Market Outlook: Mixed Signals

On February 7, 2012, we wrote an article on the topic of gold titled “Gold Stock Indicator Points Down” (found here).  In that article, the very last sentence said the following:

“based on the current trajectory, we have May/June 2012 as our tentative reversal period.”

Well, the month of May has passed and we’ve seen an amazing plunge in gold stocks since the posting of our February 7th article, as reflected in the chart below:

image

Since February 7, 2012, the XAU gold stock index declined -28.95% to the May 15th low.  As we had anticipated, the “May/June” bottom was reached, for now. Ordinarily, this would be the time to buy gold stocks, especially those that pay a dividend.  However, in our May 27th transaction review of NUGT (found here), we said that, based on our Gold Stock Indicator, there would be a second opportunity to buy gold stocks at a considerable value.

The recovery in the XAU index has been even more spectacular than the plunge.  Historically, such rapid increases in a stock or index would require a decline of at least -50% of the most recent rise, even if the trend is still higher.  Therefore, based on the most recent price of 168.71 in the XAU index, there should be a decline to the 154.56 level or half of whichever the most recent peak might be.  We’d consider buying dividend paying gold stocks at half of the highest point achieved or lower.  (Please, if you have any questions about this paragraph we’d be more than glad to explain further if we were not clear in any way.)

For now, the direction for gold stocks is up based on our Gold Stock Indicator, until proven otherwise.  However, at the same time the Gold Stock Indicator is pointing up, we have a Dow Theory bear market indication as outlined in our May 19th article (found here) suggesting that stocks in general are supposed to decline.  Our vast amount of research on the topic suggests that if the general stock market were to have a decline of 10%-15% or more, then gold stocks would decline by a greater percentage.  As an example, in 2008, when the general stock market declined –37% as reflected in the S&P 500 (full year decline), the XAU gold stock index declined -66% within the period from March 2008 to October 2008.

We don’t know which indication will take precedence.  Therefore, we are opting for the most conservative stance possible.  We’re waiting for the stock market to confirm the Dow Theory bear market indication or quickly come up with a bull market indication.  We’re holding out for the possibility that gold stocks will provide the second opportunity to buy as has been indicated in our May 27th transaction review.

Questions or thoughts?  Let us know, we’ll do our best to provided a thoughtful response.

Leave a Reply

Your email address will not be published. Required fields are marked *