By Thierry Laduguie
If you are on Twitter you will have noticed an increase in the number of posts about gold. Gold crashed earlier this week and that’s why everyone is talking about it. It appears that many traders were on the wrong side. The yellow metal has been in a bull market for years, and as we know, bull markets always come to an end. The question is: is this the end of the bull market in gold? It could be but I won’t bet on it, I am not an expert on gold. What I can say is that commodity prices, like stocks prices can suddenly drop at a time when there is no evidence of deteriorating fundamentals. This is caused by a change in sentiment.
On 20th March, the BTI, a sentiment indicator, turned bearish. From that moment I knew that stocks were at the forefront of a significant decline.
Contrary to popular opinion, economic and corporate news do not drive stock prices. Stock prices and many other assets such as gold are driven by sentiment. Positive sentiment is bullish for stocks while negative sentiment is bearish. It does not matter whether the news is positive or negative, what matters to the market trend is the state of investors’ sentiment. Corporate and economic news have a temporary impact on prices when they are released, and we can not ignore this fact, but short to long term trends are built on sentiment.
So how do we measure sentiment?
I measure sentiment with the BTI which is a proprietary indicator. This indicator moves up and down according to sentiment, when it reaches an extreme, stock markets change direction.
Note on the above FTSE 100 chart, the BTI turned up on 29 November 2012 and continued to rise until 19 March. This period was under the influence of positive sentiment, stock prices rose. The BTI turned down on 20 March, indicating a period of negative sentiment. Stock prices declined.
Another indicator derived from the BTI gave an early warning signal in early March:
Positive sentiment was receding as shown by the declining line after 28 February (the top). During the period that followed the stock market continued to rise but the sentiment indicator continued to decline (bearish divergence). That was a warning that the FTSE 100 trend would turn down.
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