Gold and the stock market have both soared this year - can it last?

By Mark Hulbert

Market timers have never before been this optimistic - but contrarians will probably get the last laugh

The markets are being flooded with liquidity, which provides a short-term boost to financial assets while worsening the long-term outlook for inflation.

One of the most obvious signs of the abundant liquidity in the markets are the simultaneous new highs of assets that historically have been uncorrelated: Both the stock market and gold have soared this year to new highs, and that's rare.

Consider equity and gold bullion's monthly returns since 1980. The correlation coefficient between the two series is 0.02, which is statistically indistinguishable from zero. (A coefficient of 1.0 would mean the two series rise and fall in perfect lockstep, while a coefficient of minus 1.0 would mean the two are perfectly inversely related. A coefficient of zero would mean that there is no detectable correlation between the two.)

I suspect that bountiful liquidity is a big reason why contrarian analysis has not been as helpful this year as many had hoped. So long as liquidity remains plentiful the markets can keep rising even past the point that investor exuberance would normally begin to exert a strong gravitational pull. The inevitable can't be postponed indefinitely, however, so it's a safe bet that contrarians will eventually get the last laugh.

Optimism in both the stock and gold markets is at or near multidecade levels, in fact. The several dozen stock market timers my auditing firm monitors currently are more enthusiastic than they were on 99.8% of all trading days since 2000 (as measured by their average recommended equity exposure level). Those market timers who maintain a separate timing model for the Nasdaq COMP market in particular are nearly as exuberant; their average recommended equity exposure level is at the 98.3th percentile of their historical distribution. And monitored gold market timers are at the 98.2th percentile of their distribution.

At no other time since daily average exposure levels began being calculated in 2000 have all three of these sentiment indexes been anywhere close to this high at the same time.

As Warren Buffett, chairman and chief executive of Berkshire Hathaway (BRK. B) (BRK. A), famously advises us, our job is to be greedy when others are fearful, and fearful when others are greedy. There's little doubt what that advice means for investors right now.

What about market timers in other arenas?

In addition to the two equity and one gold sentiment indexes, my firm also calculates a sentiment index for the domestic bond market. The chart below summarizes where all four of these indexes currently stands.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

-Mark Hulbert

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04-01-24 1121ET

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