After a big run to start the year, followed by a selloff since mid-August, Gold and Silver are looking attractive once again.  Both metals are trading at or near bearish extremes right now, indicating a potentially strong rally may be fast approaching.

We’ve often discussed sentiment readings and “crowded” trades and how they often mark turning points for a security and/or the market as a whole. As a reminder, a "crowded" trade is one where too many investors are piling in on the “buy” or “sell” side.

The theory of contrary opinion asserts that if a majority of traders agree on the direction of a market move, then the odds are significant that prices will, in fact, move in the opposite direction.

The Daily Sentiment Index (DSI) is a contrary indicator. The DSI provides an "emotional" indicator of market behavior.

Daily Sentiment Index at Extremes: Typical Behavior
(trade-futures.com)

A number of clear patterns have emerged from years of sentiment data:

  • When the DSI rises to the 85% area or higher, the odds of a top are significant
  • When the DSI falls to the 15% area or lower, the odds of a bottom are significant
  • The longer the DSI remains at a high level, the larger and longer the likely potential decline
  • The longer the DSI remains at a low level, the larger and longer the likely potential rally

The DSI for Gold sits at only 7% bulls, 93% bears, indicating a high level of pessimism for the yellow metal right now.  The DSI for Silver is currently reading only 4% bulls, 96% bears - an even more pessimistic extreme.

At the market bottom in March 2009, the DSI for the S&P 500 Index registered 4% bulls and 96% bears. 

The probabilities suggest a significant rally in both metals may be imminent.

George Kiraly Jr., CFP®, MBA is a NAPFA-Registered Financial Advisor.

Disclosure: George Kiraly Jr., CFP®, MBA is the Founder & Chief Investment Officer of LodeStar Advisory Group, LLC, an independent Registered Investment Adviser located in Short Hills, New Jersey. George Kiraly, LodeStar Advisory Group, and/or its clients may hold positions in the ETFs, mutual funds and/or any investment asset mentioned above. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. The above commentary does not constitute individual investment advice. The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.



 

 

 

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