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Go to: Top | Short-term Outlook | Int-term Outlook | Equity Updates | Indicator Summary | Commodity Updates
Short-term
Outlook (1-5 Days):
Go to: Top | Short-term Outlook | Int-term Outlook | Equity Updates | Indicator Summary | Commodity Updates
Intermediate-term Outlook (1-3 Months):
Summary: The breakout from 9/20 is
confirmation of the bullish studies from late August.
If SPY fails and trades below 112.85, we will move to 15%
Long and under 111.30, we will move to Neutral.
Detail:
No change from September 29.
The 4 Anchors:
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Short-term Outlook
| Int-term Outlook |
Equity Updates |
Indicator Summary |
Commodity Updates
Equity Indicators - Updates and Extremes
One of the
sectors we track in the Sector Breadth section is for the HUI Gold Bugs
Index. This index of 16 stocks involved in the gold mining
industry has been on a tear recently, which of course isn't a surprise
given the move in gold. Over the past
couple of days, with the latest spurt in the precious one, all of the
components in the HUI managed to close above their 10-day, 50-day and
200-day averages all at the same time. This is a rare feat for any
sector fund (even one with fewer than 20 components), and the HUI is no
exception.
Since 1999, this
has occurred 11 distinct times. Usually when we see this in a
sector, it coincides with overbought conditions and almost always, weak
returns. At least for the next 1-3 weeks or so. Let's check that
for the HUI. The table below shows the go-forward returns in that
index after all of the component stocks were above each of their 3
moving averages.
Date 1
Week Later 2
Weeks Later 1
Month Later 3
Months Later 6
Months Later The returns
aren't too bad...in fact they're pretty good. This is part of the
difficulty in using an oscillator for a sector that trends along with a
commodity, instead of one more related to the stock market. We still saw
some questionable returns in the shorter-term, but overall the returns
past 1 month later were decent (with two real exceptions). Now let's
compare that to gold itself. The table below shows the same dates,
but with the returns on cash gold prices.
Date 1
Week Later 2
Weeks Later 1
Month Later 3
Months Later 6
Months Later These returns
were even better. Only two instances suffered relatively
short-term corrections (March 2001 and May 2009), but both of them led
to positive longer-term returns. The worst of them was October
1999, which saw an additional short-term spurt higher that ended up
failing. The metal has
gotten a spectacular amount of attention lately, which always makes any
contrarian (or even non-contrarians) kind of shudder. Among the
indicators we follow, there is some sign of excessive optimism in
Public Opinion, and certainly among
speculators in gold futures (and the CME just introduced a new mini
gold contract to get even more speculators involved...). One of the
holdouts has been
Rydex mutual fund traders, but over the past few days they, too,
have started to get interested again. Assets in the Precious
Metals fund have jumped 38% since early last week and are nearing the
peak we saw in June. But I'd have to see assets get to $325
million or so (from the current $260 million), along with it making up
more than 30% of total sector assets, before I got too concerned about
that particular indicator.
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Short-term Outlook
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Commodity Updates
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Equity Market Indicators
Notes: In late August, we got a spike in bullish (for the market) indicators near the 30% level, similar to what we saw in late May and late June, and once again we saw almost immediate buying pressure. Unfortunately, we didn't quite reach the kind of extreme we have previously before the market took off. With the rally over the past 2 weeks, bearish indicators have climbed but haven't reached the 30% threshold.
More history:
* New extreme
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Bonds, Commodities and Currencies - Updates and Extremes
Individual Investor Bond Allocation
The latest asset allocation survey from the American Association of Individual Investors (AAII) was just released, and it shows a continuation of an odd development.
Investors' allocation to stocks was unchanged at 55%, but they increased their allocation once again to bonds, while sacrificing their cash cushion.
Their bond allocation jumped 4% to 25% of their total portfolio, while cash dropped 4% to 20%.
The odd thing about it is that historically, there has been a very positive correlation between investors' allocations to bonds and cash. Basically, it's a "fear trade" - when they're concerned, they pull money out of stocks and put it into bonds and cash. When they're confident, they pull money out of bonds and cash and put it into stocks.
But not lately. Over the past year and a half, the correlation has completely broken down, and investors are now using the bond market as their safe haven. When they reduce stock exposure, they put it into bonds, and not cash.
Yes, the interest rate on cash is nearly nil. But it was also extremely low during periods prior to 2010, and yet the AAII folks still didn't consider bonds to be the only safe haven.
The thing that's a little disturbing is that by using the bond market as a default safe haven, investors neglect to remember that long-term bonds do carry the risk of losing one's capital unless held to maturity, which can be a very long ways off.
Looking at the other sentiment indicators on the Bond page of the site, we can see a smattering of other extremes, like sentiment surveys and the positioning of traders in bond futures. Put/call ratios are exceptionally low, but they have been an inconsistent predicator of future market performance. Rydex traders have seemingly given up trying to time that market.
The chart above is very long-term, and it may be nothing to be concerned about. It just struck me as unusual - and not positive for bonds - that it now seems to be considered as safe as cash.
Jason Goepfert Founder, Sundial Capital Research, Inc.
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October
7, 2010,
7:55am EST
10% Long (from 10/05 at 114.24)
