Melt Up Scenario? 1/19/12 gold settle: 1654.5

A week ago, in my last post, I discussed the bullish case for gold. We are now trading higher, having made overnight highs of over 1670 last night. Despite my correct bullishness over the last week or so, I felt very confident that we would see a sell off yesterday. That sell off never came. I was kind of bummed about the fact that we didn't sell off because I was so confident that we would. Calls were getting offered in the gold options, and had been for a couple of days even as we were going higher (This type of option action often portends a coming sell off). Volume was light, which makes everything mean less, but still I was disappointed. This morning I got the Credit Suisse daily note, and saw that they had raised their S&P target to 1400 for 2012. Sentiment has been strong, housing numbers improving, and then great jobless claims data came this morning. Seeing the S&P settle above 1300 for two straight days, I began to wonder if maybe this bull was just too strong to fight. For now, I think the answer is yes.

I went through my mental Rolodex and began to see if I could compare this market to any markets we have seen over the past couple of years. What this market reminds me of most is the beginning of 2010. At the time I was working at a wealth management firm, and we decided to buy LEN and KBH (homebuilders) on the close the day before one of them (I forget which one it was) was to report earnings. A good research call I had read argued that the tax refunds they were going to receive were so tremendous that their battered stock prices would have to rally. The day after we bought the stocks, are biggest regret was not buying more. Both were up about 10% after earnings. It was a favorable tax situation, not a positive outlook for home building that made these stocks pop. The bear case of course was all too easy. With tremendous inventory overhang in the housing market, how could you buy these stocks? It was obvious just how bad that market was, but it didn't mean that the stocks weren't buys.

Why is now similar? For one, I'm starting to hear these home builders, which were all but forgotten about for the last few years get some press again. Jamie Dimon has suggested we may be near a bottom in the housing market. Stocks like Bank of America (which have significant mortgage exposure) have popped since this new positive housing sentiment has come about. And all the while, stocks have been inching up slowly but consistently. While the equities did dip after these earnings initially came out, I believe they marked the beginning of the melt up that took us into the summer months. And for the past two days, we've actually seen some treasury selling. So for now, this rally looks like it has legs, even if they push slowly. We are more likely to move slowly to the upside. This is in part why implied volatility is getting smashed as we move higher. My visceral side sees what I believe to be a series of pathetic threads and excuses that hold Europe together, and wants to short the market to no end. But this is a known known to use the phrase. This is the wrong time to get short.

As a counter point, Katie Stockton was on CNBC today saying that market conditions are currently overbought. She believes a close above 1308 next Friday would confirm the move higher. Katie knows her stuff, so this number is probably worth paying attention to. I however, would feel comfortable being long (both equities and gold) and getting out of those longs if we are unable to hold these levels.