Those familiar with Jesse Livermore and the book Reminiscences of a Stock
Operator know who Old Turkey is. He was Mr. Partridge, an old trader
who dispensed great wisdom in few words. Those at the office nicknamed him
Turkey because of the way in which he strutted around with his chest puffed
out. Livermore gleaned wisdom from Old Turkey which included the importance
of never losing one's position and placing the utmost importance on the major
trend. "It's a bull market," he often repeated. Precious metals shares are
breaking out again after a brief consolidation. It's time to channel your
inner Old Turkey, realize this is a bull market and act accordingly.
The evidence is overwhelming. After rebounding strongly to start the year,
the mining stocks corrected through May. The June reversal on record volume
created the first higher low. The miners then sustained that strength by closing
the month and the quarter with the kind of strength not seen since the bottoming
process began in June 2013. In addition to the price action, the miners have
outperformed the metals in strong fashion and especially in the last five weeks.
These are reliable signals of a new bull market.
Analysts like to be cautious and sometimes prefer to avoid momentum plays
but the charts lead me to believe that the momentum is building and has plenty
of room to run. From time to time I've posted charts of my top 15 index. I
wanted to create a much broader index consisting of quality companies with
more of an emphasis on larger companies. The first image below is a weekly
chart of my new top 40 index. It includes 28 gold stocks and 12 silver stocks.
The median capitalization is nearly $750 Million and 15 of the companies are
worth $1 Billion or more.
The index appears to be breaking out after a two week consolidation. It closed
Wednesday at its highest level in about 15 months. Note that although the index
has advanced considerably in the last month and year to date, it is finally
emerging from a reverse head and shoulders bottom that lasted 15 months! There
is significant upside potential from the pattern and very little overhead resistance
until the 2012 highs. Also, note the huge accumulation during the winter and
the relative strength against Gold.
Staying with weekly charts, here is a look at the juniors via GDXJ and SILJ.
With a bit more strength to close the week GDXJ will form a higher high and
reach a 10-month high. The next resistance isn't until $52 while the next major
resistance isn't until $70. Meanwhile, if SILJ closes the week at the current
level then it would mark the highest weekly close in 15 months. SILJ is starting
to breakout from a very well defined head and shoulders pattern which projects
roughly 30% upside from Wednesday's close.
In February
we argued that the strength in precious metals should not be feared and
that there was plenty more upside ahead. That article was premature as its
points appear to be more instrumental right now. This is a tough time to
buy as miners are no longer dirt cheap and have already rebounded quite a
bit. At the same time, there could be a lingering fear that the bear could
reassert itself at any moment. That article provides some examples of how
markets performed following major bottoms. The rebounds (in miners and general
markets) tend to last well beyond one year before there is any significant
correction.
The final bottom for miners was in December 2013 and further strength in the
coming days and weeks should provide us absolute confirmation. Though the miners
have already rebounded significantly, the charts suggest that there is plenty
of additional upside potential directly ahead. How do you play it? Focus on
quality stocks that are not so overbought and take advantage of dips (5%-10%)
when they come. Have an exit strategy just in case and then channel your inner
Old Turkey!
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