VB Update Notes for August - September 2012 – Seller Exhaustion
HOUSTON – Now that the Canadian Venture Exchange Index or CDNX is trading where it did a decade ago, in 2002, with sub $350 gold and less than $5 silver, an enormous amount of price risk has been subtracted from the smaller junior miners and explorers – in the second longest and deepest selloff bear market since the Great Gold Bull Market began. Here’s the now familiar long-term monthly chart.
Last time we pointed out that buyer’s strikes in the juniors can take the idea of a bear market to wild extremes. “Welcome to “Wild Extreme-ville,” we said then, adding: “And it may not yet be over if the usual seasonal influences we see in July and early August, heaped on top of a protracted buyer’s strike, are in play.”
Well, since that last report the sickly CDNX did attempt to cut a lower low around July 24, but did not quite make it to the June 1,153.90 nadir, as shown in the chart just below.
Gold is shown in the chart in orange (left axis) by the way. The CDNX has been confined to a tight trading range for the entire time since the last report. The good news is that it has not moved lower since then. The bad news is that it has not moved materially higher either … yet.
At this point for the CDNX the best we can say is that the trajectory lower has been put in check. It may not yet be screaming back to the upside on a rush of new positive money flow, but at the very least the bleeding from a nearly two-year gaping wound has been stopped. Looking at the chart just above for a moment, the CDNX really hasn’t lost all that much new ground since its May lows and many of the issuers we track marked their lows then or before then.
Signs of Life
We had hoped to be surprised with a counter rally in the CDNX by early August, as we thought there might have been enough new capital trying to “early bird” the fall period that it would show up in the beaten up index. Nope; not yet in the Canadian Little Guy index at least. However, we can point hopefully to some interesting and relatively positive signs which are showing in some of the other indexes we track. Take, for example, the Big Cap Miners represented below by the AMEX Gold Bugs Index or HUI.
Whereas the CDNX did cut a lower low in June than its fearful low print in May, note that the HUI’s July 24 attempt to test its May low (near 372) fetched up noticeably higher (near 385), and has since then recovered a little, back up to and through the 420s – so far.
Encouraging signals reflected in the chart above include a slightly higher low for the HUI separated by more than two months (a bona fide shot at making a double bottom base) and, of course, a similar story for the price of gold. (Not that gold needs to go higher for the miners to advance. Gold merely needs to dispel the notion it is going a lot lower in price.)
However, while we can point to a consolidation underway for both gold and the HUI, and while we can point to what looks a lot like a new, higher low, we would all feel a lot more confident if and when both indicators reach back up into higher chart real estate – high enough to print a noticeably higher high.
A clear breakout we do not yet have, as we write this segment, late on Friday, August 10.
The HUI is not the only encouraging indicator, of course. Looking at the CDNX’s cousin, the Market Vectors Junior Gold Miners Index ETF or GDXJ – which contains a large cross section of small to midsized miners - shows us a similar image to the HUI, a somewhat better looking chart than the CDNX, with a grinding, bottom-looking consolidation, a possible double bottom and a slightly higher low.
It is also a little closer now to marking a sure-enough higher high which would give technically minded traders a shot of confirmation. The GDXJ has already broken north of a tight wedge and that is also encouraging. (A higher high would come at something near $22.20 – see the Subscriber 1-year daily chart for the wedge pattern and quite a bit more.)
So while the past month has not seen the kind of reversal and meaningful surge higher that would release trader animal spirits and get gamers and investors excited again, neither have we seen very much in the way of further deterioration in the mining share indexes. If anything we are seeing the kind of pause, with apparently growing support, that we might expect to see following a historic uber-bear – with a very slightly positive bias.
We think what we may be witnessing is a case of Seller Exhaustion. If true; if just about everyone who wanted to sell or had to sell or got forced into selling has already sold given the conditions extant in late July and early August; and assuming that both gold and silver mange to prove up their important support levels (roughly $1,525-50 gold and $26 silver), then we very well could be at a very important and historic inflection point for the mining share indexes. All of them.
We very well could be in the process of marking the index equivalent of what we call “OS” or Overwhelming Support – the point at which the selling pressure can no longer move the trading to new lows. The point where there is enough buying from insiders, deep discount specialists and very large bargain hunting Vulture Speculators that the price hits a kind of concrete floor and stays there until a change in trend develops.
Like a pendulum reaching the limits of its swing in one direction, once a giant bear market has exhausted itself the stage is set for a strong cyclical move in the opposite direction.
If we have reached the seller exhaustion point (and isn’t it about time for that?), then the collective market just might be about to begin discounting the conditions it assumes will be coming three months, six months and nine months hence. With the CDNX already trading at 2002 levels, would it be all that surprising if the market collectively thought that the CDNX should be higher three months, six months and nine months from now?
That is with +$1,500 gold and +$26 silver in a world where the political command and control and the high priests of central banking seem hell bent on printing more and more fiat currency in order to pay the unprecedented levels of debt and overspending already irretrievably done. (One cannot un-spend or retroactively reduce gross budget abuse.)
Frankly, we’d be very surprised if the CDNX is not substantially higher by then and we absolutely do expect to see the market discounting a much, much better environment for the junior miners just ahead, come what may. If for no other reason than a reversion to the mean, but we doubt that will be the only reason.
This has been a brutal exodus of capital out of the miners and explorers. As we said last time, “It is a sure-enough world class Negative Liquidity Event (NLE) – the kind that eats and digests even the more stalwart of Little Guy traders -- outlasting even many grizzled Vancouver veterans, but not Vulture Speculators.”
Zooming back up to a higher vantage point, we can see all the CDNX devastation in the simple graph below.
