Embrace the Panic

I still remember December 2012 and how petrified CNBC was trying to make people of the fiscal cliff.  They had a fiscal cliff countdown for an entire month as if when it expired the stock market would explode.  Everyone on there was scared and telling you to sell stocks because of the uncertainty surrounding the fiscal cliff.  I remember one of their analysts got on and proclaimed for the first time since he was on TV, he didn’t own any stocks.  I thought this was pretty ironic considering he always had a stock to tout and tell you how awesome it was.  But even he succumbed to the fear of the fiscal cliff emanating from CNBC.  Funny thing is, it was the exact wrong thing to do to be scared of the market coming into 2013.

See the S&P 500 didn’t really do much from early 2011 to the end of 2012.  It did a sideways grind for all of 2011 basically.  By the middle of 2012 it still hadn’t gone anywhere.  Then it had a rally into about October of 2012, followed by a pullback to the end of the year.  That made the entire two year span just mostly a big consolidation, which really is what setup the potential for what we’ve seen in 2013.

sp500

Now recently we get a headline from CNBC titled “Embrace the Selloff”.  Remembering what they were saying back in December 2012, I thought this was pretty funny.

This all boils down to psychology and how people react given what has happened in the recent past in the markets.  Back in December 2012, they were scared of the fiscal cliff, not only for the fiscal cliff’s sake, but REALLY because the market had barely gone anywhere in 2 years.  So the fiscal cliff represented another reason for the markets to go down and make everyone miserable, and they hopped on that bandwagon and made sure everyone felt the fear.

Now that the S&P 500 has gone up 400 points, people are much more comfortable with it.  Which is why we get headlines talking about embracing pullbacks or talk of the Fed tapering.  Instead of fear, they are saying “bring it on” because we’ve got profits, and this market is still going higher.  This is all nonsense though because in reality the higher an asset class goes in price the more risk is built into it.

Which brings me to everyone’s favorite asset class to hate: gold.  What’s ironic about gold is most of the risk in gold has probably now been removed from its price after a 2-year+ cyclical bear market.  Yet hardly anyone will believe that, because all they remember right now is pain.  But bear markets remove risk, which is why you need to embrace the panic.

Of course you can’t take advantage of a bear market until its over, that’s the key problem with the gold market.  It looked for a second like the gold bear market was over in 2012, but that didn’t turn out to to be the case.  Now that we’re ending 2013, it’s MORE LIKELY the gold bear market is over, but maybe it still isn’t.

The best thing we can say about gold is it isn’t going down as fast as it was earlier in the year.  Ironically, people are about as or even more bearish on it now than they were then.  Gold is starting to set up a base which is what you want to see for a market to bottom and transition back into a bull market.  We could even make a new low on gold here and have a positive divergence in momentum, and still have the type of basing pattern necessary for a real bottom.

gold

Gold stocks on the other hand are still trading horribly.   The only positive thing you can say is even though they’ve made another new low, there is a positive divergence setting up.  If they do get a rally from here it will also re-establish the base that would eventually then usher in the next bull market in gold stocks.

hui

More than likely CNBC and the media will go into 2014 looking for more reasons the stock market will go up and shake off bad news.  But their optimism was only gained because stocks had a great year in 2013.  Eventually the pessimism in the gold market will be just as ill-founded as the pessimism in stocks was to start 2013.

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The original article and much more can be found at: http://www.nextbigtrade.com

The views and opinions expressed are for informational purposes only, and should not be considered as investment advice.  Please see the disclaimer.

Coal Stocks Grinding Higher

Coal stocks continue to steadily emerge from a brutal bear market over the past 2 years.  Last week the coal ETF KOL broke above its 30-week moving average for the first time since early 2012.  As you can see on the chart below KOL has been declining below this moving average in a Stage 4 decline since August 2011.  If KOL can continue to move higher above the 30-week moving average it will transition into a Stage 2 uptrend.

Looking at a daily chart of KOL a couple of things stand out.  First, the RSI has consistently stayed above 40 since September, even during pullbacks.  This is typically the sign of an emerging uptrend since KOL is failing to get too oversold when it pulls back.  Next the action in October was encouraging as volume started to increase as KOL started to approach resistance around the 25-26 area.  Things changed quickly though after the re-election of President Obama, which was perceived to be a negative for the coal market.  A wave of selling hit the coal sector right after the election and caused a big gap down in KOL.  It continued to sell down to about 23, but instead of continuing lower found support there that has held since June 2012.  Then KOL started to move higher once again in December.   KOL gapped higher to start 2013 and each of the 3 trading days in 2013 have seen above average volume, which is a good sign for a breakout.

Next let’s look at some individual coal stocks.  Most coal stocks are lacking one key ingredient for a breakout, which is an increase in volume.  Just like the KOL ETF, individual coal stocks saw increasing volume in October, but have seen limited buying pressure since the gap down after the presidential election.  These stocks need to see buying pressure to overcome the gap down resistance and to transition into sustained uptrends.

