Gold and the Gold Stocks

The very long term relationship between the gold miners and the price of bullion has not been one of perfect price correlation. This is because the producers unlike bullion have “issues” such as exploration risk, political risk, environmental risk and cost risk. However the producers under the right conditions can be a leveraged way to trade in and out of the precious metals complex.

During the early stages of gold’s secular advance (2000 through 2003) the gold miners outperformed the price of bullion. In the mid stages of the secular advance (2004 through 2008) the price of bullion outperformed the gold miners. Now we seem to be getting into the mature stages of gold’s secular advance and there is growing technical evidence via shorter term spreads that the gold miners will once again return to out perform

Action and Reaction

The Japan event of March 11, 2011 is probably going to be stimulative. Japan unlike Haiti is a large modern economy and the re-build will be a priority for the Japanese people. We know that Japan will need a lot of “stuff” – commodities, machinery, and infrastructure along with complicated transportation needs.

Technical analysts tend to believe that for every negative event there is a positive event somewhere else – sort of like Newton’s laws of motion – one being action and reaction. The negative Japan event should boost the price of coal, copper, wood and natural gas. Now the one big commodity laggard over the past several years has been the price of lumber – likely due to the depressed U.S. housing starts. We need to watch lumber closely. Note the weekly chart displaying lumber’s intermediate cycle along with a very slow %K and %R stochastic. Note the current down cycle and the bullish flat price, a sign that the intermediate cycle will turn up above the zero line. If we break above that 5-year level we need to buy the beneficiaries – action and reaction

Who are They?

Apparently they are taking the shares of Canadian Pacific Railway (CP.TO) down about 3% to-day because CP earlier warned that its earnings will be down in the first quarter as harsh winter weather hampered train operations and fuel recovery surcharges lagged. Sometimes “they” are simply the market or “they” could be guys like Gordon Gekko. They have been moving the markets for years and I still don’t know who in hell “they” are.

In the case of CP it appears that “they” (Gordon Gekko) knew something was up with to-day’s poor earnings surprise when back in mid February “they” began to sell CP and buy CNR. Take a look at our CNR vs. CP ratio chart where the price divergence is obvious. Not to worry – I am sure the OSC is all over this and protecting us little guys

Black Swan Hype (2)

Our Japan “Black Swan” is now just over a week old and so I wonder how investors reacted to the volatility of last week. Several industry “experts” went public with profound statements. For example one money manager in a memo to a securities firm, “if you’re your not invested buy now”, and (the same guy) “if currently invested sell now.”

Personally I would rather listen to the markets rather than a black swan which is a large not too bright water bird found mainly in the southeast and southwest regions of Australia. It seems the best stocks were the ones that were strong before the Japan event and remained strong after the event. Some examples are forest stocks, energy stocks and the financial stocks.

I am currently over weight the CDN bank stocks and using the BMO Equal Weight CDN Bank ETF (ZEB) - not a bad yield 3.7%, pays monthly with opportunity for capital gain.

Black Swan Hype

I don’t know about you but I grow weary of being regarded as stupid by these “Black Swan” guys who use scare tactics to influence normally sane investors.

A Black Swan is the latest buzz word which is a metaphor that encapsulates the event to be a surprise with major impact. In the “old” days we used the term “exogenous event”. An exogenous event in the capital markets is a one-off variable that is not resultant from any of the usual market drivers such as earning releases, employment data and industrial production numbers. The exogenous event (in this case Japan) is an external event that is large enough to affect markets and because it is change that comes from outside any model or analysis, there is no way to anticipate the event

The black swan buffoons tell us “this time it’s different, something is wrong.” The idea here is to have you believe that what ever worked in the past, won’t work anymore. We are to reject traditional stock analysis and to fear the current environment because it always the wrong time to invest.

They will tell you that buy-and-hold is dead because the equity markets have delivered zero returns over the past twelve years, just like the 1968 – 1980 period. What they don’t tell you is that during these long congestive periods there is great opportunity because “the next big thing” can emerge from these periods. The next big thing that emerged from the 1968 – 1980 zero return period was the new economy and the related components. To-day start-ups like Intel Corporation, Cisco Systems, Inc. Microsoft Corporation and Apple Inc. are household names.

The current 2000 – 2011 zero return period introduced the global economy and the related commodity boom. I do believe the Black Swans which is a large waterbird found mainly in the southeast and southwest regions of Australia missed this great investment opportunity.

