Are Precious Metals and Energy Overbought?

Commodities continue to climb with several commodities making new highs for the year. The equities market continues to push higher with 3^rd quarter earnings coming in better than expected. This good news has aroused more investors to put what's left of their money back into the market and has fueled this recent rally in stocks.

Here is my concern:

The market continued to make a new yearly high last week, company earnings are better than expected and more retail investors (average working people) are dumping their money back into the market again because everything is going up in value and all they need to do is buy something. When it's this easy to make money in the investment/trading world, something drastic usually happens not long thereafter.

Here are a few charts for this week in precious metals and energy.

Precious Metal Stocks – Gold Bugs Trend

Gold stocks have performed well in the recent couple weeks. I figure we will see some sideways price action before another leg higher. The question is how far will this pullback go?

As you can see there are two trend lines which make for solid support levels. I will be looking for a low risk setup around those levels.

Precious Metal GLD Gold Fund (GLD)

Gold had a great pop higher the first week of October, but now it looks ready for some sideways chop. I tend to look at precious metal stocks as a leading indicator for trading gold, so before we put more money to work in GLD, I want a buy signal for gold stocks also.

Precious Metal SLV Silver Fund (SLV)

Silver SLV and gold GLD generally move together, with silver being the more volatile of the two on a percentage basis. As you can see from the chart below, the support trend lines are much father away from the current price. If you don’t want to give back too much of your gain, then raising your stops is a safe call. But if you get taken out of your position, you should be looking to get back in at a lower price on the first sign of a bounce/reversal to the upside.

Energy Stocks – XLE Energy Fund (XLE)

It does not matter which sector or commodity I am following; it is important to analyze the stocks for that sector or commodity. These are as close as you can get to a leading indicator for possible trade setups.

In my opinion, it looks like energy stocks are about to have a pullback. The trend is still up, so I am not looking to short, rather I am tightening my stops to lock in some profits if we get a sharp pullback. Then I will be entering long again on the first sign up a reversal back up.

Energy USO Oil Fund (USO)

Oil had a great run last week and from the simple analysis above (energy stocks) I have a feeling we could see a quick one day sell off. This is common with USO and buying at the close after a long high volume sell off can provide an excellent trading opportunity.

Energy UNG Natural Gas Fund (UNG)

Natural gas continues in a bear market rally as it tests our resistance trend line on Friday. I do feel that gas has bottomed and we will see much higher prices in the future. That being said, I still think we need some time for this commodity to bottom (form a base).

Depending on the price action of natural gas this week, we may have a low risk entry point with my trading model. I will keep members posted.

Precious Metals & Energy Trading Conclusion:

In short, I feel the market is ready for a multi-month correction, but with solid 3^rd quarter earnings, new money is being dumped into stocks and commodities as investor confidence rises. This is extending the rally, and makes it even more over- bought in my opinion.

That being said, I will not be shorting the market or stocks anytime soon. This market can continue higher because average investors are putting their money back into the market. If the market does actually top in the coming weeks, there will be plenty of time to short the market using leveraged ETFs. I am still long the market and applying tight stops to my positions.

Disclosure: I currently own GLD, SLV, USO and UNG funds

Comments

[Mike Kane:]

good analysis Chris...its tough to bet against this market no matter how foolish the bull run looks, due to the capital inflows. I am not so convinced about metals being overbought though, I think there is much room to grow. We shall see...

Oct 19 01:25 PM

[Faisal Humayun:]

Gold has outperformed almost all asset classes since the beginning of the crisis in October 2007...Thus, Gold can be considered to be expensive (on a relative basis) in the near term and some correction might not be surprising...

So relative to Gold, Industrial Commodities might be a better option...But they too had a good run up and hence some correction can't be ruled out...

Also, the sentiment on the Dollar is very bearish and one can expect a short term bounce back in the Dollar....The simple relation between Dollar and Commodities tells us that any bounce back in Dollar will result in fall in commodities...

Oct 19 02:04 PM

[ManAboutDallas:]

Markets reach a state of being "overbought" when people STOP PONDERING if they're "overbought", and instead start reaching for ever-more-specious arguments why they're NOT "overbought".

And the pendulum swings.

Oct 19 04:16 PM

[ManAboutDallas:]

Short the lights out at Dow 10,334; it's the 50% Fibo of the October 2007 top to the March 2009 bottom. And if it somehow miraculously makes it to the 61.8% Big Fibo at 11,246 consider it a gift from your Deity Of Choice, and proceed accordingly.

