Thursday, January 27, 2011

Lewis: GLD signaling a bottom?

Lance Lewis has an article at Minyanville, looking at a potential bottom on GLD (link).

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The GLD gold ETF puked up 31 tonnes (or 2.48% of its bullion holdings) yesterday to bring its holdings down to 1,229 tonnes.

Now, a bullion puke of that size is interesting, because as we’ve noted before, one-day declines in the holdings of this ETF of over 1% have tended to be capitulatory in nature and have typically occurred near important lows in the gold price during gold’s secular bull market.
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Lewis also writes about rumors of a leveraged hedge fund coughing up most of this gold. As with most rumors, the little fish, rarely get a version that is anywhere close to the truth, in a timely fashion.

As always with oversold markets, oversold readings can become oversold-er. The bigger question to me, is whether the major uptrend is intact. If it is, then this is an opportunity to add to longs. However, as Lewis notes, only after the fact will traders know for sure.

I don't this is an intermediate or long term top because sentiment tends to get much frothier at major tops. Gold newsletter timers, small time gold investors are still relative cautious. Bold bullishness in the face of a decline is the typical reaction when the trend changes. Instead, I observe folks taking profits, and/or shy about new long positions.

Weighing against this is flat to down seasonal tendencies for gold into February/March. The recent highs are significant resistance, limiting potential upside. For the other markets, Feb can be risky for stocks, bonds tend down into a bottom in May. With the caveat that I find seasonality tends to be one of the weaker and less reliable indicators.

Long GDX, GLD, TBT (short puts)
Neutral SPY (net neutral with a three-leg option position)

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