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Over the last
couple weeks, gold and silver stocks have been clobbered. The flagship
index that tracks this sector, the HUI, hemorrhaged nearly a sixth of
its value in just 8 trading days! Frightened traders have been
scrambling for the exits, dumping their PM stocks at any price to rush their
capital out of harm’s way.
While such a
freefall sounds very bearish, it is actually incredibly bullish.
The mission of investment and speculation is to buy low and sell high, and
the best times to buy low are when prices are plunging and traders are
practically soiling themselves in fear. If you want to multiply your
capital in the markets, the surest way to do it is to buy aggressively when
nearly everyone else is rushing to abandon ship.
The infamous 2008 stock
panic is a perfect illustration of this truth. Over just
5 weeks ending in late October 2008, the HUI plummeted a mind-blowing
57.2%. PM-stock traders were so caught up in the popular fear that they
failed to realize that stock panics are not the Apocalypse. Markets
perpetually flow and ebb, yet life goes on. We were buying aggressively
near those panic lows, and were richly rewarded. Over the next 9 weeks,
the HUI doubled!
While the recent
sharp HUI selloff is trivial compared to that once-in-a-century stock
panic, these same principles apply at a smaller scale. When a sentiment
storm slams into a sector with strong fundamentals and leads to a blitzkrieg
of selling, the new lows never persist. Extreme fear never lasts long,
and as soon as the storm clouds of emotion start clearing the beaten-down
stocks quickly rally back up to big gains.
Thus the recent
precious-metals-stock selloff has created awesome buying opportunities.
Far from portending an endless death spiral lower as most traders seem to
assume, today’s deeply-oversold HUI technicals are extremely
bullish. For disciplined contrarian traders with the fortitude and
wisdom to ignore the herd’s irrational hysteria, the HUI’s
incredibly bullish near-term prospects are readily evident in these charts.
Precious-metals
stocks have never been for the faint of heart. They are very volatile
and unforgiving, but that’s their charm too as these wild moves create
great opportunities. In the pre-panic years between 2000 and 2007, the average HUI
upleg surged 94.4% higher over 8 months while the
subsequent average HUI correction fell 28.3% over 3 months. Big and
steep selloffs are nothing new for PM stocks, merely par for the course.
Since its latest
interim high in early December, the HUI has fallen 26.7% in just under 8 weeks.
As is often the case in PM stocks, this correction has been two-staged.
There was an initial 17.6% leg down in early December that paralleled
gold’s own. Gold has always been the PM stocks’ primary
driver, traders buy PM stocks when gold is strong and sell PM stocks when
gold is weak.
This initial
December correction in PM stocks was sharp, but it only lasted a couple
weeks. Then the HUI actually bounced at its upleg support line that was
established throughout last year. A few days before gold itself
bounced, the selling in PM stocks had been so aggressive that everyone
interested in selling soon had already sold. And once gold started
heading higher again in late December, the HUI followed.
While we sold
some PM stocks at 100%+ gains in Zeal Speculator in
early December, we weren’t buying that late-December bounce literally
or metaphorically. Given PM stocks’ volatile history, they
hadn’t corrected long enough or deep enough to properly rebalance
sentiment by eradicating the early-December greed. And as the 21.4% HUI
correction in June and early July of last year reinforced, major HUI
corrections often encompass two separate and distinct legs down.
And a couple
weeks ago when today’s second leg down commenced, it was fast and
furious as you can see in the chart. The HUI not only shattered its
uptrend’s support, which officially signaled it was in
full-blown-correction mode as opposed to mid-upleg-pullback mode, it plunged
to its 200-day moving average. 200dmas are incredibly important
technical lines in trending markets. Within secular bulls the 200dma is
the highest-probability point for corrections to run out of steam and
tradable interim bottoms to be carved.
Many years ago I
developed a trading
system based on these 200dma approaches, Relativity.
Over time in any given bull market, prices tend to advance and contract
within a fairly constant multiple-range of their trailing 200dma. When
they advance to the top of this range they are temporarily overbought, it is
time to sell or go short. And when they subsequently retreat to the
bottom they are temporarily oversold, the time to buy.
The latest
relative trading range for the HUI is rendered above, between 0.95x and 1.40x
its 200dma. Our subscribers have unlimited access to large long-term
Relativity charts updated weekly on our website that show these ranges being
established. Once you wrap your mind around these Relativity concepts,
your trading will improve tremendously as you’ll have early warning of
excessively overbought and oversold conditions that are not sustainable.