Oct 19 04:26 PM

[rick12345:]

I'm long mid-cap energy stocks at the moment simply because the high-cap's seem overbought. Silver has shown a rather lackluster performance over the last week or so, suggesting the gold bulls are running a little too far ahead of themselves; silver should be outperforming gold, which it's currently not doing. Sorry guys, but I'm just not convinced that a 2-3% return is worth the risk of a 20% fall if prices suddenly cave in.
We are still seeing a lot of choppiness in the markets, indicating profit taking and/or investor bearishness. What has to happen before people realize that the S&P is not going back to 666? Seriously, a company like apple doesn't increase revenues by 25% if consumers aren't buying.

Oct 20 05:21 AM

[TheFounder:]

"Seriously, a company like apple doesn't increase revenues by 25% if consumers aren't buying."

They are buying, they just do not live in the United States.

Oct 20 06:56 AM

[Pauly B:]

You should be just fine long with the current FED policy as it stands. It is unlikely they will do anything with rates with the job losses increasing for some time.

When the short the dollar long equities trade unwinds though it will likely be violent and send shudders through the commodity and equity markets

Oct 20 09:45 AM

[Freya:]

Sector rotation can also be interpreted as "Choppiness".

Nothing to suggest the move up has ended. Oil Futures, out with the Old, in with the New, have something to do with it also.

Lots and lots of earnings.

The USD is able to turn on a Dime, if some sort of altercation occurs in the MidEast. Then you could have The USD, Gold and Oil all going up at the same time.

Interesting couple of weeks in front of us.

Oct 20 09:49 AM

[Mr. Big:]

Perhaps it's not the value of the commodity that is going up, but the currency to which it is denominated is going down? Therefore, there can potentially be some further upside demand (real demand) for these commodities.

Oct 20 10:22 AM

[untrusting ...:]

What total nonsense. What evidence do you have that "average investors" are putting their money in the US markets? None we would suggest. Morningstar just published their report showing that in 2009 average investors have put only net about $15 billion into stocks wheras they have put about $250 billion into bonds and fixed income. Further corporate insiders are selling their stocks at near record levels with virtually zero insider buying.

The real reason the market keeps going up are:1) hugh dollar declines, 2) ultra low interest rates, 3) massive Fed liqudity, 4) prop. desks and HFT dominating trading (50-70% of entire market volumes).

It certainly has absolutely nothing to do with the average investor buying into the stock market.

Oct 20 11:04 PM

[Freya:]

The first link provides Data on what Insiders are doing as Far as Barrons is concerned. Please Note the Graph at the Bottom of the Screen. Insiders are defined as Officers and Directors of a Company, not the New line definiton of Instutitutional holders.

online.barrons.com/pub...

This Link provides an Investor Sentiment Graph. Again, look at the Graph at the Bottom. Yes, It sure does look like they have overcome some of their Fears and are coming Into The Stock Market. This Graph is For Stock Investors.

online.barrons.com/pub...

The Last link gives a reading on how Money Market Funds are Faring, at the Bottom. Pls. Note that more than 1/3 rd of the Annual Decline occurred in the last three weeks.

online.barrons.com/pub...

You believe it took this long for them to jump out of Money Markets into the Bond Market. I believe they are moving into the stock Market.

Investors Have been Geared into Believing That It is safe to get into the Stock Markets in November. The October Selloff hasn't occurred. The Sell in May people have missed it all.

Oct 21 04:04 AM

[JGL:]

Nice comments, thanks.

Regarding UNG I am still confused that UNG goes down when NAtural Gas goes up !!! (I am holding up on my UNG hoping for a winter rally...)
Regardinbg Gold, I cannot really see from your comments and charts where the next entry point for GLD would be? Any specific technical point?

Oct 21 07:52 AM

[Freya:]

JGL, The prob with GLD is that the short term outlook, next cple of months, is probably limited to another 10% or so even if the longer term is in the 100% range.

Take a gander at GDX or UGL.

As far as UNG, am not in it but the Author HT Love has an Insta you might want to look at on UNG specifically.

Oct 21 10:19 AM

[JGL:]

Thanks.


On Oct 21 10:19 AM Freya wrote:

> JGL, The prob with GLD is that the short term outlook, next cple
> of months, is probably limited to another 10% or so even if the longer
> term is in the 100% range.
>
> Take a gander at GDX or UGL.
>
> As far as UNG, am not in it but the Author HT Love has an Insta you
> might want to look at on UNG specifically.

Oct 21 11:02 AM