From Streetwise Reports: Bob Moriarty of 321 Gold discusses the role of sentiment in the commodities markets and what it means for investors.
We have an interesting situation where a number of commodities are pressing at sentiment extremes all at the same time. Since the S&P and Nasdaq are both US stock market indexes, it is perfectly natural for their sentiment readings to be similar. After all, the indexes are alike in that they are bundles of different shares. In the same way, you can reasonably assume that the DSI for gold and silver to be close, they are both precious metals.
The price of various commodities is a lot like dancing. Sometimes you lead, sometimes you follow. But for so many different commodities to be at an extreme of sentiment at the same time is highly unusual.
Punters and pundits alike have a tendency to invest using their rear view mirrors. After all, if the market has been up for every day for the last month, doesn’t that mean there is a high probability of it doing exactly the same thing for the next month? Actually not. That’s a big reason investors following the crowds or those promoters selling them their own fantasies manage to lose so much money for so many people.
Anyone who could afford $3.99 USD, or £2.75 BP, or $5.23 CAD, or EUR 3.56 could have called the top in the Bitcon scam with the same accuracy as I did. You would have to spring for the book and spend 2-3 hours reading it. That would give you all the basic knowledge you need to recognize a bubble about to burst.
But there are other pure measures of sentiment and psychology that you can pay for but will provide a hard objective measure of how investors think. The DSI by Trade Futures is the most sensitive. One good trade would more than pay for a six-month subscription.
The concept of the DSI is simple. It shows the extent of investor sentiment. The higher the number, the more bullish investors are. With numbers above 90 you are in nosebleed territory and it suggests the market is about to turn lower. The lower the number, the more bearish investors are. With sentiment below 10 the market is saying the commodity is about to bottom and go higher.
For the S&P and the Nasdaq, the DSI went to a high of 96 and 97 after trading on the 22nd of January. Volatility hit a low of only 9 on the same day. On the 24th of January the Euro hit 90, the British Pound hit 94 while the lowly and unloved USD touched a low of 8. Crude oil topped at 93 and gasoline was the same.
Over in the metals gold touched 91, platinum showed 94 and palladium was 90. The CRB commodity index also hit a high of 90.
All of those numbers are either high enough or low enough to suggest a high probability of a turn shortly. With a Blue Moon, a Super Moon and a lunar eclipse coming on the 31st of January investors might want to position themselves for reversals in a lot of important markets.
The race is not always to the swiftest nor the battle to the brave but that is the way to bet.
The SPDR Gold Trust ETF (GLD) fell $0.26 (-0.20%) in premarket trading Monday. Year-to-date, GLD has gained 3.57%, versus a 7.39% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Streetwise Reports.