Looking for a Rally in Stocks

The past few weeks have been interesting to say the least. Debt downgrades were met by more promises of accommodative Fed policy, as expected. Stocks are plunging and confidence around the world is collapsing. Gold is testing $1800 and people are running for cover. How will all of this be resolved?

Although the world appears to be ending, I would rather be long stocks than long gold right now. Stocks are extremely oversold even after yesterday’s rally and gold is getting overextended. Stocks are going to surprise to the upside once we get this correction out of the way, especially with Helicopter Ben providing support. Also, I am now short Treasuries; the rally in bonds is getting a little ridiculous.

Gold stocks are undervalued relative to the metal, so the long-term investor will do OK buying here even with a correction in gold. Perhaps we will see a situation where gold stocks underperform the stock market, but outperform the metal. This is completely reasonable. Gold will probably underperform silver on the next leg up as well. While I won’t go so far as to say the sentiment in gold is the same as the sentiment towards silver a couple of months back before the correction, it’s well on its way to getting there. Just be careful piling on longs here; at least do not be leveraged.

As long as you are not leveraged, view these corrections as gifts. Weakness in gold stocks can also be welcomed with open arms. Just when things appear bleakest, that’s when markets turn. This continues to be a very favorable setup for higher prices in the future. Maintain your balance because there will be an explosive rally from this correction in stocks.