“How’s that gold stock sell signal working out for you, bud?” The voice in the back of my head chastised me on Friday.
Two weeks ago, the bullish percent index for the gold sector (BPGDM) generated a sell signal when it turned lower from overbought levels. So, I told folks that if they had bought into the gold sector based on the BPGDM buy signal in March then it was time to take profits.
It would have been less controversial if I had told people to drown their puppies.
That essay generated more reader feedback than usual. Nearly all of it was bullish on gold stocks. Most folks thought I was crazy for suggesting the gold sector was vulnerable to a decline.
And, so far, the readers are right…
Gold and gold stocks have continued to press higher. Gold traded as high as $2,440 per ounce yesterday, up $70 since my May 10 essay. The Gold Bugs Index (HUI) closed Friday near $287. That’s up 9% over the past two weeks.
The rally has been so strong, and so persistent, that even the voice inside of my head is telling me to “get back in now, before the gold sector runs away for good.”
It’s a Contrarian Indicator
But, I’m staying on the sidelines and not chasing this move. The BPGDM is on a sell signal. We’re entering a seasonally weak period for the gold sector. And, investor sentiment (a contrary indicator) is overwhelmingly bullish on the gold stocks.
These conditions usually occur at the end of a gold stock rally, not at the beginning of one.
Of course, nothing in the financial markets is 100% certain. It is possible the gold sector keeps pressing higher, and we never get the pullback I’m expecting.
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As traders, though, our decisions ought to be based on some function of risk versus reward. And right now, it seems to me the risk of buying into the gold sector at current levels is far greater than the potential reward.
I am bullish on the sector for the longer term, and I expect the Gold Bugs Index (HUI) will finish the year even higher than where it is right now. But, given the overbought conditions, and given the BPGDM sell signal, I’m still expecting a better buying opportunity in the weeks ahead.
Best regards and good trading,
Jeff Clark
Editor, Market Minute