Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Are Precious Metals Stocks Bottoming?

By

Or just taking a breather?

PrintPRINT
Editor's Note: This essay is an excerpt from Sunshine Profit's Premium Update, posted December 30, 2009.


This week I'd like to focus on the precious metals (PM) stocks. (Charts courtesy of StockCharts.com)

Metals often move along with the corresponding equities, so it's usually useful to analyze the PM stocks, even if you're not inclined to trade them.



There are virtually no changes in the long-term picture of the HUI Index, so I'll just paste my last week's comments, as they are up-to-date also today:

Please take a look at the thin blue lines coming from the same price/time combination. Each of them was pierced, before the final bottom was put in, and this is what I expect to take place this time.

The very long-term support line has just been touched. The HUI Index even moved below it on an intra-day basis, but finally closed above this level. (...) taking the historical performance of the gold stock sector, it seems that PMs will need to move a little lower before putting in a bottom. The short-term chart confirms this:



The cyclical tendencies are not only visible on the silver market, but also in PM stocks (here: the GDX ETF), and the USD Index. On the above chart, they suggest that the next turning point will emerge in January, most likely in its early part. Taking into account the shape and direction of the current move, it seems that this is going to be a bottom.

I've marked the area that I believe that is likely to stop the current decline with a red ellipse. The $40-$42 level is likely to stop the move, because it includes two support levels that have already stopped declines in the past (in October and November), and also because it would perfectly fit the zigzag shape of the decline -- I've noticed that declines on the precious metals market (especially in PM stocks) tend to take this particular form.

Moreover, the Fibonacci retracement level of 61.8% is also within the are marked with red ellipse -- just above the $42 level.

The analysis of the PM stocks with emphasis on their performance relative to other stocks provides us with similar implications.



The GDX:SPY ratio describes how gold stocks perform versus stocks from other sectors. The ratio has been consolidation through all of 2009, but that doesn't necessarily mean that the probability that PM stocks will move higher is the same as the probability that the main stock indices will. Why? Because of the fundamentals, which are the thing that drives the prices of every asset class in the long term.

The most important fundamental factor for PM stocks are PM prices (poised to rally), while the fundamental factor for the main stock indices is the health of the world economy. Clearly, the PM stock Investors are better positioned in the long run than Investors purchasing mix of all other shares.

So, why didn't the ratio move higher during 2009? Taking a broader perspective allows me to answer this question. The probable reason is that this ratio has formed a massive rally a year ago, when it moved from below 0.2 to 0.5 in just four months. Such a dramatic move requires a significant breather before a market is ready to move higher.

It currently seems that this ratio will need to move a little lower -- to 0.39 level before a bottom is reached. This means that PM stocks and also the rest of the PM market is likely to move lower in the short term.

The last, but definitely not the least signal (or rather the lack of the signal) comes from one of my own indicators (designed to signal turning points).



Last week I wrote the following:

Please note that the majority of bottoms were not reached until there was a confirmation from the above indicator. There was no such signal so far, which means that the bottom is likely to be put in the (most likely not-too-distant) future, and that it didn't take place yet.

This week we haven't seen the confirmation signal either, so it seems that the major bottom is still ahead of us.

Summing up, the precious metals market is currently in the "close to the bottom" mode. The key question is how close is "close enough for you" to enter the market. The answer depends on your individual preferences. Long-term Investors may want to purchase PMs and corresponding equities right away, regardless of the fact that the bottom may be formed in a few weeks. While this may seem careless at the first sight, I assure you it's not. The calculations behind managing large amounts of money in a strong bull market point to the fact that the true risk is to be out of the market.
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE