Gold Miners on Verge of Breakout or Fake-Out?

By Michael A. Gayed  OCT 31, 2012 2:30 PM

Could the outperformance be a fake move to suck in more nouveaux bulls?



Fake is as old as the Eden tree.
--Orson Welles

With market open again in the US, investors have much to digest. The damage from Hurricane Sandy is one concern from the standpoint of how it could affect economic activity in the very near term. News coming out of Europe is sending money back into Treasuries as yields fall despite the reflationary efforts of the Fed through QE3. Market internals continue to look weak as I have been noting in my various writings, possibly as a result of election and fiscal cliff uncertainty. What is an investor to do?

Some investors are looking at the areas of the market that got hit the most as a good bet, given the prior prior losses and weakness. Is this what may have caused Gold Miners to catch a bid? Take a look below at the price ratio of the Market Vectors Gold Miners ETF (NYSEARCA:GDX) relative to the S&P 500 (NYSEARCA:SPY). As a reminder, a rising price ratio means the numerator/GDX is outperforming (up more/down less) the denominator/SPY.

I’ve drawn in some trend lines to show the massive bounce gold miners had in the midst of the May mini-correction, and midway through July as the Summer Surprise/Melt-Up was underway. Note the spike up, which I have circled. Gold miners on a relative basis are directly hitting up against ratio resistance. I suspect the next few days will result in the answer to the question of “breakout or fake-out,” but my own thinking here more favors a reversal in trend. Given the deflationary forces beating within the market, which my firm's ATAC (accelerated time and capital) models used for managing our mutual fund and separate accounts are sensing, gold miners may re-adjust to the fear of falling inflation expectations by lagging just in time for more nouveaux bulls to rush in.

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