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Thursday, March 14, 2013

The Chasers Follow Opinion Not Probabilities

The gold to S&P 500 ratio (GLDSPYR) illustrates only the direction of money flows (chart 1).  The chasers are chasing stocks right now.  The gold shares, lead by gold - but not necessarily meaning superior returns, will turn when the paper fuel runs out and chasers dominate the short side of the trade, but not until direction changes.

The Std Norm(E) tool reveals that that chasers have pushed GLDSPYR below negative two sigmas in January and February of 2013 (-2.43 and -2.44).  In other words, this downside push has produced the lowest reading since inception of bull market in 2001.  Low readings generate low probability events that generally preceded major trend inflections.  Further downside could generate a negative three sigma reading, but these readings are even rarer.  The trading game is a game of probability, not opinion.

Chart 1:  Gold to S&P 500 Ratio (GLDSPYR):


Source: more

Commodities will likely bounce a long their 2012 bottom until the dollar rolls over and gold resumes its rally (chart 2).  The chasers, busying chasing the flavor of day - stocks, junk bonds, etc. don't care about commodities.  That is, until they turn and everyone tries to be the first to exit from a very small trading door.

Chart 2: CRB Spot And Year-over-Year (YOY) Change



Eric, there is still about 10% of play in that ratio, shown on your website, to the trendline.
A sobering thought for pm bulls? Rod

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Hi Eric,
I was reading your post about commoditieshttp://edegrootinsights.blogspot.com/2013/03/its-time-to-friend-commodities.html

It appears that we have a 30 year cycle in place for peak commodity prices: i.e. approximately 1920, 1951, 1981. Is it possible that 2011 would mark the end of the commodity cycle for this 30 year period? It certainly didn't reach the top of its price channel, but it looks like every cycle since 1920 is peaking slightly lower with respect to the top of the channel. Also, in many cases we have two peaks separated by a few years like we had in 2008 and 2011. 
I was just wondering what your thoughts were. If this cycle peaks this year or beyond it would be unusually long compared to time between previous peaks.
Thanks as always for your valuable web site and excellent analysis!
Jay


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