The
gold miners’ stocks have suffered a correction since early August,
gutting traders’ enthusiasm for this contrarian sector. This
necessary and healthy selloff is maturing, after largely
accomplishing its essential mission of rebalancing sentiment and
technicals. The universal greed and extreme overboughtness plaguing
gold stocks as their last upleg peaked has been reversed, paving the
way for their next bull upleg.
Since corrections are challenging to weather psychologically, most
traders hate them. But they are an integral part of secular bulls,
which are ultimately an alternating series of uplegs followed by
corrections. By preventing sentiment and technicals from terminally
overheating, these corrections greatly extend bull markets’
longevity. Without rebalancing selloffs, bulls would rocket
parabolic soon exhausting potential buying.
The
overpowering greed fueled by extreme gains rapidly seduces in all
traders interested in a sector. So they rush to buy expending their
capital firepower, pulling forward much future demand which slays
bulls. Corrections prevent those premature failures, bleeding off
excess greed before it spirals out of control. More importantly for
traders, these periodic selloffs really multiply the potential
gains available in bull markets.
Successful trading demands buying low then later selling high.
Correction bottomings are the best times to buy relatively-low
within ongoing bulls, aggressively deploying capital. The
subsequent upleg toppings are the best times to sell
relatively-high, locking in big gains. Actively riding these
upleg-correction cycles is way more profitable than buying
and holding for an entire bull. Corrections bring great
opportunities!
So
traders should embrace them rather than fretting about them.
Today’s maturing gold-stock correction is sure evident in this
sector’s leading benchmarks, led by the popular GDX VanEck Vectors
Gold Miners ETF. GDX commands the lion’s share of capital deployed
in major gold miners’ stocks via exchange-traded funds. The wild
ride its share price has been on this year reflects big sector
uplegs and corrections.
Context and perspective are essential for understanding and trading
markets, so this chart shows GDX’s price action over gold stocks’
entire secular bull market. Overall between mid-January 2016 to
early-August 2020, the major gold stocks soared 256.7% higher during
this 4.5-year span. That leveraged gold’s own parallel bull run by
2.9x, on the high side of major gold stocks’ normal range running
from 2x to 3x.
But
actively trading this bull’s uplegs and corrections was far more
lucrative. The gains won in GDX’s four individual uplegs added up
to 396.6%. Those were further amplified by the increased buying
power from holding cash through corrections. Traders selling
relatively-high at upleg toppings were able to buy more shares
of the same fundamentally-superior gold miners at correction
bottomings, accelerating their overall gains.
 
This
year’s roller-coaster gold-stock price action started with
mid-March’s brutal stock panic, driven by governments imposing
widespread economic lockdowns to slow the spread of COVID-19. The
major gold stocks literally crashed on that, with GDX
plummeting 24.5% in a two-trading-day capitulation climax, as
soaring US-dollar safe-haven demand hammered gold. That left the
major gold stocks radically oversold!
After GDX cratered 38.8% in just 0.6 months, a major new bull upleg
was overdue. So only two trading days after that stock panic’s
nadir, we started aggressively buying and recommending great gold
and silver miners in our subscription newsletters. As April dawned
I wrote an essay
explaining the huge opportunities, “All this argues that a
major new gold-stock upleg is getting underway, portending big
gains coming!”
Indeed the gold stocks kept rocketing higher, ultimately catapulting
GDX up 134.1% in just 4.8 months by early August! Interestingly
that wasn’t even exceptional by this bull’s standards. Its first
upleg back in the first half of 2016 saw even-bigger 151.2% GDX
gains. But gold stocks had run so far so fast by this past summer
that they were extremely overbought. That danger was readily
evident in GDX’s technicals back then.
Prices soaring too far too fast generate unsustainable levels of
greed, threatening to prematurely exhaust entire bull markets.
While that sentiment itself is ethereal and unmeasurable, the
stretched technicals driving it are easy to quantify. A great proxy
for overboughtness and oversoldness is looking at prices relative
to their trailing 200-day moving averages. On August 5th, GDX
closed at an extreme 1.448x its 200dma!
That
was a flashing warning sign that gold stocks’ last mighty upleg was
increasingly at risk of giving up its ghost. And the necessary
resulting correction to rebalance sentiment and technicals certainly
didn’t tarry. Over the next four trading days, GDX plunged 12.2%
formally entering correction territory at a 10%+ selloff. That
sharp drop stopped us out of many of our gold-stock-upleg trades
with enormous realized gains.
Like
exact correction bottomings, exact upleg toppings are unpredictable
and unknowable in real-time. But extreme overboughtness and
universal popular greed are big warnings that toppings are nearing.
So rather than selling gold-stock positions outright after riding
uplegs to massive gains, it is prudent to stay deployed while
ratcheting up the percentages on trailing stop losses. These
are fantastic trading tools.
Gold
stocks are a crazy-volatile sector, making the big-and-fast gains
possible which give the miners their allure. Using trailing stops
strips all emotion from sell decisions. Following
corrections after gold stocks have been beaten down, new trades can
be added with loose trailing stops. They increase odds traders
won’t be prematurely whipsawed out of positions early in uplegs
before they can mature into big gains.
