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Guest Post: SP-500, GLD and GDX - Sentiment Trumps Everything
SP-500, GLD and GDX - Sentiment Trumps Everything, Submited By John Townsend, The TSI Trader
Markets rise when the preponderance of participants are buyers, and fall when the preponderance of participants are sellers. One of the key ways to anticipate the pendulum swings of participant behavior, and therefore price behavior, is to evaluate sentiment. Sentiment, more than fundamentals or technical analysis, trumps everything.
When too many players are on the same side of a trade they eventually find themselves in a crowded position where most everyone around them has the same motivation – to reverse their position when the tide changes.
Little by little, as participants slip out the back door by changing the bias of their position, the pendulum of price swings more sharply against the remaining herd in the crowded trade. Inevitably, something akin to panic sets into the herd as they begin to aggressively reverse their position for financial survival. The primary ingredient that causes price to catapult, up or down, is sentiment oscillation and capitalization from one sentiment extreme to the other.
An astute market technician, investor or trader will look for those flash points where conditions are ripe for a market reversal. It sounds easy to do, but remember that when the analysis is very convincing, the preponderance of market participants will disagree. It seems that to be effective at market timing one needs to listen not to what others are saying, but to what the sentiment data represents as truth.
With these thoughts as a foreword, let’s see what the current sentiment situation is for the SP-500.
The following chart is from Market-Harmonics and assimilates 4 years of bull/bear percentage data from Investor’s Intelligence. To this chart I have measured and notated in blue the percent change in bearish advisors per the Investor’s Intelligence data, for each downswing of the SP-500. My notation in green is the percentage change in bearish advisors for the related upswing of the SP-500. The price of the SP-500 is notated in black at each swing peak and trough.
One of the most striking observations I have made of this data is that it appears the maximum pendulum swing in the bearish direction is a 20% change. This occurred in Q1, 2008. More frequently this percentage change has topped out at 19%, followed by 16%, 11% and smaller percentage changes.
The obvious conclusion I come to is that our current bearish % change situation, at a 19% reading, is about at the maximum. History seems to show that investor’s emotions, like a physical rubber band, can only be stretched so far into pessimism (19-20%) - the bearish direction - before they snap back in the opposite bullish direction.
The pendulum swing in the bullish direction is about to begin at this very time.
I would expect that the stock market could not possibly peak until the % of bears decrease by a minimum of 8%, and more statistically likely 10-15%. With a current reading of 36%, I am suggesting that we should not even consider a peak in the stock market until the bear percentage reading drops from where it is now at 36% to 28%, and more likely to around 26-21%.
What this means for now is that 1100 is not the top in the SP-500. Far from it. The bears have not even begun to turn into bulls. Price will go much higher from here and it will take weeks, if not a couple of months, minimum, to reach a shift where the % of bears are themselves finally out of whack on the teeter-totter.
Gold, while not covered by Investor’s Intelligence to my knowledge, would appear to be in a similar setup as the stock market. For this I turn to data published this past week at Schaeffer’s Investment Research and look at the 2 year history of the GLD put/call option ratio.
When the put/call ratio spikes high, it means that traders/investors are convinced that the price of gold will fall. I have circled on the chart such instances from the past two years in red.
What we can observe is that when the bearish trade gets excessively crowded, when a preponderance of participants are convinced that gold will fall, that is not the top in gold. Rather, it is the bottom. I have circled with green the price of gold for each occasion of a put/call ratio spike.
Again, think about what is going on here. When the put/call ratio spikes upward you have an intense perception and emotionally dramatic conviction of traders that substantially puts too many folks on the same side of the trade. When gold starts to move against them, even just a little out of their expectation range, each owner of a put option is no longer a seller of gold, but becomes a motivated buyer of gold! This is precisely how huge brisk run ups in price are both setup and then executed.
If I were presently short gold and looked at this chart it would send shivers down my spine. No kidding. Nothing like finding out you are in a crowded trade that once it starts to go bad, you KNOW it will go very bad.
