Following on yesterdays thought process of determining 'rotational quality', as it related to the ETF's, and knowing when we have a reliable short term directional move developing is something that is always very difficult to understand with certainty. And this has been the case with the unloved gold sector of late. The space has been very frustrating for those with interest in the sector, really since August 2011. Since the Feb 29 2012, $100 crash in the gold market, which took the entire space down with it, we are now starting to see some recovery as per the the $XAU gold/silver index above, which is a glean into the activity of the large cap space.
The columns we want to be keeping are eye on are the 'CloseS' and 'IntraS', which refer to the Type-1 intraday momentum and Type-2 closing signals. These signals are implied reversals of the short term bias or trend of the market. This trend can be characterized as having duration of < 1 month and is often much shorter. Now, when we view the $XAU which is a good proxy for breadth in the equity space, we can see that essentially everything is generating buy signals. Now, looking closer, we can see that the majority of the long signals generated are fairly recent as per the indicated values (in days) within the column 'CloseS'. If larger funds felt the market price was an opportunity to participate, they would be buying aggressively. These are the quality rotations we are looking to capture, and they would be reflected within the 'IntraS' column, as a momentum signal intraday. As traders and investors we want to be aligned with this flow.
The screen shot above does not reflect 'urgent' or 'aggressive' fund flow back into this sector, as demonstrated by the heavily influenced 'CloseS' buy signals, which implies that the buying signal is an end of day occurrence, and not a momentum generated signal. So if we do participate as buyers of this sector we would have to scale in gradually until prices are accepted and confidence develops.
Having said that, it becomes apparent that the golds are relatively cheap vs the broad stock market. If we reference the chart below, we can see the ratio spread between Goldcorp (GG - NYSE) and the S&P500 ($SPX cash) is suggesting that the gold stocks are approaching valuations that have been seen as far back as April 2009, as evidenced by the arrows below.
We will have to continue to monitor the golds to see if this buy signal is sustainable in the short term and as it is relates to the macro view above as gold stocks get very cheap relative to the broad US stock index
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