BTU and ACI are two examples of coal stocks below their election gap downs.  Both have established a pattern of higher lows and have bullish RSI readings, but need volume to move past their gap down levels.

ANR has overcome its gap down from the election, and has seen a little more buying pressure than BTU and ACI.

As 2012 came to a close and during the start of 2013 the market has seen some sectors that were crushed over the past 2 years move substantially higher.  This includes solar stocks, steel stocks, and some major commodity producers.  The coal sector looks poised to continue rallying but needs more volume to come into the sector, otherwise the chances of the rally continuing are diminished.  In particular watch how the sector trades as a whole as time moves forward.  The best scenario for a sustained uptrend would be to see increased volume across the board in individual coal stocks as well as the KOL ETF.

Disclosure: Long ANR

Connect with me on Twitter: @nextbigtrade

The original article and much more can be found at: http://www.nextbigtrade.com

The views and opinions expressed are for informational purposes only, and should not be considered as investment advice.  Please see the disclaimer.

Gold Miners Looking For A Major Turnaround

Gold stocks are about as contrarian a sector that exists in the market right now.  Even though gold hasn’t had a down year in 12 years, gold stocks have now recorded 2 straight down years, the first time that has happened during this gold bull market.  Shown below is the performance of the HUI Gold Miners Index since 2003:

Relative to gold, gold stocks have had about the same amount of underperformance that they had from 2006-2008.  This ended up leading to two years of outperformance by gold stocks over gold in 2009 and 2010.

Relative to the S&P 500 gold stocks did horribly last year, recording their worst performance since 2003.  And this is the first time since 2003 gold stocks have underperformed the S&P 500 2 years in a row.  Notice that before the last 2 years, gold stocks had outperformed the S&P 500 by double digits almost every year, except for a down year against the S&P 500 in 2004.  Even with 2 down years in a row though gold stocks are still outperforming the S&P 500 over the long term.

Compared against 52 exchange traded funds tracking various sectors, countries, and commodities, gold stocks were close to the bottom of the barrel both during 2011 and 2012.  First shown is the ETFs sorted according to their performance in 2012.  In 2012 a lot of markets that performed poorly in 2011 had big turnarounds, most notably many European markets.  Fading the negativity towards these markets in the middle of the year turned out to be the major trading opportunity of 2012.

Next is the list of ETFs sorted according to their performance in 2011.  In 2011 the worst performing markets were basically foreign stocks and commodities.  In 2012 foreign stocks had a big turnaround, but commodities didn’t and lagged the rest of the market.

So the key thing to note coming into 2013 is commodities are one of the only sectors with 2 years of negative returns coming into the year.  There’s no doubt value investors and contrarians will be taking notice.  There’s research that shows that assets that have negative returns for 2 and 3 years in a row tend to outperform on the upside when they eventually mean revert.

Within the commodities sector gold miners are overdue for mean reversion not only against gold but against the stock market in general. Three years of negative returns in a row is pretty rare, so there’s a good chance the mean reversion for gold stocks will start this year.  Especially considering gold likely put in a major bottom last summer, and could be coming off of a successful retest of that bottom to start the year.

Connect with me on Twitter: @nextbigtrade

The original article and much more can be found at: http://www.nextbigtrade.com

The views and opinions expressed are for informational purposes only, and should not be considered as investment advice.  Please see the disclaimer.

Gold Mid-Year Review

It’s been a rough time recently for gold and gold stock investors.  The last nine months has been the second worst cyclical downturn in gold and gold stocks during this long term secular bull market for gold.  The next chart shows how brutal this recent correction has been:

This bear market was not only the second worst in percentage loss, but also the second longest in time duration:

If that’s not bad enough, it’s actually been over 1.5 years now since gold stocks have made and held onto any gains.  After closing the year at 573 in 2010, the HUI Gold Bugs Index made 4 attempts during 2011 to takeout the 600 level, and all 4 attempts failed.  The next chart shows the HUI’s performance since 2003, and notice how 2011 was the first year where the HUI had a down year the entire year.  This was then followed by the first half of 2012 where the HUI had it’s third worst half year loss of this bull market!

Gold meanwhile gained more than 11% in 2011, and muddled through the first half of 2012 with a small gain.  In reality gold’s correction off of it’s 2011 top has been extremely orderly, another example of how consistent this bull market has been.

Here’s where it gets especially brutal for gold stock investors.  Instead of leveraging the gains in gold in 2011 and the first half of 2012, the HUI drastically underperformed gold at nearly a double digit clip for the entire period!  The underperformance to start the year in 2012 was also the second worst of this bull market.

