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One of the questions that we receive on a regular
basis is whether one should invest in junior or senior mining stocks. The
answer is that diversification is the way to go, but that’s not the
full reply as weights in the diversified portfolio can still favor either
juniors or senior stocks.
The reply to this question depends on 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, ale the latter is highly
correlated with juniors in the long term (charts courtesy by http://stockcharts.com.)
 
In the long-term S&P 500 Index
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 RSI levels is also similar. Back then, prices rose nearly 15% in
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, 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 chart
(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.
As indicated earlier, we will now move to the
performance of the whole junior sector and compare to the senior mining
stocks.
As you can see on the above chart, the
juniors-seniors ratio (GDXJ to GDX ratio) corrected from February to the end
of April. We call this correction
instead of decline because this
3-month move didn’t erase the previous monthly rally (January 2012). As
all corrections come to an end eventually, it seems to be the case also with
this one. The ratio moved sharply higher in the 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 also other implications, interesting for the
precious metals investors. These are discussed in greater detail in the premium version of this essay.
Summing up, at this time juniors appear to have
greater upside potential than senior mining stocks.
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Thank you for reading. Have a great and profitable week!
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