Monday, February 18, 2013

Gold - Long Term Chart Says Buy Now!

Since 2001, Gold has been behaving very nicely and stayed in a narrow range in its logarithmic chart. So If Gold has gone down for an extended period of time and suddenly drop at level not seen for a while, or alternatively if it has gone up for a long time, and makes new highs, I like to have a look at the logarithmic chart since the bull market started in 2001, and see is we've hit the higher or lower bound of the trend
(Source: Boursorama)
Guess what, we've just hit the lower bound last Friday. Assuming long term fundamentals remain the same (debt issue, money printing...), Gold is likely to go up over time, and this could prove to be the right time to buy. The 14-day RSI is at 30 (and hit this level 3 times) which means Gold is oversold short term. So it looks like a long and short term buy at this level.

The only thing that bothers me is that is has mostly corrected through time, and not really through price (it only lost 15%) which means it keep it amazing record of 12 positive years. Which is probably why Georges Soros recently lightened his position, and Jim Rogers said he would not buy at those levels. however, Marc Faber still continues to advice buying every month.

The Gold chart may also indicate it's a good time to buy Silver which has gone down by over 40% since the $50 it hit in 2011, but it's still not technically oversold (yet).

Monday, February 4, 2013

S&P 500 Analysis: Valuation, Sentiment and Technicals - February 2013 Update

Last time I did this analysis was in January 2012, and I found out the US market was not particularly attractive with the S&P 500 just over 1,300, but not extended quite enough (AAII sentiment) to short it, the S&P 500 is now over 1,500, so let's update this long term analysis.

S&P 500 Valuation

The Shiller S&P 500 CAPE (10-year price earning ratio adjusted for inflation) is the reference to assess whether the S&P 500 is undervalued or overvalued over long period of time. Here's what it looks like now:

The CAPE stands at 22.77 vs 21.14 over a year ago, so by this metric the S%P 500 is even more overvalued than last year. Although it's still much lower than the CAPE in 2000, it's still high compared to historical CAPE, and at the level of previous tops in the stock market (1901, 1929 and 1966).

Many analyst like to look at the short term, and show that forward PE ratio is only about 14, and use this number to explain stocks are a pretty good bargain right now. In 2007, we had the same rhetoric, as forward PE were low because of high coportate earning, that were widely above their long term trend.
The chart above shows the S&P 500 earning adjust for inflation (real earning) between 1870 and today. We are clearly above trend, and this does not bode well for future returns.

Based on the 2 metrics above, the conclusion is the same as last year and it appears that based on valuation investing in the S&P 500 for the next several years might not be the best of ideas, or least it's rather risky.


US Market Investors Sentiment

Based on last week AAII sentiment survey, investors are moderately bullish for the next 6 months.
But I like to look at the 14-week moving average of the AAII sentiment survey (which I call AAII-14), since I found it to be useful to identify  some of the optimistic (and market) peaks of the past. The rule goes as follows: If the 14-week moving average of the AAII "Bullish" sentiment index is at 30% or below there could be a long term buying opportunity, above 50% there could be a long term sell opportunity.

Now this is getting interesting, as sentiment is pretty bullish, and AAII-14 getting closer to the 50% mark, even though it's not quite there for now.

S&P 500 Technicals

We are now going to have a look at some technical indicators namely RSI-14 and NYA200R, as well as draw trend lines on the S&P 500 to see what it might do in the short term.

The chart above (Yahoo Finance) is the 6 month chart of the S&P 500 with RSI-14, and we've been around 80 for a little while, which means the market is oversold in the short term.

NYA200R shows over 83% of stock are above their 200-day moving average, which is  not very bullish for stocks either
Now let's get back the S&P 500 chart, but this time over 5 years, and let's try to draw bottom and top parallel trend lines.

We seem to have reached the top of the trend started since 2010, so a correction (at least in the short term) could occur very soon.


In the short term, all indicators shown above are bearish since they all indicate the market is overbought, so it's prudent to own less US stock at the moment, and traders may also consider shorting for the next few weeks/months.

In the long term, the S&P 500 is overvalued by all measures, but market participant is not extreme just yet, so there could be a short term correction, followed by a rally before stocks head south for a longer period of times. Alternatively, it's also possible positive sentiment carries on the S&P 500 to new highs, and the long term reversal comes earlier than expected.

Saturday, February 2, 2013

Marc Faber February 2013 Market Commentary

Marc Faber has just released the market commentary for February 2013 entitled "A good Life is not a State to arrive at - but a Way of Traveling" on

Marc Faber first explains that investors should learn to relax and ignore what markets do in the short term in order to outperform. He takes one of his reader question as example:

"Why I would rather not sell my gold and subsequently buy it back at a lower price.?" 

The reason he is not selling his gold is because he wants to diversify and keep approximately 25% of his assets in gold (also 25% in equities, 25% in corporate bonds and cash, and 25% in real estate). That way if the price of gold declines, it is likely that the value of his financial assets would increase, so a decline in the price of precious metals would actually be beneficial to the overall value of his assets since he has around  50% of his portfolio in bonds, cash and equities. But now that stocks and bonds have both rallied very strongly, he feels much more comfortable holding gold than financial assets.

There is no attachment with this month MMC.

If you want to access the full Monthly Market Commentary (MMC) by Marc Faber, it is available for 300 USD per year.