Gold hit an all-time high today, rallying up to $1283.80 an ounce at one point. Gold is certainly overextended and ripe for a short-term correction, though I am still bullish on the shiny metal in terms of my longer term view. My bullish view on gold stems from the fact that the U.S. government is trying to kick the can down the road in terms of the misallocation of resources and cumulated debt.
Back in August there was a host of data that suggested an intermediate low was in for precious metals, which was the case made in an earlier article (Intermediate Low in Precious Metal Stocks?). Since that time the easy gains in precious metals have been made and now it’s a moment of truth for precious metals. Will the stocks breakout to new all-time highs or continue their consolidation since last December?
There is a lot of confusion presently in the market place as participants grapple with a very important question, “Are we in a bull market correction or has a bear market started?” It goes without saying that the answer to the above question is vital.
One market indicator that might be off your radar is mutual fund flows. We can get an idea of what the public’s asset allocation looks like by how much cash, equity, or bonds the professional mutual fund manager has in addition to how much money John Q. Public is investing into funds. It’s typically the retail investor and pension fund managers that use mutual funds. So by following fund flows, we can get an idea of where John Q Public is investing. The easy place to find this data is free, at the Investment Company Institute (www.ici.org).
There are many concepts and theories regarding economics and investing that come and go, but few have stood the test of time like mean reversion. The basic premise is that when a system moves too far in one direction it tends to be pulled back to its average or trend, much like stretching a rubber band that eventually snaps back to its resting phase. Mean reversion has fundamental applications in terms of company valuation (overvalued and undervalued) and profitability measures and technical analysis applications in terms of distance from key moving averages (overbought or oversold).
There are two boxers “duking” it out in America. On the one hand, the Federal Reserve Bank and Congress are trying to stimulate the economy, but on the other hand, the States are cutting their budgets and raising taxes. That might be the very reason the economy is getting nowhere fast.
The Market Vectors Gold Miners (GDX) exchange traded fund has attempted three times in the past year to exceed its 2008 highs but has failed on each attempt. Prior attempts occurred after prolonged rallies that had exhausted much of their energy just to reach the 2008 high. However, in the present case the GDX is oversold on an intermediate basis and yet it is only a stone’s throw away from its former all-time high.
It’s time to do a little inventory of market signals, economic signals, and earnings signals to get a reading in the tea leaves on market and economic direction. Right now, the signals look mixed. I think it’s pretty easy to argue both a bullish and a bearish case. Let’s break up the individual signals to get a checklist going of the good and the bad starting off with the stock, bond, and currency markets.
Over the course of the last two months the markets have had a lot of volatility and yet have essentially gone nowhere. While surveying the markets I see a host of indicators, indexes, commodities, credit spreads that are at a cross roads of sorts in which bullish or bearish resolution to prior trends should result in short order.