By Mark Hulbert
Gold investors are excessively bullish, typically a bad omen
Gold is skating on thin ice, according to a contrarian analysis of short-term gold market timers’ sentiment.
That’s because gold timers are extraordinarily bullish right now, and that’s bearish from a contrarian point of view. In fact, the average short-term gold timer is more bullish today than in all but 5% of the trading days since 2000. Historically, gold and gold shares have struggled in the wake of such extreme bullishness.
Consider the average recommended gold-market exposure level among a subset of short-term gold timers monitored by my firm. (This average is what is represented by the Hulbert Gold Newsletter Sentiment Index, or HGNSI.)
As you can see from the gray-shaded area at the top of the accompanying chart, this average exposure level is well within the zone of extreme bullishness.
Gold market timers got it wrong in November
It would be entirely fair to ask about the conclusion that gold-market contrarians reached in early November. Two months ago in this space, I reported that contrarian analysis was lukewarm about gold’s short-term prospects. Though contrarians were not as bearish then as they are today, they did believe that gold would head lower before it headed higher.
They were wrong, as we now know. Gold actually bottomed on the very day that my previous column appeared. And today it is 11% higher than where it stood then.
But bear in mind that contrarian analysis assesses probabilities rather than providing guarantees. The jury is out on whether contrarians were wrong in early November to believe that a gold rally had a low probability. After all, sometimes the market rallies even when conditions aren’t favorable. To properly judge probabilities, you have to look at a lot more than just one data point.
The accompanying table, below, does that. It focuses on days since 2000 in which the gold timers on balance were excessively bullish or excessively bearish — as defined by being in the top 10% of the historical distribution or in the bottom decile. Notice that, in the past, the VanEck Gold Miners ETF (GDX) has performed far better in the wake of excessive bearishness than excessive bullishness.
Average GDX return over subsequent week Average GDX return over subsequent month Average GDX return over subsequent quarter Average GDX return over subsequent six months HGNSI in bottom decile of historical distribution since 2000 +0.3% +0.8% +3.3% +3.3% HGNSI in top decile of historical distribution since 2000 -1.0% -3.2% -5.0% -4.1%
In addition, the table also shows that sentiment has its strongest explanatory role at the three-month horizon. If the future is like the past, therefore, the window in which gold is most likely to struggle is the first quarter of this year.
What about market timers in other arenas?
The gold market is just one of the arenas in which my firm tracks market timers’ average exposure levels. Besides the Hulbert Gold Newsletter Sentiment Index, my firm also constructs comparable indices that focus on the broad U.S. stock market (as represented by the S&P 500 or the Dow Jones Industrial Average ), the Nasdaq stock market (as represented by the Nasdaq Composite or the Nasdaq 100 indices), and the U.S. bond market. The chart, below, summarizes where the timers currently stand in all these arenas.
The existence of sentiment measures for different asset classes allows contrarians to forecast relative returns in addition to absolute returns. Even if gold holds its own over the next three months, for example, contrarians believe that equities will outperform gold.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.
-Mark Hulbert
(END) Dow Jones Newswires
01-07-23 1010ET
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