VB Update Notes for October - November 2012 – Markets ‘Elect’ to Pause, but Sentiment Improves

HOUSTON – Last time we pointed to obvious improvement in the indexes which track the smaller, more speculative junior miners and explorers, including the Canadian Venture Exchange Index or CDNX. Since the last full update, however, the upward trek of the CDNX has paused and a pullback has once again begun. Here’s the now very familiar long-term monthly chart. Monthly charts are useful because they eliminate much of the “noise” inherent in shorter term charts. 

Our sense is that even if the CDNX is currently consolidating or pulling back, sentiment and gamer attitudes have definitely improved since the July lows. Indeed, absent a totally unexpected black swan event, our contention is that the second junior bear market from hell in four years is in the process of morphing into a new cyclical bull for the companies we euphemistically call The Little Guys.

 

Let’s take a look at a shorter term, weekly view of the CDNX. 

While we cannot yet point to an obvious 2009-2010 style surge in positive money flow for the small juniors represented by the CDNX, we most definitely can point to two items of interest (at least). First, the current pause for the index coincides with a test of the upper reaches of the wide falling wedge shown in the chart above. Since at least March of 2011, the trading has been confined within that giant falling wedge formation. In the process of shedding a colossal 53% of its “value” the CDNX opened up an enormous, very unnatural divergence from gold (gold shown in green), which is just begging for closure. The CDNX would have to outperform gold for an extended period of time to see that divergence closed.

As most Vultures (Got Gold Report Subscribers) know, the CDNX outperformed gold for most of the 2-year period which ended in March, 2011 and has since then woefully underperformed (as shown clearly in the chart above). The 16-month 2011-2012 bear, a creature of confidence (or rather the lack thereof) is a perfect example of how negative money flow, momentum and sentiment feeds on itself until that impulse becomes exhausted completely. Negative money flow is simply the condition where more capital, more wealth is leaving a market than entering – a falling tide that lowers most all boats, if you will.

The recent attempt to break out of the wedge is encouraging and technically minded traders will understand instinctively that “something has changed” should the CDNX catch a meaningful bid and move well above the mature wedge.

It will mean that whatever had kept the index in a relentless down trend, with lower highs and lows in a tightening wedge; whatever confluence of conditions, metrics and sentiment had conspired to prevent The Little Guys from gaining popularity and positive money flow, resulting in what we have dubbed “The Second Junior Bear Market From Hell,” has, at the very least, eased and may be in the process of reversing.

Almost (but not quite) universally, when great bears end they are marked by an important reversal and followed by a new, powerful cyclical bull market as the markets strain to correct excesses in both directions over time.

Secondly, almost (but not quite) universally, bear markets for the CDNX are periods of lower and falling volume. One quick look at the chart above will confirm that the recent bounce in the popular index has been accompanied by higher, if not robust volume. (It would be surprising to see robust volume at the beginning stages of a new bull for the CDNX.)

The short version (no pun): If the CDNX manages to break out, north of the giant falling wedge and move noticeably higher just ahead, it will be one of the best confirming indicators we could ask for -- for our new bull market contention.

That failing, with the market already so severely discounted, we would look for strong to overwhelming support to form inside the wedge and we would be very surprised to see the CDNX cutting new lows for 2012.

In either case, as we mentioned last time, there is still a ton of risk which has been extracted/removed from smaller junior miners and explorers – following the second longest and deepest selloff bear market since the Great Gold Bull Market began. ... Having a gold and silver rally does help, but The Little Guys had been so severely sold off; they had been so unreasonably pummeled; they had been so shunned by the collective market, they had become collectively what we now call “Idiot Cheap.” The level at which we are pretty sure we might look back at today’s pricing of our Faves and the stocks covered by the popular indexes a year or two hence and say to ourselves, “Man, it was idiotic for them to trade so low back then.”

Our contention is that sentiment is now improving modestly for the juniors, for several reasons. We have to consider that as the second step in a new cyclical bull market, with the first step being Seller Exhaustion.

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