Wednesday, July 11, 2007

Reading Stock Market Sentiment

Gold stocks have had quite a spectacular run over the last 2 weeks. The XAU, for example, has appreciated by about 10% during this time. To many people, this rapid ascent came as a surprise. Two weeks ago, when silver declined about 60 cents in one day, there were many that thought lower prices were in the cards.

I usually like to browse investing forums because I usually learn something when I do. One forum I visit often is the Kitco Gold Forum. Browsing this forum is a great way to judge sentiment. It allows me to evaluate if the public is bullish or bearish, and let me tell you, 2 weeks ago, the public was bearish. Here is a link to one thread of many that was brimming with bearish sentiment. There were some astute forum members that did not let fear cloud their judgement, but overall, throughout many threads, the consensus was bearish.

One June 26, I made the following comment on the Kitco Forum:

"With some forum members saying that they think gold will go into the $400 area, I feel compelled to write this post. Here are some facts about the charts:

1)Gold is at its 50 week moving average right now. Gold has bounced off this area of support many times over the past 3 years, and has never broken it. If gold breaks this line, then, and only then, would I be bearish.

2)The XAU has just this morning bounced off major gap support from the gap formed in mid March.

3)SLV is deeply oversold, and due for at least a relief rally.

4)The Euro is at a major area of support. This should keep the US Dollar in line."

Lets have a look at a chart to see how gold stocks faired. Below is a chart of the HUI, a major gold stocks index, with some comments I have taken from the Kitco Forum. The day in question is June 26, so please have a look at that date.

I don't mean to brag, but I made 4 points about the charts, as quoted above, and all 4 points turned out to be accurate. As well, as the above chart shows, if you had bought gold shares on June 26, you would have made a lot of money, and gold bullion itself bottomed at this time.

The point of this post is that you should never let your emotions, like fear, impair your judgement, and when you do detect fear amongst the public or the media, then it may be a sign that a bottom is place. I have seen this work time and time again. People are greedy at tops, and fearful at bottoms. Through various techniques, it is possible to exploit this fact of life.

I will have more about judging sentiment, and how to profit from it in further posts.

No comments: