Stocks Are Likely to Lose Ground to Gold Over the Near Term

According to contrarian market analysis, gold is positioned to outperform stocks over the next several months. This expectation stems from contrasting sentiment levels between gold-market and stock-market timers, revealing a more cautious attitude among gold investors and heightened optimism among equity traders.

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Currently, the average gold-market timer exhibits significantly less optimism compared to their stock-market counterparts, who are approaching levels of exuberance rarely seen in the past 25 years. This disparity creates a more substantial “wall of worry” for gold to climb, while stocks face a limited upside due to the prevailing exuberance.

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Despite these sentiment differences, stocks and gold have delivered nearly identical returns so far this year. Through the end of November, the SPDR S&P 500 ETF (SPY) recorded a total return of 28%, marginally trailing the SPDR Gold Shares ETF (GLD), which returned 28.1%.

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The sentiment data comes from the Hulbert Stock Newsletter Sentiment Index (HSNSI) and the Hulbert Gold Newsletter Sentiment Index (HGNSI), which monitor the recommended exposure levels of short-term stock and gold-market timers, respectively.

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The average recommended equity exposure by stock-market timers, as tracked by HSNSI, is currently higher than on 99.9% of days since 2000. This extreme optimism contrasts with gold-market timers, whose recommended exposure levels, per HGNSI, are only slightly above the historical median, exceeding just 62.9% of readings since 2000.

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While gold-market timers are not outright bearish, their cautious stance stands in stark contrast to the unbridled optimism of stock-market timers. From a contrarian perspective, this skepticism suggests gold's near-term prospects are relatively more favorable than those of equities.

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Critics may point out that contrarian analysis has struggled this year, as both stocks and gold have performed exceptionally well despite sentiment levels exceeding historical averages. However, a closer look at the data reveals a nuanced picture.

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Contrarian analysis has historically shown that markets tend to perform better following periods of relative pessimism compared to periods of heightened optimism. Even in 2024, the stock and gold markets have demonstrated stronger performance in the wake of negative sentiment extremes than during optimistic peaks.

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This trend reinforces the contrarian view that the current sentiment environment favors gold over stocks. The excessive optimism surrounding equities leaves little room for upside, while the moderate skepticism in the gold market provides a more promising foundation for future gains.

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Sentiment Trends Across Other Markets

In addition to tracking sentiment in the stock and gold markets, Hulbert’s performance-auditing firm also monitors sentiment indexes for the Nasdaq and the U.S. bond market. The relative positions of these sentiment indexes provide further context for market behavior.

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• Nasdaq-Focused Stock Timers: Sentiment here has mirrored the broader stock market, showing elevated levels of optimism. This suggests limited upside potential for Nasdaq equities as well.
• U.S. Bond Market Timers: Sentiment in the bond market presents a more balanced outlook, indicating neither extreme optimism nor pessimism.

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While contrarian analysis does not imply unbridled enthusiasm for gold, it underscores a favorable relative outlook. The restrained optimism of gold-market timers creates an environment in which the metal is better positioned to exceed expectations compared to equities.

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This analysis aligns with the principle that markets often perform best when skepticism prevails, as it leaves room for positive surprises. Conversely, when optimism is at extremes, as is currently the case with stocks, the potential for disappointment increases.

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As markets navigate the remainder of the year, gold appears better equipped to capitalize on sentiment-driven dynamics. The metal’s relative undervaluation in the eyes of market timers provides a strong foundation for potential outperformance.

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In contrast, equities may face headwinds due to the exceptionally high levels of optimism among stock-market timers. Historically, such exuberance has often preceded periods of underwhelming performance.

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For investors, this divergence in sentiment offers a compelling case for reevaluating portfolio allocations. While gold and stocks have delivered nearly identical returns so far in 2024, the outlook for the months ahead may favor a shift toward gold, particularly for those adhering to contrarian principles.

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In conclusion, sentiment analysis suggests a constructive environment for gold relative to stocks, reinforcing the adage that markets thrive on skepticism and stumble on excessive optimism. As market timers in both arenas reveal their biases, the contrarian perspective once again highlights the potential value of swimming against the tide.

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