Finally, Gold Bounced! But is it a Dead Cat?

Finally, Gold Bounced! But is it a Dead Cat?

It took weeks, but it finally happened — gold bounced! The question now is, does it involve a dead cat?

The rise in gold’s price comes as the dollar takes a well-earned rest from its rate-induced climb. Gold’s behavior, for the next week or so, will depend on how rates, the dollar, and the USD/JPY pair behave. Our view is that the bias for rates is up, NOT down, so the dollar will remain strong, even if it corrects in the short term, and provide significant resistance to gold’s rally. Having broken through the $1140 resistance and reaching $1160, gold must next face $1180 resistance. Gold could check-back to $1200, but we think it is less than a 50–50 chance. We will view this rally in gold as a “dead cat bounce” until there is evidence that it’s not.

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Equities

Equities continue to trade in a similar manner to 1998–2000 (charts below).

We look at two different measures of investor sentiment; the AAII survey, and the Rydex Fund asset allocations. Even though the AAII index has some intrinsic issues because of the voluntary nature of the survey, it does have value. This week’s survey resulted in a 1% increase (to 45.6%) in bull sentiment, a 3.4% decrease (to 25.7%) in bear sentiment, and a 2.5% increase (to 28.7%) in neutral sentiment. Fear seems to be thinly spread in the market at the moment.

The Bull Sentiment pattern that we follow is still in effect (chart below) and continues to point down.

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The Rydex Fund asset allocation does not involve voluntary reporting, making it more significant when measuring sentiment. Like the AAII, the Rydex Fund asset allocations reveal elevated Bull Fund allocations, and the lowest Bear Fund allocation we have seen since spring 2015, which was the lead-up to the summer correction (chart below).

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We wish our subscribers a very happy, healthy, and wealthy New Year!

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Source: Nicholas Gomez