After making a bottom in the middle of May, there are encouraging signs this  gold bear market has run its course.  First the recent successful test of the 375 level on the HUI that was rejected for higher prices was a logical long term support level.  The 375-400 level was major resistance for 2006-2007, then became support briefly in 2008 before the financial crisis hit.  Then in 2009 that level was brief resistance again before the HUI broke above it in late 2009, then tested that level as support in early 2010 and didn’t look back after that.  Now that this 2012 correction has once again retested that level and soundly rejected it (at least so far) it could prove to be the final test for that level for this bull market.

Long term momentum has gradually started shifting back to the upside along with the recent monthly hammer candle.  Note also that the HUI staged powerful rallies in 2005, 2009, and 2010 that actually started in July, and didn’t have to wait for the full completion of the typical summer doldrums.

In the risk pyramid in the precious metals space, there is a notable positive divergence in riskier assets.  Junior gold stocks are displaying positive momentum vs. senior gold stocks.

Senior gold stocks are showing a positive divergence to gold, and also a large increase in buying pressure vs. gold when comparing relative volume.

Silver is showing a positive divergence to gold.

And gold is showing positive divergence to bonds, which is notable as bonds have soared since early 2011.

Speaking of bonds, note the negative divergence in momentum on the recent high, and also the lack of volume on this recent rally compared to the rally in 2011.

The dollar ETF UUP is also showing a negative divergence in momentum, and lack of upside volume on the recent rally.

In conclusion it appears as if the gold sector is gradually coming to the end of the recent bear market, given the technical evidence and severely bearish sentiment.  A top in paper assets (the dollar and bonds) would probably be the final nail in the coffin for this gold correction.

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The original article and much more can be found at: http://www.nextbigtrade.com

The views and opinions expressed are for informational purposes only, and should not be considered as investment advice.  Please see the disclaimer.

 

Commodities Poised For A New Rally

The market has had an impressive run since the start of the year, but one sector that has lagged is the commodities sector.  Unlike general stocks, commodities are still quite a ways away from their 2011 highs.  Recession fears and a surging dollar contributed to the weakness in commodities last year.  But a number of factors are starting to show the tide potentially turning for the commodities sector going forward in 2012.

In the first leg of the secular bull market in commodities that started in 2002, commodities more or less enjoyed a steady grind higher.  They were helped along by a bear market in the dollar.  Countertrend rallies in the dollar had little effect on commodities during this period, most notably in 2005 where the dollar rallied for most of the year.  In 2007 commodities started to accelerate higher as more individual commodities started joining the overall commodities rally.  This included the grains sector which until 2007 hadn’t enjoyed the gains other commodities such as gold and oil had achieved.  All of this culminated in a peak in the CCI commodities index in 2008 as it accelerated into a parabolic move in March, underwent a correction, then made a final top in the summer of 2008.

Then came the stock market panic in mid to late 2008.  From the onset of the panic and ever since, commodities have acted much differently than they did during the previous 6 years leading up to the panic.  They have had two major swings to the downside, along with a mini correction in 2010.  All three corrections were in large part caused by three major dollar rallies that have occurred since 2008, shown on the chart below.

The primary driver of the last two dollar rallies has been a collapsing Euro.  The first Euro crisis, which seems like forever ago, actually caused a much more severe correction in the Euro than this latest Euro crisis.  But what is interesting is a similar setup to the end of the first Euro crisis is occurring again.  This of course would be bullish for commodities since it would imply a near term end to the rallying dollar.

The next few charts show how the Euro is positioned in a similar manner now to what is was doing back in 2010 when it bottomed.  First, taking a look at Euro futures positions, back in May 2010 large speculators finally stopped adding to their short positions in the Euro after a 6-month downward move.  Open interest also leveled off, which indicated a possible trend reversal.

On the chart below you can see how this leveling off in speculative activity helped confirm the final bottom in the Euro.  Note the divergence in price and momentum in May and early June.

Now moving to the current situation for the Euro, you can see a similar leveling off in the addition of positions in the futures market.  Open interest also topped way back in December.  It’s interesting to note that there was more speculative activity in Euro futures during this latest move in the Euro, but the overall move wasn’t as significant as the first Euro crisis.

Again, a similar divergence in momentum and price led to a change of trend for the Euro in January.  So far this change in trend has held up.

Money flows into the bullish dollar ETF UUP also were dramatically lower than they were during the last major dollar rally as shown in the next chart.  And  selling pressure has started to accelerate over the last month.

Finally, from a Stage Analysis perspective commodities are starting to line up into a potential Stage 2 breakout.  On the weekly charts of individual commodities many of them are starting to move back above their 30-week moving average.  Some of the money flows are moving back from negative to positive such as the grains sector while other commodities like oil and precious metals are showing increased positive money flow.  For comparison purposes, it will be important to monitor how this move compares to 2010 which proved to be a significant breakout to the upside for commodities.  Continue to watch the trend in price action along with increased volume for confirmation.

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The original article and much more can be found at: http://www.nextbigtrade.com

The views and opinions expressed are for informational purposes only, and should not be considered as investment advice.  Please see the disclaimer.