Next month marks the 3-year anniversary of the bear market in silver that started in May 2011. Later this summer we will hit the 3-year anniversaries of the bear markets in gold and gold stocks. We are now psychologically conditioned for pain and punishment in the gold markets and to beware of the next downward plunge.
In reality though gold has been in a basing phase. It's not going down anymore, it's going sideways where the downward plunges are muted and the upward rallies are still fake bear market rallies. What's interesting about this base is that it started right at the height of bearishness in the gold market. That two day massacre in gold back in April 2013 when gold plunged below $1400 actually started the left hand side of the base. So right when everyone was panicking about gold, in reality it was starting to form a major bottom!
Just a couple months later after trying and failing to get back above $1400, gold made the low point in the base in June of 2013 around $1200. Gold then tried once again to get back above $1400, but then failed and retested the bottom of the base in December 2013. So a well established base formed in gold between $1200 and $1400 as you can see in the chart below.
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As we get geared up for the Sweet 16 this weekend it's interesting to note how investing and participating in a NCAA tournament bracket pool share some similarities. To win an NCAA pool, you have to pick a bracket that beats your opponents by picking teams that win games and earning more points for correct picks than everyone else. In the market you have to pick assets that go up or down in price before your opponents get into the same assets, so that you have someone left to sell to, to realize your gains.
You get the most points in an NCAA pool by picking the correct Final Four and winning team, and the least amount of points for the early round games. In investing you usually capture bigger gains by taking a longer term view and betting on big trends.
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Bear markets can be devious creatures. They start off with a lot of emotion, usually some type of euphoria and excessive optimism at the top. But underneath it all the market is typically thrashing, making volatile swings as buyers are piling in at the wrong time and sellers are taking profits.
Once the sellers take control the bear market starts it's downtrend. At that point the bear launches into it's second phase of faking out market participants, i.e., the bear market rally. These periodic false rallies serve to make it look like the bear has ended. But once each bear market rally fails, the next leg of the bear market is kicked off.
As a speculator it's important to learn from bear markets, how they form and how they deceive on the way down. The more experience a speculator has with bear markets the more prepared they will be for the next one. Let's take a look at some key lessons we can take from gold's latest bear market:
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If gold is entering a new bull market then it's a great time to get in. Technical evidence is mounting, big volume is coming into gold mining ETFs and they are leading the market. Take a look at the monthly volume on the Junior Gold Miners ETF GDXJ. After a huge volume increase in January, the buying pressure hasn't subsided as February is set to smash the record volume set just last month. GDXJ is also pressing up against downtrend resistance and the monthly MACD is turning higher, setting up a potential breakout.
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The gold sector is on fire. GDXJ is a leader in the ETF universe up over 40% YTD. According to the Stage Analysis below GLD, GDX, and SIL all transitioned into Stage 1 this week. On individual gold stocks, over 70% of the stocks listed below are now in Stage 1 or Stage 2. The volume in GDXJ and GDX were also huge last week, GDXJ traded over 25 million shares for the week which blew away previous record volume. GDX had it's second most up volume ever last week. SIL had it's most up volume since 2011.
GLD and SLV continued to move higher last week, but haven't seen near the increase in volume that the gold miner ETFs have. I'd like to see the volume in those ETFs increase to confirm the new uptrend. Also I would expect to see some type of pullback or consolidation occur in the gold sector sometime soon, given the huge gains.
GLD transitioned from Stage 4 to Stage 1
GDX transitioned from Stage 4 to Stage 1
SIL transitioned from Stage 4 to Stage 1
AG transitioned from Stage 4 to Stage 1
AUY transitioned from Stage 4 to Stage 1
EGO transitioned from Stage 4 to Stage 1
GOLD transitioned from Stage 4 to Stage 1
HL transitioned from Stage 4 to Stage 1
KGC transitioned from Stage 4 to Stage 1
NGD transitioned from Stage 4 to Stage 1
PZG transitioned from Stage 4 to Stage 1
RVM transitioned from Stage 4 to Stage 1
SAND transitioned from Stage 4 to Stage 1
SLW transitioned from Stage 4 to Stage 1
VGZ transitioned from Stage 4 to Stage 1
AXU transitioned from Stage 1 to Stage 2
EXK transitioned from Stage 1 to Stage 2
MDW transitioned from Stage 1 to Stage 2
MGN transitioned from Stage 1 to Stage 2
MUX transitioned from Stage 1 to Stage 2
NG transitioned from Stage 1 to Stage 2
PAAS transitioned from Stage 1 to Stage 2
PPP transitioned from Stage 1 to Stage 2
RBY transitioned from Stage 1 to Stage 2
RGLD transitioned from Stage 1 to Stage 2
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The media is good at spreading fear in the financial markets. Fear gets people's attention. Yet there's one thing that they never tell you after the fact: buying fear makes money. If you bought the bottom of the financial panic in 2009, whether it was stocks, real estate, commodities, etc., you made money. If you bought the panic over the Euro in 2010 you made money. If you bought the fiscal cliff fear in 2011 in the stock market, or you bought the dip in the dollar as everyone thought it was headed off a cliff in mid-2011, you made money. If you bought the fear in European stocks in 2012, even the fear in Greece where there were riots in the streets, you made money. If you bought the fiscal cliff fear at the end of 2012 in U.S. stocks, you made a bunch of money. There's more than one example each year from 2009 where buying fear and panic in a depressed market made outstanding returns.
How do we translate this into trading opportunities in 2014? One area that stands out is the commodities complex. Fear has been present there since 2011 when commodities topped. The fear snowballed into panic in 2013 in various commodities. The gold and silver markets panicked in April 2013 and bottomed not long after in June 2013. There's still a lot of apprehension and fear in these markets even in early 2014. Yet it's quite possible these markets have bottomed and are heading higher. Take a look at what is performing strongly so far this year (courtesy of Finviz):
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Markets tend to have no set rules that always work. Especially on shorter term time frames. But as you stretch the time frame out to the longer term general guidelines start to form for how markets behave. This includes concepts such as bear markets following bull markets, and bull markets following bear markets. Periods of overvaluation in stocks tend to be followed by periods of undervaluation. And relationships between asset classes tend to switch as one asset class becomes extremely overvalued or undervalued against another. The market hates extremes so by definition trends that reach extremes tend to eventually reverse.
With that being said one of the oldest trends in the market right now that is also sitting at an extreme is long gold, short gold miners. If you follow the gold market at all, you know that gold went up for 12 years in a row, then had a horrific 2013 as it finally had a major correction. That was previously one of the longest trends in the market to finally experience a major reversal. Which in gold's case was a bull market finally going through a bear market. But within the gold trend the relationship of gold outperforming gold miners has been in place since 2006! Gold stocks have been in a bear market versus gold for over 8 years!