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Mark Hulbert
Dec. 18, 2009, 12:01 a.m. EST · Recommend · Post:
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By Mark Hulbert, MarketWatch
ANNANDALE, Va. (MarketWatch) -- Gold timers' behavior this week leads contrarians to conclude that gold's correction is not yet over.
That's because optimism among the gold timers quickly jumped earlier this week in the wake of just a couple days of strength for gold's price. And then, after gold bullion plunged anew to fresh correction lows, their optimism didn't fade.
Both are bad signs, according to contrarian analysis. The first suggests an eagerness to jump back on the bullish bandwagon, and the second suggests that the bullishness is being clung to stubbornly. If sentiment follows the contrarian model, on both counts it will be just the opposite at the correction's ultimate bottom.
Consider the Hulbert Gold Newsletter Sentiment Index (HGNSI), which reflects the average recommended gold market exposure among a subset of short-term gold-timing newsletters tracked by the Hulbert Financial Digest. Having begun the week at 39.5%, the HGNSI had jumped to 53.8% by Wednesday, when gold was ahead for the week by nearly $20 an ounce.
The HGNSI then remained at that higher level in the wake of Thursday's $29 drop in the price of an ounce of gold.
What will it take for gold to mount a more sustainable rally? The first thing, according to contrarians, will be stubbornly-held pessimism in the face of any market strength. This is precisely what we saw late this past summer and earlier this fall, by the way. That's when the gold timers' pessimism formed a formidable wall of worry that the bull market was able to climb to new all-time highs.
Of course, the eagerness to turn bullish that we've seen this week is just the opposite of stubbornly-held pessimism.
The second thing contrarians are looking for to signal that the sentiment conditions are ripe for a more sustainable rally: eagerness among gold market timers to run for the exits whenever the market shows even the slightest sign of weakness. This also was seen several months ago as gold was mounting its several-hundred-dollar run to new highs.
Once again, however, the stubbornly-held bullishness that we've seen this week is nothing like that behavior.
Let me hasten to add, however, that contrarian analysis applies only to the short term. As I have stressed on numerous occasions before, contrarians can tell us little about where gold will be in a year's time, or even in six months.
So it may very well be, as some of gold's devotees currently argue, that bullion is headed to much higher prices -- $2,000 per ounce, even $5,000. But if the contrarians are right, the road to those higher prices includes a short-term detour that goes in the opposite direction.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
- OldYeller | 4:30 a.m. Today4:30 a.m. Dec. 18, 2009
Oracle's Larry Ellison hints that Sun may exit or de-emphasize developing servers around commodity chips and focus on its high-margin, high-performance (and low-volume) business.
6:43 p.m. Dec. 17, 2009 | Comments: 5
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