The
gold miners’ stocks are still running higher in a mounting upleg.
These sector gains accelerated into mid-April, spawning fears of
excessive overboughtness. While somewhat stretched, gold stocks’
leading benchmark remained nowhere near potentially-terminal
levels. So there’s still lots of room for this latest gold-stock
upleg to keep powering higher. Like usual its gains won’t be
linear, but will flow and ebb with gold.
The
gold-stock sector’s most-popular index remains the GDX VanEck Gold
Miners ETF. Launched way back in May 2006, it parlayed its
first-mover advantage into an insurmountable lead. GDX’s $16.2b of
net assets this week more than tripled its next-largest
competitor’s, the GDXJ VanEck Junior Gold Miners ETF. The
much-bigger GDX is dominated by major gold miners, whose stocks have
enjoyed a great run.
Gold
stocks’ latest upleg is their sixth of this secular gold bull born
back in mid-December 2015. Since GDX’s latest major interim low in
late September, this leading sector ETF has rallied 41.4% at best in
6.6 months. That nicely leveraged gold’s parallel 14.6% gain in
this span by 2.8x, on the higher end of GDX’s usual gold-price-move
amplification range of 2x to 3x. But this upleg is way more
compressed than that implies.
Hawkish Fedspeak battered both gold and its miners’ stocks sharply
lower in late January, where GDX carved a secondary bottom just 1.3%
above late September’s. So an overwhelming 29/30ths of gold stocks’
upleg-to-date gains have rapidly accrued in just the last 2.7
months! To surge so fast, gold stocks had to blast up
dramatically. That raised the specter of extreme overboughtness,
which eventually slays uplegs.
Absolute price levels usually don’t matter much in the markets, as
traders soon come to accept whatever prevailing prices happen to
be. This past Monday GDX hit an upleg-to-date closing high of
$40.87. That is much-higher than late-January’s low, but much-lower
than this ETF’s bull-to-date peak of $44.48 from early-August 2020.
Prices are all relative, so what really matters is how fast
they moved to current levels.
Overboughtness quantifies the rapidness and magnitude of rallies.
The major gold stocks powering 41% higher over a half-year is very
different from them skyrocketing that same 41% in a week. The
former gains are gradual and sustainable, averaging out to modest
0.3% daily advances. Yet the latter requires huge consecutive 8.2%
up days, which are super-unlikely and certainly not a buying pace
that can be kept up.
Overboughtness threatens uplegs when prices surge too far too
fast to be sustainable. That generates too much greed too soon,
attracting in too many traders to chase the exciting upside
momentum. Their rush pulls forward too much of their potential
near-future buying, leaving their capital firepower exhausted. Then
sellers soon overpower those depleted buyers, prematurely killing
uplegs well before they fully mature.
There are many technical tools to measure overboughtness and
opposing oversoldness after selloffs. My favorite is one I
developed decades ago called Relativity. It simply looks at
prevailing prices as multiples of their own underlying 200-day
moving averages. 200dmas are ideal baselines from which to
measure the speed and size of price moves. While they are slow to
change, they do still gradually trail prices over time.
200dmas evolve with prevailing prices, never becoming obsolete like
static baselines.
Relativity
Trading simply divides daily closing prices by their underlying
200dmas, then charts the resulting multiples over time. These are
perfectly-comparable percentages regardless of prevailing price
levels. And they tend to form horizontal trading ranges in
trending markets, which are ideal for actively gaming bull uplegs
and corrections.
This
chart superimposes GDX technicals over its Relative GDX
overboughtness-oversoldness indicator, or rGDX, over the past couple
years or so. Rendered in red, this effectively flattens GDX’s
200dma to horizontal at 1.00x. This leading sector ETF’s price
action meanders around that baseline in comparable terms. While
gold stocks may be short-term overbought, they are nowhere near
upleg-threatening extremes.
GDX’s impressive surge higher since late January is readily-evident
in this chart. It included a powerful upside breakout from a major
technical formation, a sizable pennant crossed with a descending
triangle. That was followed by a more-important 200dma upside
breakout, which both happened before Russia invaded Ukraine
catapulting gold prices sharply higher. Gold stocks’ upside
momentum has been very strong.
