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BEHIND THE MONEY: Market Ménage a Trois Could End Badly

Friday, 4 Sep 2009 | 12:00 PM ET

Not since the recent video emerged featuring 'McSteamy' of Grey's Anatomy has a ménage a trois like this so captivated America.

I'm speaking of course of the love affair between the S&P 500, gold and bonds. Over the last three months, all three are in the green. This is an unnatural relationship.

Conventional wisdom holds that as gold marches toward $1,000 and Treasury prices continue to increase, equity prices should surely suffer because investors are pulling money out of the riskier equity bet to participate in the perceived safer bet of gold and bonds. But stock prices continued to edge higher in August.

In the past, gold has paired up with the stock market for long periods because investors were betting on the same thing: inflation. Moderate inflation can help corporate profits and stock prices and also cause investors to hedge that inflation with bullion. At that same time though, they will sell bonds on fear inflation will erode the future value of interest payments.

After witnessing this recent phenomenon, I looked to one of the best market therapists out there for dealing with these complicated matters: Dennis Gartman, of The Gartman Letter, which is required reading on every smart trading desk.

He wrote back: " Relationships in stocks and commodities are like relationships between people… even married couples. For a while, relationships are strong; then they become stronger; then they begin to fray at the edges and then they collapse, never to return to their old form. Such is the relationship between stocks, gold and bonds. I’ve seen two of the three move in tandem, but never all three. And those relationships hold until they stop. There is really nothing more that one can say. Right now, it is possible for stocks and gold, or for stocks and bonds, to move together in tandem, but not all three."

So whose love will go on after this love triangle ends? The Fast Money players seem to be leaning toward gold and bonds. Technical analyst Greg Troccoli of Opalesque sees gold testing the 1,017 area. Joe Terranova, FM trader and Virtus Investment Partners chief market strategist, is betting with gold too. Seasonally, going long gold and short the stock market from September to January has made you money on average over the last six years.

The market (and life lesson) here is this: these kinds of things never end well.

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Trader disclosure: On Sept. 4, 2009, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders: Adami Owns (AGU), (C), (INTC), (MSFT), (BTU), (NUE), (GS); Grasso Owns (AAPL), (ABK), (ASTM), (BA), (BAC), (C), (COST), (CSCO), (PRST), (V), (WMT), (FAZ); Terranova Owns (AAPL), (QCOM), (EOG); Terranova Owns Gold Dec. Futures; Seymour Owns (AAPL), (BAC), (ETFC), (CHL), (VIP); Seygem Asset Management Is Short (FXI)

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