Where Fundamentals Meet Technicals: Cigna and Gold

Fundamental analysis gives us an idea of where prices might go over the longer-run based on company growth, dividends, balance sheet details, and valuations. I use 3-5 year timeframes for my individual company analysis, and 12-18 months for most of my macro analysis.

Technical analysis gives us an idea of when prices are overbought, oversold, and hitting certain psychological support or resistant lines that a lot of other traders will be looking at. In short, it measures sentiment, and gives us a sense of when a contrarian opportunity exists.

Nobody wants to catch a falling knife, or short a stock that is melting up, so ideally we want to see overdone sentiment and then some sort of reversal beginning to happen in terms of price action, combined with good fundamentals.

Several times per month for my "Where Fundamentals Meet Technicals" pieces in Stock Waves , I look through Zac and Garrett’s charts and find the ones that match with my fundamental view, to find interesting alignment. It’s interesting when two or three people can come to the same conclusion through very different methods.

This issue takes a look at gold (GLD) and Cigna (CI) stock.

Gold

Gold is a liquid, fungible, self-custodial store of value for central banks, institutions, and individuals. Unlike various securities, gold represents “outside money” with no counter-party risk if it is held physically.

For example, when the US and Europe froze Russia’s sovereign reserves in return for their attack on Ukraine, they couldn’t freeze Russia’s self-custodial gold.

A country can self-custody gold for decades, and maintain their purchasing power without relying on a counterparty for generating a yield on a devaluing currency. Here’s the oil-to-gold ratio over time:

And when countries like Japan perform yield curve control and hold interest rates on cash and bonds well below the inflation rate, devaluing their paper assets, savers can still benefit from gold as a store of value outside of that arrangement.

When gold is held via a security such as an ETF (such as GLD), it doesn’t provide the self-custodial protection against tail risks but does provide exposure to that price action.

During economic accelerations, we should expect productive businesses to outpace a conservative store of value like gold. Thousands of people working to improve their company should, ideally, outpace a hunk of yellow metal in a positive economy.

During economic decelerations or outright recessions, however, corporate margins tend to contract, valuations decrease, and so many stocks underperform gold in that environment.

Zac is pretty bullish on gold for technical reasons:

He also thinks that, with various bounces along the way, the S&P 500 as priced in gold will continue to decrease. In other words, gold is positioned to continue its outperformance vs the S&P 500 for a decent time longer:

My favorite individual measure of economic acceleration and deceleration is the purchasing manager’s index. When it’s going up, the economy is accelerating, and when it’s going down, the economy is decelerating.

As it turns out, the S&P 500 to gold ratio tends to go up in rising PMI environments, and tends to roll over in declining PMI environments, like we’re in now.

S&P 500 profit margins are indeed showing signs of having peaked and rolling over.

And liquidity dynamics suggest we also have some more strain ahead for risk assets:

I continue to view gold as an ideal diversifier in a balanced portfolio, and as a base case I continue to expect it to hold up well vs equities this year.

It’ll likely underperform during any rallies that occur, but until there is some catalyst in place for a resumption of the more structural bull market, I consider gold to be a valuable part of a portfolio.

Cigna

During declining PMI environments, defensive sectors tend to do better than the broad market. Consumer staples, healthcare stocks, utilities, and similar defensive value tends to be the place to be.

I’ve been particularly bullish on the healthcare sector for a while. Consumer staples can face a lot of pressure from inflation, and utilities are rather expensive relative to their growth rates.

Many healthcare stocks are attractively-valued at the current time, with inflation and recession-resistant operations. The key risk for most large healthcare stocks is government regulations that could limit profitability, but with polls pointing towards a split government after the 2022 elections, sweeping regulation seems unlikely for the next couple years at least.

Cigna is one of my healthcare stock longs, and it continues to offer a reasonable valuation in a difficult environment.

Chart Source: F.A.S.T. Graphs

The company has an A- credit rating from S&P, is trading at 12x earnings, and has a price/earnings/growth “PEG” ratio of around 1x, which is a classic Peter Lynch valuation green flag.

The company does face risks of course, but as part of a diversified portfolio, I expect it hold up well to both inflation and recession. It’s unlikely to be a face-ripper during a broad rally, but in return, it’s a good all-around investment based on many metrics.

Both of the technical analysts I partner with, Zac and Garrett, see a bit more correction ahead for Cigna followed by a rebound.

Here’s Zac’s chart:

Here’s Garrett’s chart:

Final Thoughts

The next 6-12 months continues to look like a difficult environment.

Macro factors continue to point towards pain. The US economy is decelerating, and the Fed is tightening monetary policy into that deceleration as it tries to control inflation. That’s a one-two punch for most asset prices.

On the other hand, sentiment on risk assets is near rock bottom. I wouldn’t short assets here, and I would expect some bear market rallies.

I would look for a top in forward market pricing regarding Fed monetary tightening, or a rebound in leading indicators of economic strength, to be more structurally bullish. In the meantime, there are still many defensive assets worth focusing on.