In this chart the
red line tracks this relative HUI, or rHUI. It is simply the HUI
divided by its 200dma, which renders all the percentages in
perfectly-comparable terms across time. In effect the 200dma is
flattened at the 1.00x line and the rHUI bounces along it in a horizontal
trading range. This construct illuminates the HUI’s endless
advances beyond and contractions back to this critical support zone in
constant-multiple terms. Consider how this powerful trading tool has
worked in the past year.
Back in April,
the rHUI was running 0.933x since the HUI was well under its 200dma.
This was deeply-oversold territory, which happened to be just before the last
time I wrote a bullish HUI
technicals essay. And indeed coming out of
such oversold conditions the HUI soon rallied rapidly, blasting 44.6% higher
in just 6 weeks ending in early June. Why did the spring rally die
then? Mostly because this sector had become seriously overbought,
pushing the top of the rHUI trading range at 1.40x this index’s 200dma.
Once the HUI
nears the top of this relative trading range, the probabilities balloon for
an imminent sharp correction. So back in early June when the rHUI hit
1.397x, it was a big warning sign for traders. After this relative
resistance approach, the HUI soon fell sharply in that June-and-July
correction. But once sentiment was rebalanced again by mid-July, the
HUI’s strong uptrend resumed.
This strength
gradually accelerated until November, when the PM stocks shot up with
gold. After soaring 32.9% higher in only 5 weeks though, once again the
rHUI hit 1.397x indicating the HUI was seriously overbought. And
that’s when today’s correction started. While no tool can
call exact tops and bottoms, Relativity offers excellent insight into when
conditions are so extreme that a major interim high or low is exceedingly
likely. This is a powerful edge in trading, which is itself the
ultimate probabilities game.
After plunging in
the second stage of its latest correction, last week the HUI knifed under its
200dma for the first time since April. On Friday the 29th the rHUI hit
0.955x, deeply-oversold territory. Being down near the bottom of its
relative range, this was a screaming buy signal. Again 200dmas are the
highest-probability bounce points within ongoing secular bulls, and 200dma
approaches are fairly rare. Since deeply-oversold lows never persist
for long, traders must be quick to jump on the opportunity to buy low.
Remember how
excited people were about gold and silver stocks back in late November when
they were soaring? Being in the newsletter business, I get deluged by
e-mails from folks excited about buying PM stocks when they look the
hottest. But this is exactly the wrong time to buy, when they
have run fast and far and look exciting. The best time to buy is in
conditions of extreme technical weakness and mushrooming fear just like
today. In order to buy low, you have to pull the trigger when you least
want to buy!
While this first
chart alone easily drives home the awesome buying opportunities in gold
stocks today, I’m throwing in another one to further buttress this
bullish case. This is the HUI/Gold Ratio, or HGR. The HGR simply
divides the HUI close by the gold close. When PM stocks are
outperforming gold, the HGR rises. And when they are underperforming
gold, usually by falling faster than gold in a correction, the HGR
falls. Today’s HGR reveals incredibly-oversold gold stocks, a
phenomenal buying opportunity.
Until the second
stage of today’s HUI correction, the HGR was advancing nicely over this
past year. It had carved the solid support line rendered here.
Each time the HGR fell to lows near this support, a sharp rally immediately
followed. And all these sharp HGR rallies were driven by sharp HUI
rallies. When they finally get excited, the manic-depressive PM-stock
traders buy with almost as much zeal as they show in their periodic intense-selling
episodes!
But over the last
few weeks, this HGR uptrend’s support decisively failed. Soon
after that, the HGR’s 200dma failed as well. The HGR has now
plummeted so far that it is back to early-July levels. In other words, relative
to gold the PM stocks are now just as cheap as they were last July just
before the launch of their strong 63.1% upleg climaxing in early
December. Buying opportunities like this don’t come around very
often.
This HGR work since
the 2008 stock panic has led to enormous realized and unrealized trading
gains for our subscribers. The whole story of gold and silver stocks
since that panic is the normalization of the HGR, its gradual return to
pre-panic levels. In the 5 years prior to the stock panic, the HUI
averaged 0.511x the price of gold. The yellow line above shows where
the HUI would be trading if it returned to this long-term pre-panic-average
level.
