would have existed in the Gold standard period. The article can be found [here][2]. Today we’ll proceed to study gold and its area of application. Also, we’ll make a technical analysis of [S&P500][3] and compare it with its possible value based on the gold standard.

I suggest calling my valuation method “G35” and adding “G35” to the designation of an instrument analysed on the basis of the gold standard. For example, the ticker of S&P500, [SPX][4], will look like SPXG35.

G35 signals

You may remember that it’s better not to use this method on small time frames because the [gold][1] industry factors may affect the quality of signals. The method shows the market’s fundamental sentiment relative to high risk assets. The main advantage and disadvantage is that the indicator may forestall real events and reflect deep market changes which will take place a few months or even years later. Also, this indicator shows the behaviour of “long money” or “intelligent money” which belongs to institutional investors and market whales. Every private investor dreams of tailing them.

![LiteForex: Example of using the innovative G35 analysis method through S&P500 index][5]

Have a look at the chart above. The red chart shows [S&P500][3]’s dynamics “as is” while the blue one takes account of the gold standard. The first thing we see is that the two charts strongly diverged from 2009 to 2012. [S&P500][4] was growing rapidly while SPXG35 was in a long sideways trend with a bearish angle.  The divergence may be explained by the following fact: the 2009-2012 growth of the stock market took place amid additional money emissions and liquidity injections. It wasn’t due to a real economic growth. In the meanwhile, institutional investors preferred keeping their money in gold. There was no trust in high risk assets and in stock particularly.  In that situation, opening long positions in the long term wasn’t safe for a private investor - another fall could happen.

Next, SPXG35 starts growing in 2013. The bearish trend is broken. This signal may be understood as a fundamental change in the market sentiment and a growing demand for high risk assets. For private investors, this is a signal of a stable long-term bullish trend. So, there’s a good opportunity for opening long positions in the long term.

![LiteForex: Example of using the innovative G35 analysis method through S&P500 index][6]

The 2013-2015 growth of the S&P500 index turned out to be one of the fastest and most stable ones in the past ten years. In the second half of 2015, we see another interesting signal - a convergence between [SPX][4] and SPXG35. In the chart above we see that latter updated its maximums in contrast to [SPX][4].  It can be read as a false correction and “weak hands” sale of speculative investors in the stock market. Thus, we can understand that no important corrections are in store. Big players continue to express a preference for the stock market and not for protective instruments. Then, SPXG35 starts growing in 2017, which confirms the continuation of the bullish trend and coincides with a long bullish rally in 2017-2018.

![LiteForex: Example of using the innovative G35 analysis method through S&P500 index][7]

In September 2018, we see a serious bearish pullback but the price recovers fast in the chart of [S&P500][4] marked as a red line. SPXG35 behaves differently though.  It doesn’t update its maximums. In April 2019, we have the first strong bearish signal. On the one hand, it points to the start of long money’s flow into protective assets. On the other hand, it means that the stock market is recovering because of speculative money. A similar situation occurred in December 2019 before the stock market collapsed amid the global pandemic.

![LiteForex: Example of using the innovative G35 analysis method through S&P500 index][8]

Also, we saw something similar on the eve of the 2008 crisis. Back then, we got the first signal at the end of 2005, almost two years before the crisis itself. Another signal was produced right before the start of the correction.

Crisis of dotcom companies as an example of an internal factor of gold pricing

However, the dotcom crisis example shows that an error in signals may occur even on such a big time frame as 1 month.

![LiteForex: Example of using the innovative G35 analysis method through S&P500 index][9]

The chart above shows that only one signal was produced on the eve of the crisis, at the beginning of 2000. However, when the market reached its peak in August, SPXG35 followed it and updated its maximums.

![LiteForex: Example of using the innovative G35 analysis method through S&P500 index][10]

Laying a gold price dynamics chart over the chart above, we see that the dotcom crisis didn’t lead to a higher demand for [gold][1] unlike other crisis periods. The thing is that the dotcom crisis was specific as it hit hard IT companies which are the main consumers of microelectronics and, as a consequence, gold. Big investors and hedge funds understood that and didn’t reinvest in [gold][1] as a protective asset. Thus, that internal market [demand][1] factor distorted the general picture.

Forecast for the US stock market based on G35 indicator

![LiteForex: Example of using the innovative G35 analysis method through S&P500 index][11]

The chart above shows SPXG35 and [SPX ][4] on the monthly time frame. In the upper chart, the blue line of SPXG35 is within the limits of a bearish trend. Based on the ultimate fall wave and channel traded in the second half of 2008, we can single out a strong support level marked as a green rectangle. The likeliest scenario doesn’t imply that this support area will be broken. So, the indicator will consolidate under the pressure of a bearish trend. The consolidation may last up to 2022. A breakup of the bearish trend line will suggest a long-term bullish signal. So, a bullish trend is unlikely to be developing this year and during the first half of 2021.

![LiteForex: Example of using the innovative G35 analysis method through S&P500 index][12]

At the same time we see that the ultimate monthly candlestick of the SPXG35 indicator closes as a “shooting star” with a long shadow above. It’s a bearish signal of a further downward movement. This pattern may be read as a confirming bearish signal combined with other indicators which point to a bearish trend in [S&P500][3].

Conclusion

The G35 method of comparing an asset cost with the potential value in the Gold standard period is a good leading indicator which can be used for confirming other trading strategies or minimizing the risk of loss. When using this approach, we need to consider internal market factors of [gold][1] pricing to avoid false signals.   This indicator will be of little use for trading instruments whose price directly correlates with [gold][1] prices. As for the [S&P500][3] index, I can say for sure that the current situation isn’t favourable to long-term investing based on the G35 analysis method. Long money escapes stock as it’s a high risk asset. The current growth is related to private investors’ growing activity and large money emissions, which must stimulate the stock market as well. Another crisis wave is quite likely to happen. So, short positions in [S&P500][3] remain a priority.

You can open a short position in S&P500 at LiteForex too. If you aren’t a trader, it’s time to start right now: the broker is raffling fabulous prizes to celebrate its [15th anniversary][13].  Both beginner and professional traders may win!

My next article will deal with the technical analysis of [gold][1] so that my instruction on the G35 indicator’s use should be complete.

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Good luck and profits, everyone!

Yours,

Michael @Hypov

I’d like to remind you that all materials are provided for educational purposes only. They aren’t financial advice and don’t guarantee any profits. All trading decisions you make are your responsibility only.

P.S. Did you like my article? Share it in social networks: it will be the best “thank you” :)

Ask me questions and comment below. I’ll be glad to answer your questions and give necessary explanations.

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  • Use my promo-code BLOG for getting deposit bonus 50% on LiteForex platform. Just enter this code in the appropriate field while [depositing][15] your trading account.
  • Telegram channel with high-quality analytics, Forex reviews, training articles, and other useful things for traders

Price chart of SPX in real time mode

![G35: asset valuation method through the example of S&P500][16]

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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  2. www.liteforex.com/blog/analysts-opinions/the-gold-standard-as-a-tool-for-expressing-the-cost-of-assets-in-kind/
  3. my.liteforex.com/trading/info?symbol=SPX&language_save=1
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