Precious metals are once again attempting to form a bottom. Both gold and silver have traded sideways to up for the last two or three months and have had Twitter sentiment increase during the move. It is encouraging to see that sentiment got oversold even as price formed higher lows early in the bottoming process. Many tweets were full of predictions for lower lows and a continuation of the down trend (hopefully shaking out weak holders). For SLV specifically, 26 was a critical level that traders believed would not hold. The next touch on the lows or the newly established up trend lines was met with significantly higher sentiment readings as investors started to believe that the danger was past. SLV has broken a short term down trend line while GLD has broken out of a short term triangle pattern. Both ETFs had sentiment confirm the break to the upside. Most important to us is that GLD and gold stocks have risen to meet a long term down trend
Here’s a quick update on Twitter sentiment, support and resistance ahead of Bernanke’s Jackson Hole speech. We’re seeing sentiment hold up this week even as the market chops around. This is in stark contrast to the huge level of negative sentiment we saw when the S&P 500 Index was consolidating just above 1400 earlier this month. So we have more positive sentiment ahead of Friday. The change comes as people are optimistic about the news coming from Wyoming (for those of you in New York and Chicago that don’t cross the Mississippi unless you’re going to Los Angeles or Hawaii…Wyoming is a western state with a small town called Jackson Hole). Many tweets are also softening their stance that 1425 can’t be broken. The support and resistance numbers are coming in a tight range between 1390 and 1425. If one of those levels are broken we could see 1500 to 1550 on the upside and 1300 to 1260 on the down side. We do have several outliers calling for 666
As with many of the internal indicators for the market over the past several weeks the Bullish Percent Index of the S&P 500 Index is showing some indecision. This index is one of our favorite broad market breadth indicators because it uses point and figure charts to determine if a stock is in an uptrend or down trend. This method takes much of the ambiguity out of technical analysis. Currently the BPSPX is showing good strength as the market has rallied out of the June bottom. It is increasing in value each week as more stocks enter up trends. This is normal behavior for a sustainable rally that we’d like to see continue. On a daily basis, the BPSPX has been trading sideways for the past several days, which is also normal for a healthy market that is consolidating. We don’t want to see the daily turn down for any extended period of time. One thing that concerns us is the negative divergence of the BPSPX with the value
This week we’re continuing to see a neutral market that is strengthening. It is running into resistance at a previous top, but underlying conditions are strong enough to give us a slight positive bias. We create our market views based on the health and strength of the current rally rather than on news and events. We care about “how” the market reacts to news not the news itself, so we realize that we’re at odds with many other market prognosticators. We wholeheartedly agree with what most people think the market “should” be doing, but we’ve found that trying to force a market to our will isn’t a good investment strategy. The news from Europe, tail risk of Israel vs. Iran, and stalling at resistance have us scared, but it hasn’t caused concern in the indicators we follow. Positive On the positive side we see our economic indicators trying to bottom. Previous attempts to gain strength in our economic indicators since the beginning of 2011 have failed so we’re watching this
A month ago we posted about precious metals where we said it wasn’t quite time to buy gold stocks. Fast forward to today and we’re still watching and waiting. The chart below shows that nothing dramatic has changed. GLD and GDX are still moving slowly sideways to up and closing in on their down trend lines. The next several days will create a break or a failure at the trend line. Belief that the Federal Reserve will initiate another round of quantitative easing is currently pushing gold and gold stocks higher. We don’t rely on the news to make our decisions so we’re more interested in how price reacts at critical support or resistance. We believe that a good break of the trend line will provide a low risk opportunity to buy GLD and GDX. A break of the trend line for GDX will also correspond with a break above the recent highs. We hold a small core position in GLD and GDX as a hedge against the
One thing that concerns us about the recent rally is the lack of new highs and the increasing amount of new lows. If you look at the chart of the Nasdaq Composite below with its new highs in green and new lows in red you can see that all is not well with the index. We’re seeing negative divergences when we want to see confirmation of the rally. An example of a positive divergence happened at the low made in early June. As the market was breaking to new lows the number of stocks also hitting new lows was decreasing. At the same time the number of stocks hitting new highs was increasing. This was a positive divergence that gave hints that a good rally could follow. Once the rally started the number of new highs and new lows on Nasdaq performed properly for a lasting rally. Then we got a bad jobs report on 7/6/2012. You can see in the chart the serious damage the jobs report
Exxon Mobile is fairly characteristic of how people feel about energy and oil stocks recently. Our Twitter Sentiment Indicator for XOM has been reaching extreme levels. The last time we saw readings near or above .80 it turned out to be an initiation thrust that helped push the stock to new highs. In fact, the move not only broke several months of recent consolidation, but was strong enough to also clear the early 2011 highs. Sentiment on Twitter for oil stocks like XOM have shown high readings as the stocks are seeing new highs. It looks like the extreme sentiment may indicate the stocks are oversold. Our smoothed indicator is rolling over which may be signaling XOM is ready to consolidate the move through the 86 level. A correction back to the 84-86 level would be healthy as it will allow sentiment to clear its overbought condition. It will also provide money managers and traders alike an opportunity to buy at a low risk entry point and a small discount.
Our Twitter sentiment indicator for the S&P 500 Index is finally showing some strength as the market is attempting to break out to new 52 week highs. The consolidation at 1400 on SPX induced extremely negative sentiment levels. The longer the market stalled just above 1400 the more negative people got with their tweets driving both daily and smoothed sentiment to the lowest levels since the June low. It appears that this build up in sentiment got enough people committed to the short side of the market to allow a break out above 1410. The move to 1415 was enough to get people excited about this rally’s potential pushing our daily sentiment indicator to our highest recorded levels. The consolidation on 8/17/2012 just above 1415 did not dampen sentiment and is helping to move our smoothed sentiment indicator quickly higher. We’ll be watching to see if a break through 1422 brings higher sentiment readings or a contraction back below the zero line (as has been the case for every higher
Our Long / Short hedging strategy is now 80% long and 20% short. As the market consolidated above 1400 we saw improvement in most of our core indicators tracking market trend, risk, and strength. We’re still not seeing the strength we’d like in enough of our measures of the economy and market quality. Conditions such as we’re experiencing today are most likely associated with a continuation of an up trend after a correction. However, during a bear market these conditions occur near bear market rally highs. Our current Hedge Ratio is .25. The long portion of our portfolio continues to be stocks we want to own for the long run that we believe will out perform in an up trend. Our 20% offsetting short is simply a short of the S&P 500 Index. The green lines are adding exposure (removing shorts and increasing longs). Yellow lines represent increasing our hedging (reducing longs and increasing shorts). The red line signals aggressive hedging with instruments like puts, volatility, or actively managed bear
We saw continuing improvement in our core market indicators this week allowing us to add exposure to the market in our Long / Cash hedge strategy. We are now 60% long and 40% cash. Most of our measures of market strength, trend, and risk are positive, while most of our measures of the economy and quality are lagging. This is the point during strong bear market rallies where we often see whip saws. During the 2000 to 2002 bear market this level of exposure was often associated with a market peak within a few weeks. However, during normal up trends this level of exposure generally signals a continuation of the up trend. In the chart above green lines are adding exposure and yellow lines are raising cash.