But
late in uplegs when GDX stretches far above its baseline 200dma,
downside risks greatly multiply. So as prevailing greed and
overboughtness mount after major uplegs, trailing stops should be
tightened to lock in more of the unrealized gains when the selling
inevitably arrives. Brokers automatically exit those
very-profitable positions when the tighter percentage losses are
hit, preventing traders from dithering.
But
trading corrections is never easy, as they are cunning. These
rebalancing selloffs are punctuated by some of the sharpest rallies
seen in bull markets. Those deceive traders into staying deployed
which maximizes their losses. These blistering countertrend
surges convince people that either corrections are over or milder
high consolidations are instead happening. GDX bounced back to
surge 9.9% into mid-August.
But
a mere 12.2% correction over just four trading days is far from
enough to accomplish its essential work of rebalancing sentiment
and technicals. GDX remained stretched far above its 200dma,
and the popular enthusiasm for gold stocks stayed high. Serious
downside risks remained, so I was thankful to be sitting in cash
after realizing those huge gains. The odds for a deeper and longer
correction were high.
In
early September I wrote another essay analyzing why gold stocks were
still in
correction mode. It concluded “with gold stocks remaining very
overbought technically, and greed still elevated after an
insufficient selloff, a resurgent correction is likely.” I even
gave a target for it, “That could easily extend to 25% in GDX,
another 20% lower from this week’s levels.” Traders gave me lots of
flak for that contrarian warning.
The
upleg-correction cycles in bull markets act like big pendulums,
swinging to one extreme before soon reversing right back to the
opposite one. Overboughtness and greed soon mean revert through
neutral to oversoldness and despair. The biggest mistake traders
make at extremes is assuming they can persist indefinitely. Rather
than look for the inevitable mean reversion, they extrapolate
the present into the future.
Their greed blinds them to essential longer-term perspective,
convincing them big gains will reaccelerate so they should hold
their positions and add more. That psychology creates a conundrum
for businesses like mine helping people understand and successfully
trade market cycles. After being stopped out in a major upleg
topping, sitting in cash is the wisest place to be. But that
irritates the greedy, so they stop listening.
The
only trades I added in our newsletters during gold stocks’
correction were put options on sector ETFs and inverse-leveraged
gold-stock ETFs. These trades rally during selloffs when
gold-stock prices fall. Our subscribers had rapidly multiplied
their wealth in the preceding upleg ending in early August. In our
weekly and monthly newsletters, we had realized 17 and 9 stock
trades averaging +81.3% and +83.6% gains!
Those were absolute during that last gold-stock-upleg span, with
trades mostly added between mid-March to mid-April and largely
stopped out from late July to late August. Those gains annualized
to outstanding +303.9% and +334.9% averages! That’s a heck of a run
by any standard. Yet almost every day during gold stocks’
correction, subscribers e-mailed me frustrated or even angry I
wasn’t going long gold stocks.
Gold
uplegs and corrections are the tide on which the gold-stock boats
float, as the fortunes in the yellow metal overwhelmingly drive the
profitability and hence stock prices of the miners. This whole
sector rises during gold uplegs, and all the gold stocks fall
during gold
corrections. So adding new gold-stock trades early in
corrections before any signs of bottoming is a fool’s errand. That
all but guarantees big losses fast.
Over
the next month into early October, the gold stocks and thus GDX kept
grinding sideways to lower on balance. But new correction lows were
few and far between, and gold-stock prices hovered fairly close to
their early-August highs. So the
gold-stock-correction-is-still-underway thesis wasn’t very popular.
During such times in the newsletter business, subscribers’ interest
wanes so they tune out markets and renew less.
Trading success doesn’t come from tickling people’s ears, but from
heeding key indicators reflecting upleg-correction cycles. The
outlook is never bullish all the time, there are seasons to
buy and seasons to sell. Like professional poker players, it only
makes sense to bet big when odds for success are way in our favor.
Though GDX remained relatively high, its peaks and valleys were
forming a definite downtrend.
Heading into late October when GDX remained around $40, down even
less from its early-August peak than in that initial sharp selloff,
I wrote another essay “Gold
Stocks Still Correcting”. GDX remained way above its 200dma,
which is bull-market corrections’ strongest support zone. I
warned “major gold stocks per GDX have yet to revisit oversold
levels and eradicate early August’s universal greed” so “more
selling is coming.”
GDX
indeed soon slumped to a new correction low in late October,
extending its total selloff to 17.9% in 2.8 months. But that was
still really mild by the standards of the three previous corrections
in this gold-stock bull. GDX averaged far-more-severe 36.5%
selloffs over 8.0 months! And GDX remained up at 1.058x its
200dma. The previous correction bottoms came well under this key
baseline averaging just 0.754x it.
But
I argued then that this current GDX correction didn’t need to plunge
that deeply to finish its necessary work. Two of those earlier
corrections were dragged way lower than they should’ve been due to
anomalous unique events. Mid-March’s COVID-19 stock panic was one.
