Today the price of gold is surging near the $2,100 level as silver approaches $25 and the mining stocks continue to move higher, But there is more happening in the markets…
King World News note: Sometimes it is easier to be a gold bull rather than a stock market bear as fiat money is being debased all over the world. Take a look below.
December 27 (King World News) – Jason Goepfert at SentimenTrader: The Panic phase of the Typical Sentiment Cycle has fully reversed.
Key points:
- By October, the Typical Sentiment Cycle suggested that investors were in the Panic phase
- That has now fully reversed
- Similar cycles, when the Panic phase of the Cycle fully reversed, typically preceded low drawdowns in the S&P 500
The Panic phase of the Typical Sentiment Cycle has fully reversed
Last October, we saw that according to the Typcial Sentiment Cycle, investors had been woefully discouraged for a historic length of time. Then, they exhibited signs of returning confidence by March of this year, which was also a good sign for forward returns.
A popular heuristic uses some version of the Cycle popularized by Justin Mamis in his 1999 book, The Nature of Risk. The Mamis chart encompasses the price path of U.S. stocks from roughly May 1990 through March 1991.
There are essentially four major parts to the Cycle:
1. Enthusiasm – High optimism, easy credit, a rush of offerings, risky stocks outperforming, stretched valuations
2. Panic – Extreme pessimism, oversold breadth, risky stocks crash, negative media coverage, credit slams shut
3. Discouragement – Stocks go nowhere, trend-followers suffer, some pockets of outperformance, credit starts to thaw, activity slows
4. Returning Confidence – Stocks rise choppily, smaller stocks do well, credit becomes easy, more new offerings
Due to the decline during the late summer months, the Typical Sentiment Cycle suggested that investors were back in the Panic phase of the Cycle. This is determined by comparing the price action of the S&P 500 to the typical Panic phase of past sentiment cycles. By October, this correlation had spiked above +0.6 (out of a scale from -1.0 to +1.0).
It has since eased and fully reversed back to -0.6 in a historically quick fashion.
Contrarians always want to assume that a quick reversal in sentiment is bad. Sometimes it is, but usually it isn’t…
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Quick retreats in Panic typically preceded more gains
The table below shows every time since 1928 when the Panic phase of the Typical Sentiment Cycle reversed from above +0.6 to below -0.6 within 30 trading days. There weren’t too many examples of this happening, and a couple of them led to modest declines in the S&P 500 over the next year. However, the average risk was low, and the reward was high.
Within the next six months, two drawdowns were worse than -10%. One of those was just barely, and the other one, in 1932, occurred during a period of extreme volatility, and the maximum gains actually exceeded the maximum losses.
After these bouts of Panic had fully reversed, Value stocks showed the best average returns over the next year, at more than +30%.
What the research tells us…
There are innumerable ways to measure investor sentiment. Most contain at least some measure of price action, as sentiment and price movement are two sides of the same coin. By monitoring how prices behave and comparing that to past episodes of an idealized sentiment cycle, we can often glean insight into whether the Cycle has likely neared a turning point.
Currently, these correlations do not indicate an extreme in any phase of the Cycle. The most notable is Panic, which has fully reversed its extreme from October. After similar cycles in this phase, stocks tended to keep rising, with low average drawdowns. If you would like to become a subscriber of the fantastic work that Jason Goepfert and his team produce at SentimenTrader CLICK HERE.
King World News note: The US dollar Index is now trading at 100.97. This is helping to fuel the upside surge in the gold and silver markets today. But the truth is that fiat money all over the world is being debased, and this makes it very tricky to be a stock market bear. We will have to see how 2024 unfolds in terms of whether or not the stock market continues to head higher or whether the massive bubble in stocks will unwind. Regardless, the momentum shift in favor of gold, silver and the mining stocks over the S&P500 is quite clear.
Top Trends For 2024
“THIS IS THE YEAR FOR GOLD!”
To listen to the top trends forecaster in the world discuss his top trends for 2024 and why this is going to be the year for gold CLICK HERE OR ON THE IMAGE BELOW.
JUST RELEASED! Big Money Entering The Gold Space!
To listen to Alasdair Macleod discuss big money entering the gold space as well as what to expect from gold, silver, and the mining stocks in 2024 CLICK HERE OR ON THE IMAGE BELOW.
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