Where's the Market Heading Next?
This correction we've had for a week or two now has really begun to unveil some nice bargains. Many stocks are down 30-50% from their highs. Like I said, I think we might have a bounce this week but will go lower and/or sideways until around august.
Let me now highlight some other people's opinions:
The action on Friday was characteristic of a reversal and it was sector wide with Reversal Days showing up in the charts of the gold stock indices and many gold and silver stocks. The action in the metals themselves was less convincing, with silver looking like it had bottomed, at least for now, but gold itself looks rather ambiguous.
Even before they started to head south in earnest, Precious Metals stocks were seriously underperforming gold and silver, and as soon as the metals broke down, stocks caved in. The flip side of this relationship is that we can expect PM stocks to hit bottom ahead of the metals, and, when the time comes, we should be on the lookout for this as a great buying opportunity. On a trading basis we appear to be at a buy spot now, and some of the stronger stocks may not drop below the current lows. We should remain aware that while the metals are likely to drop to lower levels after a near-term bounce, stocks may not drop below current levels, or if they do, not by much.
Many observers believe that the correction is now over, which is understandable given the severity of the drop in little more than a week, but this is not believed to be the case, at least for the metals, for reasons we will now look at, so if we see an impressive rally over the next week or two, as expected, we should not be deceived.
Elliot Wave (see 15 month charts) and the 5% follow through major intermediate term cycle sell signal suggest that the major upcycle since 5-16-05 for HUI/NEM/XAU has ended, and, Elliot Wave suggests that the long term upcycle since 5-10-04 and the Cyclical Bull Market since late 2000 for HUI/NEM/XAU have ended (see second chart). The long term upcycle since 5-10-04 was probably Elliot Wave 5 of the Cyclical Bull Market since late 2000 (see second chart), which indicates that a one to two year Cyclical Bear Market may have begun for HUI, NEM, and the XAU. Keep in mind that the metals usually lag at major cycle highs and may not peak for a few more months. Also, many gold/silver stocks' cycles are out of sync with HUI, NEM, and the XAU's, so there should be many great investing and trading opportunities if a Cyclical Bear Market has begun for HUI, NEM, and the XAU.
I HAVE SOME GOOD NEWS! Good news for ‘gold bugs’ that is! The current shakeout in gold and silver prices is just about over! The next rally is just around the corner!
Included in this article is a chart that measures the strength of gold mining stocks versus gold bullion. It is the XAU Philadelphia Exchange index of 12 major precious metals mining companies,(including Newmont and Goldcorp), divided by the latest gold price.
The good news, at least for the larger commodity stocks and high-end juniors, is that unlike the two-year drought from which we emerged in the fall of 2005, the market has become far more efficient in quickly ringing out its excesses, and it seems unlikely that we will once again effectively grind sideways for two years. Furthermore, gold is now on far more radar screens, and being more than simply a U.S. dollar story in the eyes of the market, it now has many compelling reasons to regain favour in short order. In sum, gold needs to move lower still, but this correction will likely be a short and vicious one, rather than a long and drawn out one, like the last. Investors with quality holdings should simply weather the storm and add to positions on the impending further weakness in commodity shares and as four-month hold paper comes free creating more selling.
In times of panic selling across the board it’s always good to take a few steps back and take a peek at the big picture… If you do so you’ll notice that nothing has changed a bit. The HUI uptrend is still in tact and the under-performance of the shares vs gold is running into its very end.
Yes, you’re reading this right, the gold shares are on the verge of outperforming the yellow metal again within days from now. This doesn’t mean that the shares can’t go down any further from here but the down moves will be limited against potential down moves in gold.
The fact that after 20 years of going nowhere, commodity investments paid off in the last three to four years is having predictable effects. (Contrarians, take note.) Calpers, the nation's largest pension fund, is considering allocating 0.5 percent of its $200 billion under management to commodities. Citigroup Inc., the world's largest financial services company, is doubling its staff at its commodities-trading unit worldwide. Duck-like behavior, to be sure. Bill Miller, who specializes in beating the S&P 500 as manager of the Legg Mason Value Trust (2005 was the 15th consecutive year of outperforming the S&P), says in his April 2006 letter that he's "skeptical of the advice to start or increase a position in commodities after the biggest bull move in 50 years." He concedes there's a reason to own commodities (if one believes they provide equity-like returns uncorrelated to stocks), and a time to own them (when they're down and trade below the cost of production). "That time is not now," he says.