It’s Mailbag Friday!

The postal carrier was busy again this week. 

I received lots of questions about the current state of the stock market and about my currently wrong-headed bullish stance on gold. Here are a couple of the more “G-rated” comments and my responses to them…

Jeff, I’m getting a little confused about your projected intermediate direction for the market. You have said on several occasions recently that you expect the market to go higher, potentially reaching new all-time highs this summer. However, in your daily reports, you keep talking about a pullback. I’m assuming you mean a short-term pullback followed by the new projected high?

– Deborah

Hi Deborah, thanks for your question.

As a trader, I change my mind often. I constantly re-evaluate the situation. So, as conditions change, my outlook changes.

You are right. Near the end of June, as the S&P 500 was sitting at about 2700, I was bullish. I expected July to be a strong month for stocks. And I thought the S&P 500 might even make a run at new all-time highs this summer.

Since then, the S&P has run up nearly 120 points. That’s a huge 4% gain in just three weeks. And conditions are now a whole lot different than they were in late June.

For example, many technical indicators have flipped from extremely oversold conditions to modestly overbought. The Volatility Index (VIX), which was above its upper Bollinger Band three weeks ago, is approaching its lowest level of the past six months. And investor sentiment – a contrary indicator – has flipped from extremely bearish to extremely bullish.

Under these new conditions, it’s hard to envision a lot more upside from here. As you pointed out, I became much more cautious earlier this week. That’s not an arbitrary, wishy-washy change of position. It’s a change based on remarkably different conditions than what we were looking at a few weeks ago.

Now, if we do get a quick, short-term pullback in the market, and if the technical conditions stretch into extremely oversold territory like they were at the end of June, well… don’t be surprised if I turn bullish again. Like I said, as conditions change, my outlook changes.

Here’s another question about the recent action in gold…

Gold is heading even lower. I keep thinking it can’t go lower, that it is going to rebound soon, but it does keep going lower. Do you see a rebound any time soon?

– Bill

Hi Bill. Thanks for writing in.

There’s no doubt… owning gold and gold stocks has been the most frustrating trade of the past several weeks. But it is in this frustration that gold often hits a bottom.

Yesterday, I wrote my usual morning update to my Delta Report subscribers while gold was dropping to its lowest level in a year. The blog post, printed below, sums up my thoughts on the current action in the precious yellow metal…

Gold is getting hit with a sledgehammer again this morning. After some encouraging action yesterday – where both the metal and the stocks recovered from steep opening losses to close unchanged on the day – gold is down $12, and GDX is trading almost 2% lower in the pre-market.

If this holds until the opening, we are going to see some of the most oversold conditions in gold since December 2016.

It’s painful to sit through this decline while holding a handful of gold positions. But I remain confident the metal and the stocks will be higher in the weeks and months ahead.

Having said that, remember what I wrote yesterday… Gold needs to get above the $1,233 level to create a bullish-looking reversal pattern on the chart. We might be able to adjust that level down a bit, depending on the action today. So, since we already have some exposure to the sector, I don’t really want to pile on until we get some positive price action that confirms a reversal. I think we’re close to that point. But I’ve thought that for the past few weeks and it hasn’t played out – yet.

I will say this, though… Sentiment towards gold and gold stocks today is worse (A LOT WORSE) than the sentiment towards retail stocks last October.

Longtime readers might recall that situation. Retail was the worst-performing sector in the market at that point in 2017. Amazon was crushing everyone. And a number of retailers were on the verge of bankruptcy. That’s about when I started recommending bullish trades on stocks in the retail sector – like Macy’s, Dick’s Sporting Goods, Bed Bath and Beyond, and Gamestop.

Every one of those trades went against us at first. Oversold conditions got even more oversold.

But every one of those trades eventually proved profitable.

Right now, the gold sector is more hated than retail was last October. The sector has disappointed traders and investors by trading in the same range for 18 months. Folks think bitcoin and other cryptocurrencies have taken over gold’s traditional role as a “store of value.” Just about no one thinks buying gold and gold stocks is a good idea right now.

From a contrarian perspective, this seems like a tremendous opportunity.

Best regards and good trading,

Jeff Clark

P.S. Thanks to everyone for writing in this week. I always look forward to reading your questions and  comments – whether positive or negative.

As you know, my inbox is always open. Keep your feedback coming right here.