By Mark Hulbert
Gold has been following a contrarian script over the past several months, including this past week when it fell by almost $100 per ounce.
Unfortunately for gold traders, that script points to lower gold prices in coming days and weeks.
Consider the average recommended gold market exposure level among several dozen short-term gold timers my firm tracks on a daily basis. (This is what’s represented by the Hulbert Gold Newsletter Sentiment Index, or HGNSI.)
This average rose to 70.3% on Nov. 16, which was higher than 97% of all other daily readings since 2000 — well above the 90% threshold that in prior columns I used to define excessive bullishness.
Gold responded just as contrarians expected, as you can see from the accompanying chart, below, falling from a high above $1,877 on Nov. 16 to below $1,780 on Nov. 24.
Just the opposite sentiment picture prevailed the last time I wrote about gold market sentiment, in early October. That was when the HGNSI fell to below all but 99.6% of all other daily readings since 2000, suggesting that “ a buying opportunity is at hand .” Spot gold rose $103 over the subsequent six weeks.
We’re nowhere close today to another such buying opportunity. Though the HGNSI has fallen somewhat since where it stood in mid-November, it is merely in the middle of its historical range. Specifically, the HGNSI currently is at 28.1%, which stands at the 52 percentile of the historical distribution since 2000. To make it into the bottom decile of that distribution — what I have previously defined as the zone of excessive bearishness — the HGNSI will need to fall to minus 14.6%.
That’s a long way off. That’s why contrarians expect more gold market weakness in coming days and weeks.
By the way, the gold market is not the only arena experiencing excessive bullishness in recent days. The same has been true for the Nasdaq stock market. On Nov. 17, one day after the peak of gold sentiment, the Hulbert Nasdaq Newsletter Sentiment Index (HNNSI) hit its own peak, higher than 97.7% of all other daily readings since 2000. The Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP +0.59% has fallen more than 400 points since then, and as you can see from the chart below, the HNNSI still remains quite high — just barely below the zone of excessive bullishness. Contrarians therefore expect more weakness.
What about market timers in other arenas?
The gold and Nasdaq markets are just two of four arenas in which I track market timers’ average exposure levels. The others are the general stock market and the bond market. Each month in this space I highlight one of them and analyze what it’s saying from a contrarian point of view.
In the meantime, the chart above summarizes where the timers currently stand in all four arenas.
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 firstname.lastname@example.org .