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At any
given point in time different markets are at different points in their
long term cycles. Markets can be anywhere from just starting a new bull
market to late in a parabolic top on the bull side. On the bear side
once a market tops it tends to go through either a bear market downtrend
or a sideways consolidation that frustrates the bulls for an extended period
of time, or a combination of the two. As a longer term trader the goal
is to try and determine where the market is in it's cycle and to get
positioned as early as possible to capture the biggest profits.
Two
markets that are at very different points in their cycles are gold and
Internet stocks. These two markets don't have anything to do with
one another but both are important and have their own following among
investors. The key is forgetting about biases towards these
markets and focusing on where they are in their long term cycles to determine
what, if any, opportunities they hold.
Internet
stocks have made a lot of headlines recently because they made huge moves to
the upside in 2013. Then they crashed over the last few months.
If you go back and look at a long term chart you'll see how this all
unfolded.
First
let's take a big picture look at where Internet stocks have gone. This
chart shows the Morgan Stanley Internet Index going back to it's induction in
2000, coincidentally at a major top which was the tech bubble. After
suffering a disastrous bear market from 2000-2002, Internet stocks embarked
on a new bull market along with the bull market in general stocks. But
one thing to notice is Internet stocks were not a leading sector during the
bull market from 2003-2007. This tends to be typical for a sector that
led the previous cycle. Internet stocks barely outperformed the
S&P 500 during this period.
 
During
the next cyclical bull market from 2009 to the present Internet stocks came
into their own and started outperforming the rest of the market. The
big move came in early 2013 as Internet stocks became one of the
dominant sectors in this bull market. With the recent technical damage
done to this sector though, the Internet stocks are now in a Stage 3 which is
the sign of a potential top or at minimum a consolidation. The 30-week
moving average has flattened out and price is now starting to trade below it.
With
Internet stocks showing the signs of a potential top, gold is doing the
opposite, showing signs of a potential bottom. After crashing in 2013
gold started forming a Stage 1 base as early as April 2013, giving the base
1-year in duration. Gold continues to trade below it's 30-week moving
average, but has recently formed another consolidation zone right underneath
this moving average. This is setting up another decision point for gold where gold has the
potential to break back above the 30-week moving average and launch a new
uptrend. Or it could fail once again at this level and continue its
bear market.
There's
a couple of interesting things to point out in this chart for gold.
Notice how in early 2013 the candles rejected the 30-week moving
average for multiple weeks as evidenced by the wicks failing repeatedly to
get above that level. In the current consolidation gold is still
failing to get above the moving average, but is showing more evidence so far
of rejecting lower prices by printing hammer candlesticks. Momentum was
already negative when gold started crashing in early 2013 after it's tight
consolidation. This time momentum is trying to stay positive with the
MACD Histogram still above zero. Finally the Bollinger Bands have
tightened considerably at this point just like they did during the last
consolidation, which indicates a big move is on the horizon.
Let's
turn our attention to sentiment in these two markets. Think about the
difference in sentiment between Internet stocks and gold over the past couple
of years and how it fits well with the price action. Internet stocks
had a plethora of IPOs in 2013 that received a lot of hype from the
media such as Facebook and Twitter. CNBC covered their IPOs with a
fever pitch and covers each of their earnings releases religiously.
This produced a lot of excitement and even though these companies had
high valuations to begin with their shares continued to soar higher, up to
their recent correction.
Checkout
the diagram below which shows the typical sentiment cycle a market goes
through, and note how it compares well with the recent euphoria in Internet
stocks. In reality the euphoria minimized their investment potential, either
for a short period of time if this is just a correction in Internet stocks or
for a longer period of time if we are seeing a cyclical top. 
Contrast
this with gold where gold received not only negative attention in 2013, but
in a lot of cases outright derision and ridicule from the media. Gold
tends to already attract this sort of attention from the media given that it
is an alternative asset class that only goes up when things go bad, at least
in the media's eyes. In reality gold is driven by a number of factors
including it's own supply and demand fundamentals, and trades in its own
cycle. The media can hate gold all they want but it's still going to
trade in bull and bear cycles, with or without their approval.
But the
key thing to note is not the market, but where it's at in it's cycle.
Gold clearly fits well into the despondent or depression phase
currently, where hardly anyone expects higher prices are possible after a
brutal bear market. The question is whether the bear phase is over and
how long this depression phase needs to continue. That's where a
framework such as Stage Analysis comes in handy because it simplifies the
major swings in price action into a system for determining the birth and
death of major cycles.
So
clearly Internet stocks and gold are not only different markets, but they are
trading at different points in their respective cycles. But the point
is it matters more where they are in their respective cycles than what they
are as far as the trading opportunities they present.
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