One of the important aspects of being a successful trader is when one can recognize they are in a trade that “isn’t working.” One of the ways we make that determination is by measuring trends of an individual stock or sector vs the trend of the overall market. For instance, the S&P500 is up over 30% from its 1,075 October bottom, therefore assets that aren’t on par with those gains over the same time aren’t working for whomever is holding them.
If you’ve been short the market the last few months, that’s clearly a trade that isn’t working. If you’ve been long the market, then that’s obviously a trade that is working. Technology and financials are trades that are definitely working. Recognizing what’s working and what isn’t isn’t the hard part. Rather, the hard part is recognizing what trades aren’t working that people think still are.
Take the performance in gold for example: Since the S&P500′s bottom in October gold is up 3%; since gold’s most recent bottom in late December, the yellow metal is up 9%; year-to-date, gold is up 6%. All of these gains are underperforming the broader market, as gold has pretty much traded in the same 12% range between 1,575-1,775 for the last 6 months (with the exception of brief forays below and above). By that logic, the “long gold” trade isn’t working.
Now here is the key:
“With none of the three categories in this week’s Kitco News Gold Survey earning more than half the total of number of participants, there is no clear majority outlook for next week’s trend in the gold market, although there are a few more bulls than bears or neutral participants.
In the Kitco News Gold Survey, out of 32 participants, 21 responded this week. Of those 21 participants, nine see prices up, while seven see prices down, and five are neutral. Market participants include bullion dealers, investment banks, futures traders, money managers and technical-chart analysts.”
-Kitco News Gold Survey 3/16/12
So even though the long gold trade hasn’t been working, surveys like the one cited above don’t seem to recognize it. To us this implies that many market participants are still bullish on gold and from a contrarian perspective, this could have bearish implications for the precious metal. Looking at GLD (the ETF that tracks the price of gold), the price action looks pretty bearish overall.
GLD hasn’t been able to break above its 2011 highs (something the overall markets have accomplished) and it just traded to fresh 8 week lows while the market is stampeding to new highs. In our view there could still be much more downside in store for GLD. Key resistance to watch is $162.50-$165. A failure to re-conquer those levels could see GLD head back towards the $150 level and give up all of its gains for 2012. We would consider move below last week’s low around $158.50 as an invitation to get short.
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