An exogenous event

According to a blog post at The Traders' Trader, Bill Cara, (I don’t know this guy) at: www.CaraCommunity.com “random noise was the helter-skelter spin of all the Talking Heads on Financial Entertainment TV leading up to and in post mortem discussions re the FOMC announcement. My point on this is consistent: turn the TV off. (and) If there are 5, 10, 100, or 1,000 Talking Heads, or whatever number of clowns make it onto the stage, you are not going to learn anything. These people are not there to make you money; they are simply walking billboards for financial services industry companies like Ameritrade, PIMCO, Merrill Lynch, or whatever. The more they talk, pointing you in different directions, the greater is the random noise.” (and) “An exogenous event in capital markets is a one-off variable that is not resultant from any of the usual market drivers. It is, however, an external event that is large enough to affect markets.”

OK – I’m back. The Japan earthquake was an exogenous event that was unforeseen and will interfere with normal junctures and trends in the capital markets. In other words there will be capital winners and losers as a result of the massive re-build. As investors we must avoid the losers and make sure some of the beneficiaries are in our portfolio. The obvious sector winner is the lumber exporters such as Weyerhaeuser and Int’l Forest Products – just to name a few. Out chart displays a surprising pattern – both of these names were in up trends before the Japan crisis. Strange that in the midst of a crisis the stocks that were advancing before – continue to advance and the stocks that were declining before, continue to decline. When you look back at the 911 crisis the same thing happened with up and down trends uninterrupted. The fundamental guys will never get it – the trend is your friend

Negative Divergence

Divergence is a situation that occurs when two lines on a chart move in opposite directions vertically. Divergence can be comparing a stock's direction to the direction of its RSI, its MACD or a momentum oscillator. Divergence can also occur between two related asset classes such as the price of gold and the price of a gold stock. There are two kinds of divergences: positive and negative. Positive divergence occurs in a down trend when one line moves higher while the other is still declining. Negative divergence occurs in a uptrend when one line moves higher lower while the other is still rising.

Note our Dow Industrials vs. Dow Transports chart with the Industrials are just at or above the January peak – now note the Transports are well below the January peak setting up a negative divergence condition. This could be the early setup for a Dow Theory sell signal and keep in mind that while rebound bulls are short they are never followed by severe crashes – but rather a short trendless bear – a stock picker’s market 

The Crude Risk Premium (2)

Just to review - the current run up in the price of Crude is the risk premium the market tacks on due to the uncertain outlook for the larger crude producing Arab states. The “risk premium” beneficiaries would be the senior and junior crude produces and the oilfield service companies – names like Suncor Energy Inc, Canadian Natural Resources Limited, Cenovus Energy Inc, Precision Drilling Corporation and the BMO Junior Oil Index ETF (ZJO) Other beneficiaries in the consumer space, Dollarama Inc., Dorel Industries Inc and Tim Hortons Inc. In the US stocks like Altria, Disney, Yum Brands and Coca Cola are just beginning new intermediate cycle advances

The energy complex has been red-hot lately which is good if you’re on board, what to do if you have missed the big move? Do you hold your nose and buy now? Suggestion; the oilfield service companies will benefit even if crude stalls in here. Note the weekly chart of Precision, Savanna and Trinidad plotted with a 10 and 30 week MA - all just in the early stages of a run and posting new 52-week highs. New 52-wk highs are like new 52-wk lows – the first one is usually not the last one.

The A-B-C Correction (2)

Five weeks ago here I suspected the Dow Transports was at the beginning of a normal Elliott Wave A-B-C correction that typically follows an impulse wave.

The correction will usually begin above the 50-day moving average with the A wave down breaking under the 50-day and stopping at support at above the 200 day MA. The subsequent recovery B wave fails to make a new high (swing failure) and the following down C wave breaks under support at the 200 day MA and the selling can get nasty. Sometimes the recovery wave B will exceed the beginning of wave A – see our Dow Transport daily chart.

According to Elliott Wave International, In a regular flat correction, wave B terminates about at the level of the beginning of wave A, and wave C terminates a slight bit past the end of wave A, as we have shown in Figures 14 and 15. Far more common, however, is the variety called an expanded flat, which contains a price extreme beyond that of the preceding impulse wave. In expanded flats, wave B of the 3-3-5 pattern terminates beyond the starting level of wave A, and wave C ends more substantially beyond the ending level of wave A, as shown in Figures 16 and 17.