Such
a big-and-fast surge left technically-oriented traders increasingly
worrying about overboughtness in this sector. The quicker and
higher gold stocks rally, the greater the risks they will become
unsustainably-overbought. Lesser overboughtness can trigger
mid-upleg pullbacks, while greater overboughtness kills uplegs
ushering in deeper and longer corrections. So monitoring
overboughtness is essential when riding uplegs.
Heading into that long Easter weekend as GDX rallied to new upleg
highs, the rGDX stretched to 1.233x. In other words, GDX
closed 23.3% above its trailing 200-day moving average. Also well
over its shorter-term 50dma, this leading gold-stock benchmark was
definitely overbought. But was it overbought-enough to threaten to
prematurely truncate gold stocks’ latest upleg? Nowhere close
according to bull-to-date precedent.
I
started looking at price levels relative to their 200dmas
way back in
2004, and have spent long years since both backtesting
Relatively and actively trading on it. The latest five calendar
years proved to be a good general timespan over which to define
Relatively trading ranges. These are based on best-fit
horizontal lines for relative multiples’ lower-support and
upper-resistance levels. GDX’s current range is shown above.
The
rGDX’s trading-range support is down near 0.80x its 200dma. Those
are extremely-oversold levels seen after major corrections that are
really likely to birth new bull-market uplegs. Both GDX’s current
young upleg and its previous couple launched after the rGDX plunged
under or neared that strong-buy zone. In late September, GDX fell
to 0.838x before the preceding correction gave up its ghost ushering
in today’s upleg.
On
the overbought end of this spectrum, rGDX trading-range resistance
is up near 1.35x its 200dma. These are extremely-overbought
levels revealing high odds bull-market uplegs are topping before
rolling over into subsequent corrections. Once GDX stretches more
than 35% above its 200dma, traders need to be wary of uplegs
failing. That doesn’t mean selling outright, just ratcheting up
trailing-stop-loss percentages.
When
mature uplegs are really surging and fueling popular excitement,
they can coast longer and higher on self-feeding upside momentum.
The faster gold stocks rally, the more traders want to chase their
big gains. As exact upleg toppings aren’t knowable in real-time,
realizing gold-stock gains risks missing out. It is more prudent to
tighten up trailing stops to ride the upleg as long as possible
while protecting more gains.
GDX’s latest 1.233x upleg-to-date relative-multiple high remains
well under that 1.35x warning zone! So odds are this latest
gold-stock upleg hasn’t yet surged high-enough fast-enough to
exhaust traders’ near-term buying potential. The major gold stocks
may be short-term overbought, but pullbacks within ongoing uplegs
are natural and healthy. They rebalance sentiment, preventing greed
from growing excessive too soon.
Even
1.35x is actually on the lower side historically for major
gold-stock upleg toppings. For years GDX’s relative-trading-range
upper resistance actually ran near 1.50x. It was just
dragged down to 1.35x in the most-recent trading-range update late
last year, thanks to one of the most-extreme market anomalies
witnessed in our lifetimes. That was March 2020’s pandemic-lockdown
stock panic, which is seen in this chart.
Leading into that, GDX had powered 76.7% higher over 17.5 months in
a major upleg. That gradual rate of ascent was very sustainable, so
the rGDX was only running 1.153x when gold stocks reached their last
interim high before COVID-19 lockdowns slammed global markets. GDX
had stretched higher above its 200dma within that upleg, but never
enough to threaten its demise. Then gold stocks were sucked into
that panic.
They
plummeted as gold was battered lower on epic gold-futures selling in
response to huge safe-haven dollar buying. We aggressively bought
the resulting
radically-oversold gold-stock lows, which I argued at the time
were an unsustainable anomaly. Indeed GDX rocketed higher into a
massive 134.1% upleg over just 4.8 months, which crested at a 1.448x
rGDX multiple in early August 2020. That was a more-normal peak.
The
subsequent gold-stock upleg into mid-May 2021 was also killed way
early by another unique event. That was when the Federal Reserve
started its gargantuan hawkish pivot from zero interest rates
and epic quantitative-easing money printing to both rate hikes and
quantitative tightening looming. So that gold-stock upleg failed
super-early, at just 28.4% GDX gains over 2.5 months and a mere
1.074x rGDX.
With
the world finally learning to live with COVID-19, it certainly won’t
spawn another lockdown-driven stock panic. And with the
Fed’s newest
rate-hike cycle already underway and set to accelerate as QT
follows hot on its heels, the next market-shaking hawkish Fed pivot
is many years away. So gold and its miners’ stocks are likely to
return to more-normal Relativity trading ranges less distorted
by anomalous events.
