The weak hands club

Commentary: Contrarian analysis suggests gold's plunge a mere correction in an ongoing bull market.
By Mark Hulbert, MarketWatch

ANNANDALE, Va. (MarketWatch) -- If gold bullion's plunge over the last couple of days is enough to scare you into selling, then join the club.
The club of weak hands, that is.
The very purpose of sharp corrections during major bull markets is to transfer ownership from weak to strong hands, thereby preparing for the next leg up. And a contrarian analysis of current sentiment among gold timing newsletters points to gold's recent plunge as just a correction.
Consider the last time that gold bullion suffered a one-day plunge as big as it suffered on Wednesday,
when gold for April delivery fell by 5.9%. That occurred in May 2006, nearly two years ago.
Far from precipitating a major bear market, however, that month's correction prepared the foundation that enabled gold to eventually surpass its previous all-time highs.
According to contrarian analysts, one way to tell whether a scary decline is the beginning of a bear market, as opposed to a mere correction, is by analyzing sentiment that prevails among gold timers. Mere corrections have two distinctive sentiment characteristics: Before the correction begins, bullishness must not have reached excessive levels; and once the decline is underway, there must be an eagerness to jump on the bearish bandwagon.
Both of these hallmarks were present during the May 2006 correction, leading contrarians at the time to be bullish. ( Read June 2, 2006, column.)
At least one of these hallmarks exists today, furthermore, and the jury is out on the second.
Consider the Hulbert Gold Newsletter Sentiment Index (HGNSI), which reflects the average recommended gold market exposure among a subset of short-term gold timing newsletters tracked by the Hulbert Financial Digest. Prior to the current gold correction beginning, the HGNSI stood at 65.4%. That's nearly 35 percentage points below the HGNSI's all-time high of 90%.
What will be crucial to watch for in upcoming sessions is how quickly the gold timing newsletters run for the exits. To the extent they do, confidence will grow even more that this is a mere correction in an ongoing bull market.
But with early precincts reporting, things are looking good: In the wake of Wednesday's plunge alone, the HGNSI dropped more than 15 percentage points.