Cam Hui, Humble Student of the Markets, March 18, 2013
The blogosphere is full of comments about the Cypriot bailout on the weekend (for examples, see How to start a banking crisis, Cyprus edition and The Cyprus conspiracy II). Instead of writing about Cyprus, a topic that I have no special expertise in, I thought that it would be timely to write an update to my blog post on February 19 about the resource-based sectors (see Time to buy gold and commodity stocks?).
Since I wrote that post, the metals and mining stocks have begun to stage a turnaround. To recap, the mining group is showing signs of being overly beaten up and washed out. This chart of XME, the mining ETF, against the market shows that it is trading at or near investor capitulation levels relative to its long-term history.
Take a look at the shorter term one-year relative chart of XME vs. SPY. The miners are starting to show some positive relative strength against SPY. Is that the sign of a nascent recovery?
Similarly, gold stocks are highly unloved against bullion. I have not been a big fan of buying gold stocks for gold bulls (see Where is the leverage to gold?), but in this case a long gold stock/short bullion position is likely to have much better risk/return profile than any time in the recent past.
Shorter term, however, my inner trader is still watching this pair of a relative turnaround as the HUI/Gold pair remains in a relative downtrend.
On the other hand, I can't say I am overly bullish on gold itself. The silver/gold ratio, which is a measure of the speculative interest in precious metals, is stuck in the middle of its historical band indicating neither excessive bullishness nor excessive bearishness on the PM complex.
Nevertheless, I am seeing signs of a capitulation, or washout, in investor sentiment. Here in Canada, the chart of the junior Venture Exchange Index against the more senior TSX Index shows that the ratio is at or near levels indicating investor capitulation in the juniors, which are mostly junior resource companies.
Not enough energy in Energy?
In my last post on this topic, I was more constructive on the energy sector as the sector was showing signs of a relative strength turnaround. Since then, the sector remains range-bound against the market and appears to be consolidating sideways on a relative basis.
The price of Brent crude confirms my observation about the range bound, or sideways consolidation pattern shown by energy stocks.
At this point in time, the energy sector may not have enough energy, or momentum, to present itself as the new emerging leadership sector.
As I write these word, the markets have a risk-off reaction over the Cyprus news. EUR is plummeting against all currencies and against JPY in particular; USD is up: ES is falling and gold is up marginally but a base metal like copper is down. While the initial market reaction isn't necessary the sustainable reaction, the Cypriot event may serve as a catalyst for the resource sectors (and the metals in particular) to stage a turnaround and present themselves as the new market leadership. It will also prove to be an important market test for the price of gold (and the gold bugs), to see whether investors flock to USD assets or to gold in this instance of an unexpected eurozoneconfiscation tax of banking depositor assets.
The blogosphere is full of comments about the Cypriot bailout on the weekend (for examples, see How to start a banking crisis, Cyprus edition and The Cyprus conspiracy II). Instead of writing about Cyprus, a topic that I have no special expertise in, I thought that it would be timely to write an update to my blog post on February 19 about the resource-based sectors (see Time to buy gold and commodity stocks?).
Since I wrote that post, the metals and mining stocks have begun to stage a turnaround. To recap, the mining group is showing signs of being overly beaten up and washed out. This chart of XME, the mining ETF, against the market shows that it is trading at or near investor capitulation levels relative to its long-term history.
Take a look at the shorter term one-year relative chart of XME vs. SPY. The miners are starting to show some positive relative strength against SPY. Is that the sign of a nascent recovery?
Similarly, gold stocks are highly unloved against bullion. I have not been a big fan of buying gold stocks for gold bulls (see Where is the leverage to gold?), but in this case a long gold stock/short bullion position is likely to have much better risk/return profile than any time in the recent past.
Shorter term, however, my inner trader is still watching this pair of a relative turnaround as the HUI/Gold pair remains in a relative downtrend.
On the other hand, I can't say I am overly bullish on gold itself. The silver/gold ratio, which is a measure of the speculative interest in precious metals, is stuck in the middle of its historical band indicating neither excessive bullishness nor excessive bearishness on the PM complex.
Nevertheless, I am seeing signs of a capitulation, or washout, in investor sentiment. Here in Canada, the chart of the junior Venture Exchange Index against the more senior TSX Index shows that the ratio is at or near levels indicating investor capitulation in the juniors, which are mostly junior resource companies.
Not enough energy in Energy?
In my last post on this topic, I was more constructive on the energy sector as the sector was showing signs of a relative strength turnaround. Since then, the sector remains range-bound against the market and appears to be consolidating sideways on a relative basis.
The price of Brent crude confirms my observation about the range bound, or sideways consolidation pattern shown by energy stocks.
At this point in time, the energy sector may not have enough energy, or momentum, to present itself as the new emerging leadership sector.
As I write these word, the markets have a risk-off reaction over the Cyprus news. EUR is plummeting against all currencies and against JPY in particular; USD is up: ES is falling and gold is up marginally but a base metal like copper is down. While the initial market reaction isn't necessary the sustainable reaction, the Cypriot event may serve as a catalyst for the resource sectors (and the metals in particular) to stage a turnaround and present themselves as the new market leadership. It will also prove to be an important market test for the price of gold (and the gold bugs), to see whether investors flock to USD assets or to gold in this instance of an unexpected eurozone
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