So in late October I stuck with my original targets of a 25% GDX
selloff and sub-200dma slump. That was again sorely tested in early
November.
Prior to the US elections a month ago, traders universally assumed
the pollsters were right so Democrats would win control of the
presidency and both chambers of Congress. They figured that meant
another huge pandemic-stimulus-spending bill would be passed early
next year after the inaugurations. But that blue-wave sweep didn’t
come to pass, with Republicans holding the Senate and gaining many
House seats.
Just
a couple days after the voting, traders realized no second CARES Act
was coming from the still-split Congress. So oddly they assumed the
Fed would have to step in and really expand quantitative-easing
money printing. That unsubstantiated hope ignited huge
buying in almost everything on November 5th, catapulting gold and
GDX 2.5% and 7.2% higher! Again traders were convinced this
correction was over.
GDX
had not only blasted 12.9% higher in just six trading days since its
latest low, but it was breaking out above both the upper
resistance of its correction downtrend and its 50-day moving
average. So surely a new upleg must be underway, right? But I
again argued the contrarian case in our newsletters, that this
gold-stock correction still hadn’t run its course and more selling
was coming. So we continued to hold cash.
Finally as stock markets soared in the wake of the elections on
central-bank money printing and hopes for more QE, the selloffs in
both gold and its miners’ stocks really accelerated. Across
12 trading days mostly in mid-November, GDX plunged 19.3% on gold
itself falling 9.1%. That heavy gold-stock selling climaxed on the
usually-quiet Thanksgiving week, when GDX dropped 6.9% that Monday
and Tuesday alone!
In
the week or so leading into that capitulation, the tenor of my
incoming e-mails really changed. Instead of previous months’
leading question of why wasn’t I buying gold stocks, people were
worrying they were going to fall much lower. The residual
greed enabled by this sector’s high consolidation from early August
to mid-September had faded, giving way to mounting fear. That’s the
psychology necessary for bottomings!
By
November 24th GDX’s total correction had extended to 24.9% over 3.6
months, right in line with my original 25% target from early
September. Even better, it had blasted GDX well under its 200dma
which is again the strongest support zone in bull-market
corrections. GDX closed that day at just 0.945x that key metric,
which is oversold. Early August’s extreme greed and overboughtness
had finally fully reversed!
That
was enough evidence that the necessary sentiment and technical
rebalancing had probably been accomplished. So that very GDX-low
day, I started layering in new fundamentally-superior gold-stock
trades in our newsletters to ride the next bull upleg. That
campaign grew to include more new trades early this week. Thanks to
its latest correction, this sector is unloved and back down to
relatively-low levels.
Just
like upleg toppings, exact correction bottomings are impossible to
discern in real-time. Gold stocks could definitely still head even
lower extending GDX’s correction. Or they could grind sideways
consolidating low. But after a 24.9% selloff over 3.6 months
forcing this gold-stock benchmark well under its 200dma and killing
greed, odds are the great majority of downside risk is behind
us. Upside potential outweighs it.
The
prudent way to game a probable correction bottoming is to gradually
redeploy your capital over time in fundamentally-superior gold
stocks. The idea is to add new trades straddling the likely
actual absolute low. The earlier ones could grind lower before the
next upleg really starts, while the later ones could get added after
it is underway. But layering in new trades over time lowers risks
and ups odds of catching a bottom.
Buying low and selling high can only be accomplished if there is
plenty of uncertainty when those trades are being executed. By the
time major correction bottomings or upleg toppings are readily
apparent to all well after the fact, the best gains have already
been won. Even if this latest gold-stock correction doesn’t
prove over yet, it has definitely really matured and accomplished
its mission. Thus we can game its bottoming.
At
Zeal we walk the contrarian walk, buying low when few others are
willing before later selling high when few others can. We overcome
popular greed and fear by diligently studying market cycles. We
trade on time-tested indicators derived from technical, sentimental,
and fundamental
research. That’s why all 1178 stock trades recommended in our
newsletters since 2001 averaged hefty +24.0% annualized realized
gains!
To
multiply your wealth trading high-potential gold stocks, you need to
stay informed about what’s going on in this sector. Staying
subscribed to our popular and affordable
weekly and
monthly
newsletters is a great way. They 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. Subscribe
today and take advantage of our 20%-off sale! There’s no
better time than around a correction-bottoming buying opportunity.
The
bottom line is recent months’ necessary and healthy gold-stock
correction is maturing. The leading GDX gold-stock benchmark has
finally fallen far enough and long enough to reverse greed to fear,
with last summer’s universal bullishness vanishing. And the heavy
selling finally forced this sector back down to oversold levels,
with GDX hammered well under its 200dma which is relatively-low
within ongoing bulls.
All
this greatly increases the odds that the lion’s share of this
correction’s essential work is now behind us. While this total
selloff could still deepen, waning downside risks are increasingly
being outweighed by big upside potential in this gold-stock bull’s
next upleg. So we can start gaming this correction’s bottoming by
gradually layering in new positions in fundamentally-superior gold
stocks, now trading at relatively-low prices. | 
