Tuesday, December 25, 2012

Part Two: Should I Buy Stocks Or Gold Today?

The goal of this site is not to provide readers with short term day to day "trades." The goal is to study the global macro-economic landscape and look for secular market trends that last years if not decades.

Once we can determine what those are and where we are in the current secular cycle you can then look for shorter term moves within those secular cycles. The main tool to use during these shorter term cycles is sentiment.

That may sound like a mouthful, and it is, so let me provide a real life example to help show you how this process works. Just over a month ago I posted an article titled Should I Buy Stocks Or Gold Today? In that post I discussed this very topic as I like to do when sentiment moves toward extremes.

I believe that we are currently in a secular bear market in stocks. This does not mean that stocks will always trend downward during this cycle, in reality the last two major secular bear markets looked like side ways moving markets when looking at a chart over a century long period. However, during this sideways type market (which is the best case scenario) the danger always exists to the downside.

The chart below shows the bear markets over the last hundred years (including the current one) in pink and the last secular bull markets in green. These cycles tend to last 17.6 years - for much more on secular cycles see Historical Guide: Stock Market Cycles & Public Ownership.


The next chart zooms in on the far right pink portion of the chart above to our current secular bear market in stocks. You can see the "side ways" movement.


I spent the latter part of the summer leading into the fall discussing the optimism growing in the stock market (and the simultaneous danger that optimism creates) as prices moved higher. Then the week following the election stocks plunged every day for a week straight. Following that plunge I posted the article linked above saying that pessimism in the market was back. This did not mean that it was time to buy stocks (we are still in a secular bear market) but that the short opportunity that existed before was gone and it was time to remove those shorts.

The opposite existed in the gold market. As stocks fell, gold surged higher and optimism entered the market. That optimism did not exist in the early stages of the summer at the previous buying opportunity. The same concept exists in the gold market today as with stocks only in reverse because gold is in a secular bull market. You don't sell when the market surges and optimism enters the markets, you just hold positions and wait for the next decline and pessimism to return.

Fast forward to this week.

The following chart illustrates this process of sentiment tracking beautifully. You can see that during the most recent sell off into and following the election that the sentiment indicator (the bottom line) turned green. This is called the dumb money indicator and it calculates a composite of four different sentiment indicators:

1. Investor's Intelligence
2. MarketVane
3. American Association Individual Investors
4. Put/Call Ratio

When the line turns greens it means that investors are pessimistic about the future (they think that stocks are going to fall further). This was the moment that I said that you can remove your short positions. Click on chart for a larger image:


Now the indicator (bottom line) has taken a sharp reversal. As stocks have once again moved higher the optimism toward the market is back. The indicator has risen drastically and is now back in the danger zone. This provides a much safer entry point for those looking to add to stock short positions.

Gold has seen the same flip flop. Gold prices have fallen drastically over the past two weeks and investors are fearfully selling metals (or sitting on the sideline) as pessimism has returned. As I discussed in detail last week in Deja Vu: Gold & Silver Plunge Into Year End - this is the best time to buy.


2 comments:

  1. Hi there - great blog - however of late it is becoming increasingly difficult to load / navigate the page - despite using a PC with 8GB RAM, IE9 and WINdows 7 . There is some script that is causing this. Please fix. Thanks!

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  2. Thank you for letting me know. I have sent your comment over to someone I know who is more tech savvy than myself. Hopefully they can determine what the problem is.

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