Meanwhile the red
line shows the actual HUI itself. Note that back in March around the
general-stock-market lows, the HUI was only running about 57% of where the
long-term average HUI/Gold Ratio suggested it should be. By early
December, this gap had closed to 82%. Make no mistake, over time the
gold stocks are gradually normalizing relative to today’s higher
prevailing gold prices. Unfortunately this critical truth is usually
forgotten in the day-to-day chaos of this volatile sector.
But since its
early-December interim high, the HUI has stumbled far more steeply than
gold. Thus last Friday the actual HUI was only at about 68% of where
the pre-panic average HGR suggests it ought to be. This is also the
lowest level seen since the exact mid-July bottom before the last strong HUI
upleg was born. From a variety of perspectives, HGR analysis
corroborates and amplifies the message of this strong PM-stock buy signal.
Shifting gears
briefly, the fundamentals also support this bullish stance.
Stock prices ultimately follow long-term profits, and the higher the
prevailing gold price the greater gold-mining profits grow. Averaging
$1115 so far this year, this is the best gold-mining environment ever seen.
In 2009 the average gold price was around $975, 14% lower. Gold miners
are going to make more and more money, which is going to attract more and
more capital into this still-tiny sector.
The recent
selloff, as is true in almost all sharp corrections within ongoing secular
bulls, had nothing at all to do with fundamentals. Gold itself
has largely been consolidating around an average price near $1110 since
mid-December, its mining outlook hasn’t changed a bit.
Corrections are always driven by sentiment, emotions. Unlike
fundamentals which are very slow to change, sentiment turns on a dime.
Today’s bullish
HUI technicals couldn’t be clearer, it really looks like an incredible
buying opportunity for gold and silver stocks. In basic technical
terms, the HUI has shattered its upleg’s support line and is even
sojourning under its 200dma, the best time within ongoing secular bulls to
buy aggressively. It is the HUI’s first sub-200dma episode since
April. On top of that, the rHUI is flashing a deeply-oversold
strong-buy signal for the first time since April as well. PM-stock
traders should be salivating at this!
And when you
layer in the HGR analysis on top of this, the buy signal flares even
brighter. Relative to gold the PM stocks are now at their worst levels
since last July right before a major upleg launched. You really
couldn’t ask for a better convergence of bullish HUI technicals.
If you want to buy low and can steel your emotions for the challenge,
I don’t know what more you could hope for today.
At Zeal we are
absolutely seizing the moment. In our hot-off-the-presses new monthly
newsletter we added a couple new PM-stock positions
likely to thrive in the near future. And in our weekly
newsletter more geared towards active traders,
we’ve deployed 7 new PM-stock trades in recent weeks. All these
trades are likely to witness excellent gains as the HUI recovers over the
coming months as gold and silver enter their seasonally-strong
springs. It should be a very lucrative run.
And we certainly
aren’t done, we’ll continue to buy aggressively as long as PM
stocks remain ridiculously cheap. If you act quickly, you too can
capitalize on this rare buying opportunity before it vanishes. Subscribe today and
harness our hard-won market knowledge and wisdom for your own
advantage! In each newsletter I explain what is going on in the
markets, what is driving it, how various markets are influencing each other,
and how this translates into specific trading opportunities. This elite
level of applied analysis is one heck of deal for just $10 per month!
The bottom line
is the HUI technicals look exceedingly bullish today. The recent sharp
selling that has sparked such widespread fear among PM-stock traders is
actually creating phenomenal buying opportunities. Though gold remains
strong which means mining it will be more profitable than ever, the stocks of
its miners have been driven to silly levels by emotional selling.
But as always,
this sentiment storm too will pass. Soon all the weak hands will be out
and the PM stocks will resume their long post-panic normalization with gold
and silver prices. Investors and speculators tough enough to buy now
when few others want to will reap the largest gains as this secular PM-stock
bull resumes. But such deeply-oversold buying opportunities seldom last
long, so carpe diem!
Adam Hamilton,
CPA
Zealllc.com
January 15, 2010
So how can you
profit from this information? We publish an acclaimed monthly
newsletter, Zeal Intelligence, that details
exactly what we are doing in terms of actual stock and options trading based
on all the lessons we have learned in our market research. Please
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Questions for
Adam? I would be more than happy to address them through my
private consulting business. Please visit www.zealllc.com/adam.htm for
more information.
Thoughts,
comments, or flames? Fire away at zelotes@zealllc.com.
Due to my staggering and perpetually increasing e-mail load, I regret that I
am not able to respond to comments personally. I will read all messages
though and really appreciate your feedback!
Copyright 2000 -
2006 Zeal Research (www.ZealLLC.com)
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