CHAPEL HILL, N.C. (MarketWatch) — Gold’s $20 plunge on Friday was accompanied by a big increase in bullishness among gold timers.
That’s just the opposite of what you would expect, since the normal pattern is for gold timers’ bullishness to rise and fall in lockstep with the market.
It’s a bad sign that this normal pattern has been broken, according to contrarian analysis. It suggests that there isn’t yet absolute bearishness that marks a significant bottom.
Consider the average recommended gold market exposure among a subset of short-term gold market timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). When I last wrote about this average two weeks ago — on Sept. 24 — it stood at minus 46.9%, suggesting a significant amount of bearishness among those gold timers. That, in turn, was bullish from a contrarian point of view.
To be sure, as I wrote two weeks ago, contrarians would turn bearish again if gold timers quickly became bullish at the first signs of market strength. Little did I know that the gold timers were about to become more bullish without any signs of market strength whatsoever.
For one week after that column — until last Wednesday, Oct. 1 — gold traded in a narrow range, and the HGNSI didn’t budge. But then came last Thursday, when, despite a slight drop in the price of gold, the HGNSI skyrocketed by more than 31 percentage points, to minus 15.6%.
That was an extraordinary development. We’ve rarely seen one-day changes in the HGNSI that big, and on those few occasions, it’s been because of a correspondingly large jump in prices. We received emails Thursday night from subscribers to our sentiment service, wondering if the HGNSI jump that we reported had been a typo.
It was not a typo. Clearly, there was eagerness on many gold timers’ part to declare a bottom. That is something rarely seen when the market is really bottoming out.
Contrarians, therefore, were not surprised when gold plunged on Friday by more than $20 an ounce.
Those developments are depressing not just because gold lost a lot of ground. It also suggests that I was jumping the gun in declaring that the low HGNSI level reflected a high-enough level of despair and pessimism to mark a bottom.
On the contrary, we now know — courtesy of the HGNSI’s jump late last week — that gold timers’ bearishness was only skin-deep, and that they stand ready to become bulls again at the drop of a hat. True bottoms typically are accompanied by bearishness that is much more stubbornly held than that.
Might Friday’s unexpected plunge be enough to convert the erstwhile bears into stubborn ones? Early indications are not encouraging. As of Monday evening, for example, the HGNSI stood at minus 34.4%. While that is lower than last Thursday’s minus 15.6% reading, it remains 12.5 percentage points higher than where it stood before last Thursday.
