Another Look at Stock Market Sentiment

I used to subscribe to a service that would mail me educational DVDs on trading and technical analysis, and, once I was finished watching them, I would mail them back, all for a monthly fee. Most of the DVDs I watched were not very good, but one DVD, by someone named Jake Bernstein, really caught my attention. Since then, I have watched about 6 DVDs from him.

In the DVD I first watched, Jake Bernstein talked about stock market sentiment. He explained that his company would phone several hundred brokers and traders, and survey them on their thoughts on the markets. What Mr. Bernstein found is that when the respondents were unusually bullish, the market was due for a correction, and when they were unusually bearish, a bottom was likely in place.

While most people don't have the time to survey people, this example illustrates one important fact, which is that the public is usually wrong. There are some creative ways to exploit this fact, and today, I will share one of them.

What I have done is look at the statistics of a popular Gold website called Kitco. Through a website named Alexa.com, you can find out how popular a website is, and graph this data. I have made a graph of how many people visited Kitco.com over the last year.

Using my graphic design skills (MS Paint), I have placed a graph of GDX, the Gold Stocks ETF, beneath it. The result is shown below.



This may be a bit of a stretch, but I have shown that spikes in web traffic at Kitco have resulted in tops in GDX chart. This worked really well during 2006, but not so well in 2007, and this is because Gold Stocks have been trading sideways for so long, that the public may not be interested anymore. Incidentally, this fact, that the public has lost interest, is actually a bullish development for Gold. This chart hopefully proves that when the public is interested, you shouldn't be.

Think about the Dot Com boom. Was everybody interested in Tech stocks in the early 1990's? No, nobody was. Was this a good time to buy? Yes, yes it was. Was the public interested in Tech stocks in the late 1990's? Yes, and I was too, but it was the worst time to get into that sector.

I will have more about gauging sentiment in further posts, I hope.

Good Times for Gold Investors.

Gold stocks have performed amazingly well over the past few weeks, and I'm glad to see that Gold Bugs are finally making some money. I have been trying to build a bullish argument for gold ever since I started my blog, and if you read my previous posts, I hope you will be able to see that.

However, I am not always bullish on gold. There are times where I will build a bearish case for gold, and I will justify it to the best of my ability. Right now, though, is not one of those times. Far from it. To me, the charts are saying that Gold stocks have a long way to run, and I have a lot of evidence to back this up.

Yesterday, I posted a powerful piece of evidence, which was the giant triangle on the XAU/GLD ratio chart. Today, I'll post another significant milestone.

The chart below is a weekly chart of the Euro. The Euro and Gold tend to trend in the same direction, so anything positive on the Euro chart is positive for Gold. If you glance at the chart below, you can see that the Euro is trading higher than ever before. It has broken out of a double top formation, and this is, on a long term basis, very bullish.



One thing to keep in mind is that this is a long-term signal. It means that Gold will likely be higher several months from now, but does not necessarily mean that Gold will go up tomorrow. In fact, on the very short term, there are some developments that I find disconcerting.

Firstly, the USD has been getting killed over the past few weeks, and is deeply oversold. The USD also has not broken long-term support, although, I know, it eventually will. What this means is that the USD could be due for another dead cat bounce.

Secondly, I would like to see Gold Stocks relieve some of their overbought condition before I'd invest any more of my money. This should allow them to rest up, and get ready for another wave higher, which is what the weekly charts are saying.

So, the bottom line is that Gold Stocks are looking excellent for the long-term, but vulnerable in the short-term.

My Weekly XAU Gold Ratio Chart

I think this is a chart that many other gold traders look at. It is a ratio between the XAU and the Gold ETF, GLD. In other words, a ratio between gold stocks and gold bullion. This is a very essential relationship to look at. The reason it is so important is because in order for the bull market in gold to be considered healthy, gold stocks must be leading gold bullion. When gold stocks are outperforming gold bullion, it is considered bullish for both.

Let's have a look at a long term picture of this relationship. Below is a weekly chart of the ratio, so that each candle represents one week of price action. When the ratio line is rising, it means that gold stocks are leading, and when it is falling, gold stocks are lagging.



One thing that is interesting is that you can apply technical analysis to ratio charts, just as you can with ordinary charts. As long as traders are looking at it, you can apply technical analysis to it. In the above chart, notice the perfectly formed triple top, that I marked off with a horizontal blue line, and three down arrows. Each down arrow represented a good time to unload some of your gold holdings, although you could only capitalize on the last 2.

There is another feature about this chart that is incredibly interesting, and it applies right here and now. I am referring to the enormous triangle that I have outlined, which has been in development for about 18 months. As you can see, the ratio has, just now, broken out of this triangle. I feel that this is a long-term bullish indication.

Although there are many long term indications that lead me to believe that gold will be MUCH higher in a couple of months, there are still some short term hurdles. First, as a mentioned in my previous post, the XAU has gone up about 10% in a very short time, and is now overbought.

Second, the XAU is right at some major overhead resistance. I would be surprised if the XAU had enough energy to plow through this resistance without first taking a bit of breather to relieve the overbought condition, but anything could happen. The chart below is of the XAU, and the main thing to note is the red horizontal resistance.



On a completely different topic, I notice that Eldorado Gold is down about 30% so far today. I have no idea what happened, but I think this illustrates why I prefer to hold gold ETFs rather than individual stocks.

The Canadian gold ETF, symbol XGD, which I hold right now, has a weighting of about 1.5% of Eldorado Gold. This means that Eldorado's fall only has a negligible effect on XGD. If you were fully margined with Eldorado Gold yesterday, your account would be completely blown out today. This is why it's better to hold ETFs, and don't over-trade. Like most lessons I have learned, I had to learn this the hard way. I hope you don't have to.

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.