Last week we discussed the
concept of relative strength. Again, relative strength is the measuring of
one market against another. There are perhaps 1000 mining companies and maybe
5% of them are worthy of your research and investment. Fundamental analysis
should lead you to the best companies while technical analysis (relative
strength analysis in this case) can generate a precise list of top prospects.
Today we are focusing on relative strength in a larger context and will then
apply it to the gold stocks.
One of the best times to use
relative strength is during or after a strong market selloff or panic. After
2008, I was most bullish on Gold and Agriculture for the simple fact that
both didn't have the long-term technical damage that occurred in most
markets. Most markets plunged below 2005 lows. Markets that escaped that fate
and held up reasonably well would make new highs first and well ahead of
global stock indices (which have yet to make new highs).
In the chart below we show
various markets (Gold, AGs, T-Bonds, Chile, S&P). Gold bottomed in late
2008 above its summer low in 2007. Agriculture prices bottomed slightly ahead
of their bottom in spring 2007. Bonds maintained their uptrend in 2008 and
beyond. Chile has been one of the strongest markets (held above 2006 lows)
and surged to new highs while the S&P is nowhere close to a new high. The
other four markets had the best relative strength in 2008 and thus performed
the best from 2009-2010.
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So how does that history apply
to today? We just had a mini-panic or a mini-2008. The stock market likely
put in an intermediate bottom. This doesn't mean it will breakout but it
means the lows are safe for a while. Now its time to spot the relative
strength leader which will be a leader in the immediate future. In the chart
below we compare gold stocks to commodity stocks, emerging markets and the
S&P 500.
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While emerging markets and
commodity shares are in structural bull markets, both will soon meet
multi-year resistance. Also, both broke their previous 2011 lows.
Essentially, both have short-term technical damage to repair and long-term
resistance to overcome. Meanwhile, the gold stocks have been in a
consolidation for 12 months and held above their summer low during the
mini-panic. We see a combination of relative strength and very limited
overhead resistance.
A weekly close above $67 in
GDX should usher in the beginning of a true bull market move in the gold
stocks. After viewing these charts one can visualize the gold stocks
galloping higher in 2012 while their commodity and emerging market
counterparts encounter multi-year resistance. The reasons do go beyond technical.
We've written about the low valuations, lack of ownership and the bull market
moving towards its recognition point. The recent double bottom in GDX should
make one feel more comfortable. Their relative strength in 2011 indicates
leadership and potential for a major move higher in 2012. If you'd like
professional guidance in navigating this bull market and finding the best
performing stocks, then we invite you to learn more about our service.
Good Luck!
