Friday, August 16, 2013

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,



  1. John -

    One thing that skews this a bit: some of the miners have responded more quickly with the recent reversal in sentiment than others. For example, GPL has aleady doubled from its June 21 low of $0.65 and is at $1.18 or so. It shows a 7% drop from last March's high of about $1.26 - but the actual percentage of drop from "sentiment" is really on the order of about 48% when considering the low.

    I'm nitpicking I know - as usual this is a great study you have done and lends much in the way of guidance.

    Thanks for that.

  2. Where does Franco-Nevada FNV fit in this scheme?

  3. Anon #1 - you kinda make my point. There are miners, like GPL, that have rebounded in the more recent time frame of the past 100 trading days - and rebounded strongly. These miners are presently "the best of breed". My rhetorical question is, should one now buy a stock like GPL based on its relative strength (knowing that it has recently risen 100%) or should one consider running the rake through the ashes to see if they can find something more likely to go up 100% quickly 'in the future'.

    Hey, there is no right or wrong answer, just opinion. Thank you for allowing me to share mine with you.

  4. Anon #2 - FNV is currently a member of that small rarefied elite group of miners who are actually higher today than they were 100 sessions ago. In FNV's case, by +2.87%.

  5. what is your TSI parameter??

  6. Anon - I wasn't using the TSI for this. Just happened to be on my chart (as usual). My only parameter of concern was closing price 100 bars back, present closing price and what % is current price below price 100 bars back.

  7. I'm wondering how to make an adjustment for some of these "ultra" etfs such as AGQ and NUGT. Both came in at the low end of your study. I believe NUGT is supposed to move at 3 times the normal change in price as the average gold miner. Naturally, the drop in price is going to be greater than the non-leveraged player. However when the price of the average gold miner goes up, say 5%, won't the price of NUGT go up about 15%. Unless my thinking is fuzzy, it seems that all those leveraged etfs are the place to be (if you can stand the heat during the normal consolidations).

  8. Loren - I tend to agree with you. I think someone wrote me an email and asked if I had any favorites on the bottom of the pile (besides CGR). I looked at what was there and concluded that the best bet of them all was probably exactly what you suggested. The thing is that a single stock, like CGR, could have something horrible happen and the investor gets wiped out. But I would not think neither NUGT nor AGQ are subject to that kind of risk. Nice catch Loren!

  9. Very interesting. Thanks.

    Here's an alternative way of looking at this.

    If my numbers are correct, the GDX drop was from $38.16 to $30.43 or 25.4%.

    A GDX 1/15 call @ $3.20 would show a profit of 93% after 100 days if GDX rose by 25.4%. With no change in the underlying, a loss of 8%. Of course it could never happen (ha!) but if GDX lost 25.4%, the call would lose 73%.

    A GDX 1/14 call @5.35 would have a profit of 165% with a GDX gain of 25.4%, a loss of 25% if no change and 93% loss if GDX fell by 25.4%.

    While the risk is serious, the single stock risk is removed and the potential profits are large.

    I relied on OptionsOracle for the calculations.


  10. Doug - I guess the nice thing about options is a smaller amount of money controls 100 shares of price movement than owning the 100 shares outright, so one does not have as much money on the table at risk. The spooky thing about options, of course, is that they expire and the issue of the time value premium is a ticking clock that can feel like one is trying to paddle upstream against a strong current. That is, stock price gently rises but over that time the declining premium value of time to expiration accelerates and you can kinda go nowhere, or at least not get there as fast as expected.

    Thanks for sharing very good information Doug. Options are indeed an alternative way to play this (just not for me - 'ol scardy cat whose tail has been stepped on way too many times). Go get 'em and I sincerely hope you make a killing!

  11. John -

    I just want to say how awesome this blog is. You give some of the best training/insight on the markets, with a nice combination of wave theory, pure technical, like the TSI and your programming methods, AND fundamental information. I know it is your hobby, and you enjoy sharing it, but when there are others out there charging excessive fees for such knowledge, and they are no more "sophisticated" OR successful than you are (and in most cases LESS successful) . . . well . . . I just really appreciate having a resource like this. I have learned a lot here and it has made me a much better trader.

    And you are a very gracious person to boot!

    Thanks so very much,


  12. Thank you for the kind words, which are payment in full for my efforts.

  13. Thank you so much for your diagrammatic explanation about golds..

    Good stuff..


  14. John,

    just a simple question... What do you think will happen when the FED reduce or stop QE ?

    Thanks for your work with TSI.


  15. Hi Robert - hey, thanks for being a reader of mine.

    I had to read your simple question twice, just to be sure it said what I really thought it said.

    Do you seriously think the FED is going to reduce or stop QE? Wow - that idea blows my mind. The second they hint at it the market starts to fall apart.

    Robert, they are not going to stop is my answer.

    Why in the world do you think the FED or the politicians have any intention of doing anything other than getting as much comfort for everyone for as long as possible .... for absolutely nothing (the price of printing money)?

    There is no mandate, no will - to do the right thing (called being responsible and paying your debtors. Who is demanding that? Nobody. Rather, the moment anyone suggests that cuts in 'entitlement programs' (or other massive sized funding issues) are needed the politicians point fingers ('you do it', 'no, *you* do it', 'NO, it was your idea and I PLAN TO GET RE-ELECTED') and nothing happens.

    You know, money - pieces of paper - represent a promise to exchange value from one person to another. So long as everyone blindly has faith that this piece of paper represents the fair exchange of value from one person to the next, everything is OK. But the day is coming and soon, that people will stop having so much faith in the piece of paper, which causes currency devaluation for starters. If true, then it is easily understandable that more people will want to own something that is not made of paper and something that the governments around the world are not printing at will.

