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Monday, February 4, 2013

Here Comes The Public - Stocks, Silver, Gold

A spike in bullish sentiment towards concentration suggests a rising market temperature (chart 1).  The public, the consummate chaser of extremes - buying strength and selling weakness, can't resist chasing "hot" markets.  In other words, like tourist flocking to the gift shops, here they come!

Increased public participation often translates into rising volatility, so be patient.  The invisible hand knows how to apply just enough pressure to the inexperienced to create the sharp breaks necessary for accumulation.  Watch for them and follow it as long as the message of the market favors risk-on.

Chart 1:  S&P 500 And American Association of Individual Investors Sentiment Survey Bulls As % of Bulls and Bears Sigma

The recent and largely quiet breakout in the long-term small cap stocks index suggests an equity rally that could surprise even hardcore bulls (chart 2).

Chart 2: Small Cap Stocks Total Return Index (LCSTRI), LCSTRI to Gold Ratio (SCSTRIGOLDR) and SCSTRI Cycle Z Scores (SCSTRIC1&2) 

Silver investors, likely worn out by another long AB delay, should not ignore the action in the small cap stocks.  The long-term correlation between silver and small cap stocks is 0.73.  In other words, as goes small cap stocks, so goes silver. Since the long-term correlation between gold and small caps and gold and silver are 0.83 and 0.95, respectively, it also suggests rising gold prices.


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