Even
including that pair of prematurely-killed squib uplegs, all five GDX
has completed so far during this secular gold bull have still
averaged awesome 85.0% gains! So today’s sixth just hitting
+41.4% at best still remains small compared to bull-to-date
precedent. It should continue powering higher on balance for months
to come. The gold stocks’ sentiment, technicals, and fundamentals
remain exceedingly-bullish.
While GDX’s powerful surge over the last several months left it
somewhat-overbought, sector psychology never grew
particularly-bullish. Gold stocks still hadn’t surged far-enough
fast-enough to spawn sufficient greed to expand this contrarian
sector’s popularity into mainstream traders. Normal bull uplegs
generally don’t fail until excessive greed attracts in too many
traders too soon exhausting their near-term buying potential.
That
terminal gold-stock euphoria hasn’t developed yet because this upleg
hasn’t been exciting enough to drive it. Again still small
compared to GDX’s bull uplegs in recent years, gold stocks haven’t
surged far enough to challenge upleg-threatening levels of
overboughtness. Upside momentum needs to accelerate dramatically
before that can happen. A major technical buy signal and strong
seasonality ought to hasten that.
In
mid-March GDX flashed a fabled Golden Cross buy signal, as
its shorter 50dma climbed back above its longer 200dma! These
powerful buy signals happen early in major uplegs, with the last
decisive Golden Cross triggering early in mid-2020’s huge 134.1% GDX
surge. And May is actually the strongest month of the year
seasonally for
gold stocks, with an older index averaging big 4.9% gains in
modern gold-bull years.
Gold
stocks are ultimately leveraged plays on gold, which
overwhelmingly drives their earnings and thus stock prices. The
major gold miners of GDX
have earned fat
profits for seven quarters in a row before this latest Q1’22,
which will be reported over the next several weeks. With this
newest quarter’s average gold price surging another 4.6% higher than
the preceding Q4’21’s, the
gold miners’ Q1
results should prove great.
Higher earnings will force their generally-already-low valuations
even lower, leaving their fundamentals looking even more bullish.
Those will continue improving as gold prices keep marching higher on
balance, driven by the
raging inflation
unleashed by
extreme Fed money printing and stock markets likely rolling over
into a bear market on Fed tightening. Last week’s
gold-upleg-strengthening essay analyzed both.
So
this current gold-stock upleg is well-positioned to keep powering
higher on balance in coming months. While it will flow and ebb like
usual, surging higher before pulling back, it hasn’t yet grown
large-enough or gotten overbought-enough to threaten giving up its
ghost. Sentiment, technicals, and fundamentals are still giving
all-clear-ahead signals. Thus any weakness can be used as buying
opportunities to add positions.
If
you regularly enjoy my essays, please support our hard work! For
decades we’ve published popular
weekly and
monthly
newsletters focused on contrarian speculation and investment. These
essays wouldn’t exist without that revenue. Our newsletters draw on
my vast experience, knowledge, wisdom, and ongoing research to
explain what’s going on in the markets, why, and how to trade them
with specific stocks.
That
holistic integrated contrarian approach has proven very successful.
All 1,296 newsletter stock trades realized since 2001 averaged
outstanding +20.0% annualized gains! Today our trading books are
full of great fundamentally-superior mid-tier and junior gold and
silver miners to ride their uplegs. These stocks have recently
surged sharply, but still have massive room to run.
Subscribe today
and get smarter and richer!
The
bottom line is gold stocks are still running higher, their sixth
upleg of this secular gold bull remaining underway. Despite its
strong rally in recent months, the leading GDX gold-stock benchmark
hasn’t yet hit upleg-threatening levels of overboughtness. Gold
stocks still haven’t surged high-enough fast-enough to generate
excessive popular greed, which is necessary to accelerate their
gains to extreme overboughtness.
Until that happens, there’s no need to worry about this young upleg
failing. Both gold stocks’ technicals and fundamentals are strong
and still improving, with gold itself continuing to power higher on
balance. This underlying gold bull fueling gold stocks’ gains
should head much higher on the Fed’s raging inflation, and weaker
stock markets hit by aggressive Fed tightening. This is a
super-bullish backdrop for gold stocks. |