S&P 500 and Gold Sport Two Misleading Sentiment Anomalies

Groupthink tends to create losses for most and juicy gains for a select few. The S&P 500 and gold show some compelling sentiment extremes that could be misleading if viewed in isolation.

I love a good “reverse lemming” or contrarian trade. Investor sentiment is one of the best tools to spot a contrarian setup.

Even though the market has been stuck in a rut, there are a number of sentiment extremes. Many of those sentiment extremes however, parade some curious anomalies.

Love to Hate Gold

Last week Bloomberg reported that: “holdings in gold-backed exchange-traded products reached a record 2,629.3 metric tons yesterday,” an extreme sign of gold optimism.

More people than ever flock into ETFs like the SPDR Gold Shares (GLD) and iShares Gold Trust (IAU). The fiscal cliff, QE3 and QE4 probably have something to do with that.

Gold futures traders on the other hand are quite bearish. Only 10% of futures traders are bullish about gold.

I have never seen such polar opposite sentiment for the same asset class.

Let’s Buy Stocks Before They Drop

Bank of America just reported that its private clients (retail investors) are selling stocks at the fastest pace in 19 months (see chart below). Such eagerness to sell tends to occur around bottoms not tops.

The behavior of option trades is the exact opposite of BofA retail investors. According to the ISE exchange, traders bought 208 calls for every 100 puts.

Such a rush into call options has pretty consistently led to lower prices in the past.

If you spend more time looking at other sentiment gauges, seasonality, technical patterns, cash flow, cycles of stocks vs. broad market indexes, and correlations between asset classes, you’ll find even more anomalies.

The thing is, anomalies – curious and unique as they might be – cause analysis paralysis, they don’t provide trade setups.

When in doubt, stay out or sign up for the Profit Radar Report to find low-risk trade setups. Low-risk setups provide sizeable profit potential in exchange for negligible risk, even in environments like this.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.

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