Now that Gold's Bull is Charging, Where is the Easy Money?

This evening I was musing over a question posed by a reader about whether this or that mining stock looked to offer the biggest bang in the near term, as it appears the gold bull and its related mining stocks have declared war on being repressed another single day.

I decided to write a little computer program to help me get to some answers and this post will share with you today's assessment of 105 mining related issues in modest detail.

It didn't take me long to figure out which metric to use for my query. The path of least resistance, in the short run anyway, is for miners to achieve the price level of this past March 22nd. This was a high point followed by a huge gap lower and price should have no problem retracing that level as the bull charges ahead.

A quick look at several stocks revealed a clear similarity with my observation of the Market Vectors Gold Miner ETF (GDX - see chart above). Now the only question was how do I code something that will tell me something potentially useful?

I counted the number of bars since March 22nd and determined the number (surprise, surprise) to be 100. From there I thought it would be interesting to see which stocks had held up the best over the past 100 trading session, and which ones were crucified without mercy.

So that gave me the computer code:

((close[100] - close) / close[100]) * 100

In English it means subtract today's closing price from the closing price 100 trading days ago, divide that result by the price 100 bars ago, then multiply the whole thing by 100. The result is the percentage that price has fallen over the past 100 trading sessions.

I've made two charts detailing the results of this calculation for 105 mining related securities. First is a chart that alphabetizes the ticker symbols with the % change in price, and second is a chart that lists the same ticker symbols arranged first by those that have been corrected the least and the data continues to those miners that have been corrected the most severely.

So I guess the obvious question is, what does this tell us and which stocks offer the best bang for the buck?

Hummmm.... I was afraid you were going to ask that.

Well, it depends.

OK, that answer didn't help much, did it?

Here is the thing: the stocks with the highest relative strength probably have something very obvious going for them in the way of fundamentals that is understood by the market participants. If true, this likely explains, generally, why they are outperforming the rest. For whatever reason, investors in the past 100 trading days have been reluctant to lose their long positions in these securities as the selling hysteria capitulated. Investors viewed these securities as somewhat "safe", I guess.

But will these same currently outperforming stocks be ahead of the pack a year from now?

Maybe, but I doubt it.

What tends to happen is the market wrings the potential gain out of one set of stocks then looks for a new set of stocks that are comparatively undervalued. So, what is hot now is not hot later.

Another thing that happens is that stocks leading now are doing so in the context of the current price of gold and silver. When the price of gold and silver begin to rocket the stocks at the bottom of today's pile, which are more severely dependent on the price of gold and silver and therefore extremely out of favor when metal price is low, will totally rocket past the others in terms of price appreciation should/when precious metal prices make a substantial advance.

The 'safest' trade in the short term may well be the group of miners showing the most relative strength presently. And there may well be horror stories underlying the price performance of those stocks that appear presently as comparative dogs. 

I guess my encouragement is to recognize that in that pile of dogs there are incredible winners that have been misplaced in the chaos. 

I encourage you to do your research, read the company quarterly reports and consider how the profit margin of some of today's dogs will change astronomically if/when precious metal price rocket higher. If in the rubble you find a few promising candidates and hold on tight, you will vastly outperform today's leaders (in my opinion).

Have a great weekend and keep in touch,

John
tsiTrader@gmail.com