What Now, Jittery Market?
May 21, 2009
– Comments (61)
TMAP D21V15--that's right, the series has changed names to avoid claims that I'm a permabear, but I'm still blogging until the market goes down.
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First things first, I've been belated in answering questions about mining stocks. After taking a hard look at the situation, I have little positive to say. The GDX broke out over strong resistance at 40 and there was nice volume yesterday. However, the fundamentals of the mining companies just aren't that great. Oil (i.e. costs) are quickly on the rise and we have no indication that gold or silver is about to break north. Without them, the mining industry just doesn't make the profits you need to justify these companies' valuations. The usual suspects of overvaluedness such as Goldcorp look just as overpriced as ever. I refuse to pay 11x sales and buy a stock with a forward P/E of 45--thus GG is still wildly overpriced and is even a decent short.
Let's talk smaller caps. Here the situation is better. Lots of juniors are breaking north over long-term resistance. Stocks like Northgate (which I own) are clearly making a bullish case. The driver here is not profits, though NXG in particular has profits, but instead the unfreezing of the capital markets. I saw the head of strategic planning at Newmont speak a few months ago and he was saying that the majors were looking for deals and that juniors were calling up asking for assistance. Now that loans are available, the period of consolidation he was calling for within the industry may occur. I expect a lot of mid-majors with working mines like NXG and JAG in particular to get bought out. Does that mean you can buy the profitable mid-majors now? No, but if you get a 10% pullback in a name you like, I'd consider nibbling. The danger here is if the capital raising window closes and the NEM, GG, and ABX's of the world don't raise cash in time to make their purchases. The potential for dilution as the majors raise cash to buy juniors is another reason to avoid the big names. My favourite trade here is a short GDX/GG and long NXG/JAG trade, but I personally am not heavily invested in the gold sector at the moment. My next big trade will be (assuming we get the typical summer mining swoon) grabbing a lot of sub-dollar juniors this August when they're 30% cheaper.
There you go Soycapital...feel free to leave me a comment if that doesn't cover what you were looking for.
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On to the broader markets.
The S&P topped at 930 a few weeks ago, made a decent correction and then met a crossroads. This was going to be my post Monday but the market rose so quickly from the crossroads that my post was outdated before I was done typing it up. However, this low-volume pump job failed to make a new high and instead created a lower high and a double top. Volume has risen again as the market has declined from the lower high. Now we sit at 890. For the bulls to have a case, the market must hold 878 on the S&P. If we bounce here, we form a triangle which could potentially break north or south. If 878 goes down, the up move is in all likelihood over. My most likely scenario is now a move down to 878, a bounce to 900 and then a convincing break below 870 which signals clearly that the bear is back. There are a variety of other options which include a straight breakdown today/tomorrow, another retest of 930 and so on, but the likeliest in one more weak bounce.
Fundamentally speaking for a moment, I urge the bulls to explain to me how -16% annualized GDP growth in Japan is good news. Since they are huge exporters of high quality stuff to the US, I assume you're going to see retail get crushed here in the coming months. I'd also point to the spike in interest rates yet again, the 30-year bond is going NUTS today. Uncle Ben's efforts to make free mortgages for all are just not working.
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Once again, thanks for most of the comments (and trolls, you know who you are, just quit posting please.) and I look forward to posting as long as is necessary before all of you realize that this bear market rally clearly has ended.
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