Thursday, May 10, 2012

Another sign of a short-term bottom

I recently wrote that gold and gold stocks could be setting up for a short-term trading bottom (see A bottom for gold and gold stocks?) and followed up with a post that the market may be seeing a short-term reversal at these levels (see The "Merde" rally?). Now comes another sign that a trade-able bottom in risky assets may be near.

The chart of the gold stock ETF GDX below shows that it experienced an outside day yesterday on high volume, which is an indication that we could be seeing signs of a trend reversal.

While there is still a high degree of headline risk, consensus sentiment is becoming overly bearish, which is contrarian bullish (see Mark Hulbert's article Major correction unlikely), and the stock market is now overpricing tail-risk in Europe. Notwithstanding the problems posed by Greece, the message from the bond markets of France, Italy and Spain is one of relative calm.

Who would you rather believe, the stock market or bond market?

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.


Enis said...

Cam, I've been a long-time silent follower, and I wanted to thank you for your unique market color, cutting through the noise of daily headlines. I agree with you on gold miners specifically:

though I am more cautious on the broad market overall given the continued relative strength of XLU:

Keep up the great work, thank you again.

Amar Harolikar said...

Hi Cam,

I agree that from a fundamental point of view, Europe risk have been overestimated.

A Greece default and exit from Euro will cause a lot of big headlines, sound and noise and some bit of chaos in financial markets. A few banks might even closed down, but I doubt a Citibank will need to beg the Fed for money.

I really doubt that a minuscule country like Greece, barely 1% of global GDP is going to cause a global slowdown !

From a more short term perespective, I would tend to think that S&P is likey to continue the correction. Four reasons :-

- The cat and mouse game between Germany (EU?) and Greece will cause a bit of anxiety

- US recovery is going on in a steady but a slow pace - however, there are no new major triggers to take the markets beyond the historical resistance at 1450 -1500 levels

- S&P has had a massive run from 1200 in Dec to a high of 1420. Right now it near 33% retracement. Given all the negatives (sentiments, not fundamentals) that need to be priced in I would assume a 50% retracement.

- S&P is making lower tops, MACD is making lower top. Stoch are at bottom and turning up, while candles show slight bullishness - could that just be the S&P be making another lower top, before retracing all the way to 1310 levels?