The now giant falling wedge that is the CDNX is near its lower wedge extreme and poised for a test of the upper channel, we believe, and the timing is about right for that to get underway in the next few weeks (if not already underway).
The fact that gold has failed to reward gold bears with a seminal chart and support breakdown is a huge tell and argues very strongly that the CDNX has hugely oversold the pullback and consolidation for the yellow metal. Note, please, the gigantic divergence which has opened up between the price of gold and the level of the CDNX in the simple chart above.
Let’s take another, longer-term look at that divergence in the chart below.
We can see the relationship clearly in the next chart, which compares the CDNX to gold monthly since 2002.
The chart just above is the kind of chart that makes a contrarian salivate with great anticipation. Consider that prior to the Lehman collapse the CDNX traded at a multiple of the price of gold – up to 5X the gold price. Today it has fallen all the way to less than .75X the price of gold. Simply amazing volatility on display in the chart above. And, contrarians know and believe that volatility works in both directions. The market first creates, or rather, is driven into huge divergences and gargantuan imbalances -- which it abhors -- and then gets busy correcting them given enough time and patience. For many gamers it is the pace or frequency and the amplitude (size) of the giant moves which are out of phase with their own tolerances and psychology/comfort levels – so they end up missing them completely. More about that in a future offering.
Cyclical Bear Inside a Great Gold Bull
As a side note, sometimes our descriptions of charts and events can be a little confusing, especially to newcomers. As one very exasperated Vulture recently put it, “You call this a bull market? If this is a bull market I sure don’t want to see what a bear looks like.”
No! Let’s be crystal clear on that one point. We have been in a cyclical bear for a year and a half. That’s a fact, but we believe it is in the context of an amazing, once in a lifetime major secular bull market for gold, silver AND mining shares. And since we believe that, then our attitude and game plan virtually has to be that we take advantage of these rare, but frustrating cyclical bears by building and improving upon our positions as best we can during them.
Then it is a matter of sticking with our positions with the companies we have high confidence in AS LONG AS IT TAKES. The fact is and always will be that we do not and cannot control the timing of the giant swings in market volatility. Thus, to win, we Vultures must, that’s must, learn to adapt and be prepared for longer periods of time between the swings in the bull/bear pendulum than 99.5% of the market participants are willing to game. To the extent we can frame our thinking along those lines the more likely we are to maintain our confidence in our game plan and the more likely we are to build our best positions when others are running off the battlefield screaming, waving their arms in surrender.
If we thought that the bull market for gold, silver and mining shares was over and done, we certainly would not be buying down or averaging down on anything.
But when we are given fantastic cyclical bear buying ops INSIDE a huge secular bull, then we are being given the best of the best of buying ops – when the companies we game are loathed, hated and woefully under-owned. Buying ops are scarcely ever better in fact.
Lower Risk – Higher Reward
Now, please, think in these terms for a moment. Think in terms of how much risk has been removed from the junior mining space in the span of 16 months.
Consider that the collective prices of all the companies in the CDNX, for example, were more than 50% cheaper in June than they were in March of 2011. In our simple way of looking at it, that means that there is today less than half as much price risk overall and of course, a ton less risk in selected companies within that group.
Consider that the collective prices of all the companies contained in the GDXJ, as a group, were more than 56% lower in May than they were at their April, 2011 pinnacle. For Vulture Speculators that is powerful and exciting “stuff.”
The very simple point of this message is that today, with The Little Guys having already been trounced, pummeled, beaten up, marauded, mistreated, bludgeoned, spit on … you get the idea … today, when the companies we track and attempt to game are so bloody cheap, we Vultures believe the risk to the downside is now very limited, but the chance for large upside advancement (measured perhaps in multiples) increases with each passing day.
But, friends and fellow Vultures, this is a game of patience, and of tenacity and of confidence. Confidence only True Vulture Speculators grow to embrace. And, that is why we have been (and are still) picking up new positions and adding to others in this environment.
Our Vulture strategy might be paying off too, as we can now point to multiple issues that have made significant advancement up off recent low bottom prints (some of which we were on the bid for). For examples, we point to Northern Tiger Resources (NTR.V) which has more than doubled its lows cut in July and Guyana Goldfields (GUY.T) which has improved more than 49% from its June panic inspired spike lows. (See the subscriber charts for both.)
For further evidence along those lines, take a peek at the chart for Mega Precious Metals (MGP.V), up 50% off its lows in July and how about the Subscriber chart for Millrock Resources (MRO.V), which has recently tested as high as 66% above its May panicky low print.
And we should not leave out the significant improvement we have already seen in others, such as Riverstone Resources (RVS.V), Timberline Resources (TLR), ATAC Resources (ATC.V), Brazilian Gold (BGC.V), Rainbow Resources (RBW.V), Comstock Metals (CSL.V), Semafo (SMF.T) and too many other issuers to name them all. This, despite the fact that the CDNX has yet to turn in any meaningful advance … not yet!
Sure, we can cut and run from the issues that reach the point of no return, with no hope and no prospects, but only because they have zero chance of returning to their former glory.
The way we play the game we are going to end up with a few of the unfortunates – it’s part of the price of trading at the extreme low end of the resource totem pole during a major cyclical bear. If the past is prologue to the future, however, the multiples we gain on our other Little Guy fish we keep will more than make up for the few we end up casting overboard – on the way to resource gaming victory.
Enough about that for now. Let’s pause here and move directly into the Vulture Bargain (VB) Roundup update for August - September, 2012.
As always, the first place to look for new commentary is directly in the charts themselves (available to Subscribers). As we have been saying frequently in these reports, moving forward the charts will become more and more the focus and these formerly too-long written reports less and less the focus.
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