Now, I am not saying that the bottom for gold is in just yet. Gold could still delight the bears and frustrate the bulls with one last brief maneuver lower this week. But after that, if it happens, I believe gold’s low will most definitely be in and then there will be a lot of folks who will wish they did not hold puts on gold.
While gold has not yet told us if the last shoe has dropped, the GDX miner ETF, however, is suggesting a favorable outcome. The following daily chart is the GDX and below its price movement is the True Strength Index Indicator (TSI) with volume. You can make you own chart and use the TSI indicator by visiting FreeStockCharts.
On the negative side for GDX, the True Strength Index indicator reading is still barely below ZERO in negative territory (-0.06). On the positive side, GDX is sporting a positive divergence between price and the indicator, a recapture of the uptrend line begun last February, a breakout of a 4 week price downtrend line and a breakout of the TSI indicator on increasing positive volume. All in all, I regard this setup as bullish for GDX and most likely for GLD, as well.
If you are interested in reading more about the techniques of using the True Strength Index (TSI) indicator, want to be exposed to discussion and analysis of various mining stocks, as well as the US Dollar and stock markets, or just want to participate in a blog where your thoughts are heard and responded to, I invite you to join me at my website which is: The TSI Trader. Or jot me an email, tsiTrader at gmail.com
I wish you a profitable week!
John Townsend
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Ho hum another 'Buy Gold' thread on Zero Hedge. This site is becoming more like the home of religion with every passing day.
Eh? It says "What this means for now is that 1100 is not the top in the SP-500. Far from it. The bears have not even begun to turn into bulls. Price will go much higher..."
I don't usually see that sentiment making it through the bear filter here.
A good article I think, I liked his reasoning.
I think there is a good chance we will begin to see a run higher, though not necessarily any irrational exuberance type rise. Credit spreads are still way wider than pre '08 but slowly falling.
Maybe the USD run is coming to an end.
but the stock chart seems out of date: it shows an old and significantly lower s&p 500 price than is current. might not the sentiment indicators have changed as well?
I love how unecessarily misleading the spoo bear% chart is by being inverted ;) well done :p
Well, tpbeta, you may be right re buy gold = religion each day. Really, I respect all articulated opinions re gold.
I am in the buy the physical gold camp.
We will see as Obama marches on with his compliant Congress...
FWIW I think gold will go down and then up, so goldbugs are probably going to do OK long run. I'm just annoyed by the nonsense reasons continuously put forward for buying the stuff. It's a commodity bubble hedging against inflation. Get over it.
I love the work freestockcharts.com does, and follow TSI because it seems to be accurate. Townsend is not a 'Buy Gold' priest, he calls them up and down. I appreciate the post, as I play GDX and advise some of my friends on it, and welcome any and all commentors who have something to say and something to back up their views.
Come on TSI.... In your blogs july 21st analysis you were saying the exactly opposite fot the S&P. At that time it was at 1083. Anyone that followed your analysis would have shorted the market. Are you a Gipsy? Dont try to throw a bullish spell on me. I am protected with Gipsy tears.
Frightening. It amazes me how many traders overlook volume/distribution/money flow indicators. We have thin, dumb money markets; mixed with option 'knockout' barriers at the top end of most risk currencies. If he is looking at gold, very tight long's on the EUR and short on gold that's the vega spread. gold hasn't got a big bid signal on it, cause i'd turn bullish on gold if the yuan went up with the INR, that aint happening
At this point a totally overpriced risk market, especially stocks.
If goldman sachs, butnuts at ICAP are putting out buy recommendations on the EUR and indexes; then we got some big gap down sells coming. i don't think goldman wants to get squeezed when they got caught long eur last time
Supporting the author's view on gold, Barron's of course led with a typical account on gold. As if their expert was really a contrarion. Oh and they cited Barclays to support his bearish "contrarian" view of gold.
As for conventional stocks, who really cares anymore?
Didn't the S&P just go up like five percent?- was that bearish sentiment.. how do these things get calculated?
