Check Your Emotions At The Door

We're good stock pickers, a skill we have honed over several decades-for which we've amply rewarded readers, and won accolades and awards. We can also adeptly read future stock market direction. Our secret to market timing has been omitting emotion, and instead relying on useful market indicators-some developed in house and a few devised by others.

Focusing on historical trends is particularly important, since headlines (whether dire or glowing) can cloud personal judgment at the most inopportune moments. Today, many scary headlines (looming sequestration, currency wars, etc.) could prompt investors to head for the hills.

Back in January we based a bullish case for stocks in 2013 on one such indicator. This week, another proven indicator has flashed a positive signal. Listen up. It combines action in the market's weekly Advance/Decline Line with both a) the performance of the unweighted average of New York Stock Exchange issues (both excellent measures of broad market participation) and b) market volatility.

In the last 40 years, about 80 percent of the time, strong readings on our in-house indicator preceded bull runs in the next three- and six-month periods. Moreover, readings like this one have previously preceded above-average gains, particularly for small cap shares. Investing is never a sure thing, but we now have another piece of evidence in favor of the bull.

We also follow an indicator created by technician Norman Fosback in the 1970s that usually, for decades, has accurately called major market turns. This one suggests that the stock market is not yet in danger of peaking. It measures the number of stocks hitting new 52-week highs and lows on the New York Stock Exchange-with specific focus on the lesser of the new 52-week highs and new 52-week lows, as a percentage of total issues traded on the NYSE.

As visible in the graph below, low readings are bullish and high readings tend to be bearish. Right now, few stocks are generating new 52-week lows. That means a major downturn is unlikely. Indeed, stocks look ready to sprint up, given that readings like this one often mark the launch of sizable advances. Of course, this could change in coming weeks, but currently we see little danger of a big equity slide.

Remember, the record S&P 500 high of 1565-set in 2007-while less than 3 percent above today's level, will probably be hard to top. Stocks typically dance around multi-year highs for a while before logging decisive gains. This time around should be no different.

Our indicators are not limited to stocks either. Although we remain bullish on gold for a long list of reasons previously cataloged in this space, the Midas metal could go either way in the short run according to our gold indicator.

Gold sold off sharply last Friday on news of SEC filings that show hedge fund investor George Soros cut his gold position in the fourth quarter. Technicians would say that gold violated key support and could, short term, head down to $1,550 or less. And on Wednesday, it headed still lower.

Still, we'd note that should gold reach $1,550, it would represent a decline of only about 3 percent. That's equivalent to a 60 cent slip in a $20 stock-hardly cause for apoplexy.

Moreover, extremely low relative strength readings on gold usually mark inflexion points. Gold last looked this bad at the 2008 market bottom, from which the price per ounce rose by about $700, to more than $1,900, before peaking. We expect gains this time to be no less spectacular. When they will come, we cannot say. But heavier trading volume as gold falls suggests to us there is strong buying interest at current levels. It could go as low as $1,535, but afterward, the sky is the limit.

Gold stocks have been slaughtered in recent months, but present good value as well. The stocks trade as if gold now cost less than $1,000 an ounce. But the gold bull market is far from over. Historically, such discrepancies have usually not lasted very long. We would encourage investors to capitalize on the fire sale by buying- stocks like NovaGold Resources (NG), New Gold (NGD) or Franco Nevada (FVN). The same can be said for our silver stocks, all of them equally attractive at current prices.