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Mining Stocks: Are Juniors or Seniors the Better Bet?


Here's an analysis of which has the better upside potential.

One of the questions that my firm receives on a regular basis is whether one should invest in junior or senior mining stocks. I provide an answer at the end, but I'd first like to make a few points. One is that diversification is the way to go, with the caveat that weights in even a diversified portfolio can still favor either juniors or senior stocks.

The second point relates to when the question is asked – there are times when juniors outperform and there are times when they underperform the senior mining stocks. Before providing you with a chart of the junior-senior ratio, let's take a closer look at the situation in the general stock market, as the latter is highly correlated with juniors in the long term (charts courtesy of

In the long-term S&P 500 Index (^GSPC) chart, we have much the same outlook as we saw last week. The recent correction appears quite similar to the one of 2010 and the consolidation seen in relative strength index, or RSI levels, is also similar. Back then, prices rose nearly 15% over about three months following the small correction. Self-similar patterns (like this one) are quite reliable, so at this point, stocks appear ready to move higher.

In the short-term SPY ETF (proxy for the S&P 500 index) chart, however, the situation is somewhat mixed. This week could be viewed as a few days of rally followed by consolidation (with another rally just around the corner) or the beginning of another move to the downside. The 50-day moving average continues to be within range as a support line and may continue to hold declines in check. Note, however, that it was been broken temporarily on several occasions late last year.

In the Broker Dealer Index (^XBD) chart (a proxy for the financial sector) we see that a key support line has held. This line is at the first key Fibonacci retracement level and is also close to the high seen in the financials last October, slightly above 95. Support levels are in check and the bottom may be in. The rally seen since late 2011 has corrected and it now appears that the financials are ready to move higher and perhaps take other stocks with them.

Consequently, the situation for stocks appears mixed for the short term and bullish for the long term. Overall therefore, the outlook is bullish as long-term signals carry more weight than short-term ones. The impact on the junior-senior ratio is positive.

Now, back to the performance of the whole junior sector compared to the senior mining stocks.

As you can see on the above chart, the juniors-seniors ratio (Market Vectors Junior Gold Miners (GDXJ) to Market Vectors Gold Miners (GDX) ratio) corrected from February to the end of April. We call this a correction instead of decline because this three-month move didn't erase the previous month's rally (January 2012). As all corrections come to an end eventually, that seems to be the case with this one. The ratio moved sharply higher in recent days and the correction appears to be over as the resistance line has been broken.

The implication is that another wave of juniors' outperformance is likely underway. This chart yields some other implications, interesting for the precious metals investors.

Summing up: At this time juniors appear to have greater upside potential than senior mining stocks.

For the full version of this essay and more, visit Sunshine Profits' website.

Twitter: @SunshineProfits
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No positions in stocks mentioned.
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