Another observation : the changes and the levels in bear sentiments of the first half 2010 ressemble closely those of first half 2007. Does that ring a bell ?
What were most pundits saying in July 2007 : Q2 results were great, almost nobody believed we might be entering a recession soon (and even less a depression). What are most pundits saying now : Q2 results are great, the "recovery" is real, no risk of a double dip.
In Aug2007 we had a similar configuration as today. Then the market went up 10% until Oct 2007, followed by down 60% in the following 18 months...
So Yes, the SP500 will likely appreciate by a meager 10% in the next 3 months. That's the last bull trap which catches the most pathetic..
A 10% upside potential followed by a 60% downside risk, take it if you wish, I'm not risking a cent in this market.
NB: I've been a bear since Aug2007. I sold everything I had in the market that month, never went back in. Been in cash and a slowly growing share of Gold since then, a comfortable security blanket that I will need for my old days that are rapidly approaching . I don't play short term risk in this market, I'd rather go to the casino for that, at least I get free drinks. And I see no reason to change my position today. No reason at all.
There's only one thing that will change me from bear to bull : when I see outstanding private debt / GDP levels rising again. Maybe in a decade or two.
+10000
Agree. +1. Look down the road further than 20 feet and you'll see trouble coming back. The financial MSM is happily putting lipstick and pancake makeup all over the pig right now. On the equities side, sell into the rallies and get out before the Fall, is my $.02 view.
Fall is around the corner, VIX is low, and DOOM puts are still cheap. This isn't going to be some 20% correction. The caveat is whether it will be borne by equities, currency, or my preferred target, debt. Hurricane season is here, boyz!
In total agreement chrisina except for building a gold position...(still waiting for a bit more capitulation on that sector). I too sold out of stocks in late 2007 and have been a bear ever since, it has done me well.
I'm not sure why sentiment seems to be such an important indicator to the author....I didn't know computers experienced emotions or sentiment..... There are no humans left trading, so the sentiment is coming from algo programmers?
The markets are a mess...risk is NOT quantifiable as long as accounting rules and financial regulations have ceased to exist or become so perverted that transpanrency has become just a really bad joke. The government is pouring trillions into the economy to somehow jumpstart the economy. They'd do better to hook up summers, bernanke, and obama's nuts to a car battery. The stimulus is further distorting market valuations, profits, and expectations. It isn't even a rigged game anymore, just a mish mash that only makes sense to the senseless, whom abound in D.C. and on Wall Street.
The problem with this argument, IMO, is that sentiment has directionally changed. An increasing S&P will only increase bearish sentiment, not decrease it. This was proper logic in the 1990's when we were in a secular bull. But, today is a different world and everyone knows it.
POINT BLANK?
Bullion, coin dealers call for investigation of U.S. coin blanks supply.
A congressional subcommittee has been asked to investigate the growing backlog in and foreign procurement of U.S. bullion and collectors' precious metals coin blanks manufactured by the U.S. Mint.
http://www.mineweb.com/mineweb/view/mineweb/en/page60?oid=108615&sn=Deta...
GLD put/call ratio charts a long bull run which has now finally broken above 1:1 and author thinks it very bullish... So let's see how much above the bullishness goes, with that thinking put/call ratio of 2:1 should be super bullish. And when it finally reverts to opposite maximums where the bull run started from on the displayed chart, around 6:1, then it's ultra turbo super mega bullish! :)
BUY GOLD, you can only lose as much value as there's bubble (some 75% as of now), but you're still left with a nice shiny inert lump of metal! That's a good deal, many Nasdaq millennium bubble participants didn't get as much as a paper stock certificate :))
well if this site is anything to measure by, then everyone is a bull, since on this site for the last week it has been nothing but talk of market recovery. not really all that contrarian, since that is also what is on cnbc at the moment.
my gut is still telling me crash, skid and burn, but i wouldnt recommend anyone follow my gut.
A few women might appreciate a good six-pack.
You think the people on this site are bullish?! What does bearish look like...a razor blade through one wrist and halfway through the other?