Equities Are not a Bargain, and Gold Speculators Are Living in a Very Crowded Room

Earnings reports this week delivered mostly upside surprises and the S&P 500 reacted by marching higher until Thursday when both Google and Microsoft surprised to the downside. By Friday, the market decided that these negative surprises were largely confined to those companies and recovered some of the previous day’s losses to finish higher on the week, although well off the week’s high. Earnings season is turning out to be not as bad as feared, but it is early in the season, and May is just around the corner — “Sell in May and go away” is still a possibility.

As the chart below shows, the PE ratio for the S&P is climbing back up and is at levels well above the historical average (15).

S&P 500 PE Ratio


The price-to-sales ratio at 1.86 is the highest it’s been in fifteen years. Investors are paying a premium for the economic activity of companies.

S&P 500 Price-To-Sales Ratio


The yield on the S&P continues to slip, and is at about half of the historical average of 8%. However, considering how much lower alternative yields are, this may not be very meaningful.

S&P 500 Earnings Yield


Fundamentally then, we don’t see equities as a bargain and are not about to go chasing prices higher. The pressing question we all have is; are we topping out, or are we at least nearing a top?

Our Price Modelling System has gone from giving a weak negative to a moderately negative signal, but we are cautious about increasing our short equities position at this time. {This section is for paid subscribers only}

The sentiment indicators for the market are still not proving to be decisive. On the chart below we see the following:

· Bear assets declined slightly (bearish)

· Bull assets where unchanged (neutral)

· Bull sentiment increased, but still not elevated (neutral)

· Bear sentiment decreased (bearish)

On the chart below, we have high-lighted the local tops for the S&P (green rectangles) and have marked upward spikes in the Bull Sentiment, and downward spikes in the Bear Sentiment (pink vertical lines and pink arrows) that occur ahead of the local tops. Notice that the Bull and Bear spikes occur one to four weeks in advance of the S&P tops.

In almost every case, the Bull Sentiment is lower (pink ovals), and the Bear Sentiment is higher (blue ovals) when the S&P makes a top than at the spike that preceded it. This may be an indication of the “wall of worry” that markets sometimes rally on. In any case, the slight increase in fear just before the market tops is highly predictive.

So what does this say about the present situation? Most recently, the Bull Sentiment spiked five weeks ago and is now lower than it was then. The Bear Sentiment, however, is lower than it was then which is not what normally happens at tops. We would like to see the fear indicator increase before we increase our shorting activity.

The possibility also exists that a new (higher) spike in the Bull Sentiment may be about to form before the market tops. We will be watching.


Gold continues to track downward in sync with the 30-year bond.

Gold also continues to move lower with the dollar, even though short-term the dollar has moved up over the last two weeks, and if the dollar rally continues toward the upper part of its recent trading range, we expect that gold will experience a sold drop.

The long side of the gold trade is getting VERY crowded, and the commercial traders continue to short like there was no tomorrow.

The commercial traders know the gold business better than the hedge fund managers (who only know how to follow trends) and they are selling gold that they don’t yet own because they fully expect to be able to buy it back at a lower price, or in the case of the producers, sell their future mined-gold for a higher price now than when they actually have it mined.

Can this go horribly wrong for the commercial traders? Of course it can, but what are the chances? The FED is not going to cut rates this year; the rest of the World IS cutting rates (or threatening to) which, by default, should support the dollar; inflation is not likely to explode upward; and the economy will continue to gently improve. Except for the ‘total economic collapse’ doomsayers, there are more reasons to sell gold than to buy it, which means that as soon as the hedge funds smell a change in trend, there will be a terrible crush to get out of the long room.

Granted, these are the probabilities, not prescience.

ANG Traders

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Forty years of private equity trading, and still learning.

Forty years of private equity trading, and still learning.