Justin Smyth's Blog

It’s been a rough time recently for gold and gold stock investors. The last nine months has been the second worst cyclical downturn in gold and gold stocks during this long term secular bull market for gold.

As we go through the first significant pullback in the market for 2012, the dollar seems to be at a turning point that should influence market trends for the next few months. Going all the way back to 2002, there has been a strong inverse correlation between stocks and commodities, and the U.S. dollar.

The market has had an impressive run since the start of the year, but one sector that has lagged is the commodities sector. Unlike general stocks, commodities are still quite a ways away from their 2011 highs. Recession fears and a surging dollar contributed to the weakness in commodities last year.

Sector rotation has been the name of the game to start 2012 for the stock market. The lagging sectors from 2011, including the financials, homebuilders, industrials, and materials, have been the leading sectors to start the year. This is exactly what the market needed to start establishing a more healthy structure.

Of the legions of investors who are welcoming a fresh start to the year after the choppy and directionless market of 2011, perhaps gold stock investors are the most eager. Gold stocks had a volatile year last year with no progress made on the upside. The HUI Gold Bugs Index was rangebound between 500 and 600 for the whole year, with 3 failed breakouts above 600.

One of the beauties of trend following is ignoring the constant swirl of noise that surrounds the market. Charts don’t lie, and they don’t have opinions. By pouring through a wide variety of charts, from the major market indexes, to commodities, bonds, and foreign markets, you can develop an overall feel for what is going on in the markets.

Back in July I wrote an article discussing the fact that the Euro had failed so far to come under pressure during this wave of the European debt crisis. In fact it was still in a technical uptrend since bottoming in 2010 after the first wave of the Euro crisis.

The S&P 500 has been consolidating for two weeks now between 1100 and 1200 ever since the dramatic plunge earlier in the month. The question now is do we get a bear market rally that would logically retest the 1260 level on the S&P 500?

Just like the mess politicians are making with the debt ceiling debate, the stock market continues to trade in a choppy fashion for 2011. Currently we are in the third pullback in the giant trading range that’s been in effect all year.

If you simply looked at a chart of the Euro over the last year or so, and didn’t know about all of the problems facing the European Union, you could conclude that the Euro was just experiencing a pullback in an ongoing uptrend.