    Sorry for the long winded response. I am forcing myself to stop writing this because I would go on for hours and your eyes would glaze over (if they haven't already :-).

  16. Dear John
    thank you for your ever kind analysis and time spent on same. Nugt had another reverse split yesterday of 1:10.
    looking at your trading account, your breakeven price is now 760???
    What is your opinion on same? I am sure there are many traders in the same boat.
    Surely, will this etf truly be able to reach that high price to recover?
    Hope to receive your thoughts on same.
    thank you

  17. Anon - Wow - $760 to break even on NUGT? That's incredible. Even more incredible that the 'all-time high' of NUGT is now given as $2,072! Yesterday these shares were worth $9.60 and today they are $96 - maybe that's some consolation. I might be better off to buy a lottery ticket (school teachers do not buy lottery tickets - but they don't mind if everyone else does :-)

    Seriously, I am not phased by this news. First, because I did not put my life savings on this one trade. Second, because I own those naughty shares straight out - not on margin etc. Third, it's just an exercise in math to change the price proportionately from one number to another - who cares?

    Will these shares reach $760? Beats me. I suspect the time decay of holding a 3X ETF long term is not whatsoever in my favor. In fact, I am sure it is not. So this is a real life learning lesson for me and whoever else may benefit from the observation.

    Absent the complication of the 3X issue, I don't see why NUGT would not at least reach its now 'new all-time high' of $2,072. So given that point of view I choose to shrug my shoulders and resolve to see what happens. I certainly have ZERO interest in selling the shares, if that is something you are wondering.

  18. Last 2 days of this sidewack move in Gold/Silver then on to the next leg up.
    See the circled area

    Fractal exactly the same as last year, even the same time of month.

  19. James - I don't know where you come up with this stuff but if nothing else, it continues to prove to me that there are a kazillion people looking at the same thing, coming up with very similar outlooks, and each are looking at it through a totally different point of view. That alone is amazing.

    Years ago, many years ago now that I think about it, I was taking classes/seminars with the objective of potentially switching from being a public school music teacher to one that primarily teaches math. I had been taught to do math the way I suppose we all were taught to do math 50 years ago - but the *new* training I was receiving at that time stressed the different learning styles of people. So rather than the teacher explaining to the student(s) the proper computational procedures to use, the teacher was to *ask the student(s) to explain* how they found the mathematical solution.

    Personally, and in reflection, I think this educational technical has its place but for the most part is just a bunch of baloney and some touchy feel-y liberal schmooze to impart 'an improved means' to teach the skills of mathematics to youngsters. But I will say it did cause a startling revelation in my conscience about just how drastically differently people can look at the same problem, come up with the same answer, and using methods of thinking that are unorthodox, to say the least.

    For myself, I look at the TSI and though I am imperfect and it is imperfect, I usually have a decent hunch (favorable odds) what it is telling me a few chess moves in advance. I won't put you to sleep with elaboration but would just to mention that I agree with you that we were due to get this pause and there should be a little more upside (a higher high than a few days ago) before this daily cycle begins to wind down.

    Thanks for your chart and for taking the time to share your thoughts.

  20. No problem. Your work is fascinating and I appreciate it. Good Luck in future trading. :D

  21. Looks like that chart is holding up again :D

  22. John -

    We picked up another 15% or so today on the way to our CGR "ten bagger!"



  23. James - surprise, surprise. Today was day 12 of this daily cycle so one might rightly be skeptical enough that this was the top for now...on the argument that the daily cycles average 24 trading days and should this cycle come in a tad short (the last two were long at 29 and 28 days respectively and usually these longer cycles get relieved by a shorter cycle)then that would make sense.

    BUT, usually the TSI (7,4) tips this scenario off with a negative divergence. That is, though price has made a new high near the mid-point of the typical 24 day cycle time frame, the TSI dutifully does not - providing warning. Today's situation surprisingly leaves the TSI (7,4) showing us not only a higher high but also a trend line break BUY signal courtesy of the previous TSI highs of July 23 and August 16. Hummmmmm.....

    If you look back on a daily chart quite a ways you will probably notice that when these little hesitations in the TSI at this general height resolve favorably with a higher higher (as today) it is NOT the end of the shorter term party. If I were trading this on a daily basis I would NOT throw in the towel if Monday is down, in other words.

  24. Hi Phil - wow, I did not even notice. I have my head down 16 hours a day working on these computer strategies and just come up for air to check my email. Anyway, I did just look at the CGR price and says $0.32. That's good. But for the fast finger traders out there I would SELL. There is quite a negative divergence showing on the daily TSI (7,4) and odds are strongly in favor of a price take-back - at this point. A few people probably saw gold breaking higher and panicked - either covering CGR shorts or buying. Whatever. I'm in this for the longer haul so the blips are not important to me.

    I hope to have all my stuff ready to launch by September 1st - kinda a self-imposed deadline. So far I have 8 ticker symbols dialed in with the TradeStation Walk-Forward optimization and passing some extremely tough tests. Now I am working around the edges to get a couple more ticker symbols figured out while I design the spreadsheet to document the computer's TSI-vector trades as well as my own 'using my head' trades.

    Hey, if you are making some money Phil, and it has something to do with me, that is wonderful!

  25. I think this Daily cycle will top in Gold Between September 6th and 11th. $1475-$1503

  26. I think this week Gold rises about $45.00 and Silver $1.85-2.00