We're Due: A New Bull Market

From the April 29, 2016 HRA Journal: Issue 250

You think it would be easy writing an issue at the end of a month like this.  You know “smile to the crowd, take a victory lap, etc.”  Not so much.  The month was SO good I was left struggling how to couch updates for stocks that have doubled or tripled in a couple of weeks.  I’m not complaining.  It’s a good problem to have obviously but you’ll understand if I sound a little bipolar in spots. It’s hard not to be paranoid after moves like that.

As my Alert subscribers know I have been dealing with a major software issue—the software used to produce the Journal.  It’s still not fixed but enough progress was made that I could get this issue completed.  I apologise for its being over a week late but I’ve been in “Microsoft Hell” for the past 10 days. And, for the record, no it’s not a hardware issue and no MSFT doesn't know what’s wrong either.  Not comforting.  Don’t be surprised if the next issue looks slightly different because its produced on different software.

When markets get hot you have to check your individual tolerance for chasing stocks higher. I think this is a new bull market and many stocks will ultimately go much higher.  The road will have bumps though.  It feels like clear sailing for a while but force yourself to keep taking gains regularly and don’t chase a stock if you’re uncomfortable about the price move its already had.  Watch currencies too—there are very strange things happening out there.

***

No, you’re not hallucinating.  Or if you are we’re doing it together. Don’t wake me up.

In the past three weeks there has been a sea change in the junior resource market.  It’s not helping everyone, and it shouldn’t, but companies with good stories to tell and management that is trusted to do its best for shareholders are rapidly gaining attention and price.

Markets like this are obviously great and a lot of fun for those already positioned.  I certainly hope most of you longer term readers are.

It’s been a tough four or five years for everyone in the sector. We’ve earned some market joy.

Even with the sudden surge of interest it will take time for things to change in a meaningful way for those that have their boots on the ground in the field.

The gulf between those that just “discovered” the sector again those that struggled in it through a horrible bear market is vast.  The chart below displays it nicely.  I chose a chart length and intentionally chose a non-logarithmic price scale (sacrilege for technical analysis types) to display what I’ll call “the newcomers perspective”.  

Looking at the chart with a newcomer’s perspective gives a very different view than that of grizzled resource veterans that are just starting to poke their heads above the proverbial lip of the foxhole.  

To those who stayed, the upward move on the right side of the chart looks like a cliff.  I’ve seen scores of editorial pieces from guys like me calling for immanent doom or at least a deep correction because of how fast prices have moved. 

Will it happen?  At some point yes, obviously.  Bull markets never go straight up just as bear markets never go straight down.  A bull market that climbs a “wall of worry” and sees multiple corrections along the way is much stronger than a parabolic move doomed to ultimate failure.

I’m not trying to be pedantic about all this but I think the question of perspective is important and will help guide us through the early stages of the bull market that is just beginning. 

With things suddenly getting hot my phone has been ringing off the hook.  I’ve talked to a lot of people across the sector and I’ve noted that, in general, “resource sector insiders” still have a very healthy dose of paranoia.  They have been living the nightmare.  They aren’t thinking in terms of the five year (weekly bars) chart on page one.  Their view is more the one year (or less) daily bars chart below. 

Keep in mind the chart below is merely a subset—the right side of the chart to be precise—of the chart on the previous page. See how much difference perspective makes? 

Those of us glued to the trading screen are looking at a cliff and thinking “oh my gawd, we all gonna die!”. The generalist that stayed out of resources for years is looking at the five-year chart and thinking “meh. It’s a trend change.  I should be worried about this?”

Don’t get me wrong.  I think the concerns of sector insiders are real and valid.  The question in the near term is whether that concern infects the trading pattern of generalists.  Generalists may be recent entrants but they wield far more money as a group than resource sector insiders. 

If enough “outside money” decides these stocks are going higher right away then they are, even of longer term resource traders are selling into the rally.  It’s simply a function of relative buying power.

The point I’m getting to here is that its perfectly possible we see a continued rally in gold stocks, especially the juniors.  Why?  Because trading in companies at that level is as much about sentiment as it is about hard cold facts, including the gold price of the day.  There has been a clear sentiment reversal and new money is looking to position itself.

If gold pulled back enough in a multi-week consolidation then, yes, we’ll get a correction in the juniors too.   Given recent moves by central bankers that pull back certainly doesn't look immanent. When and if it happens will depend on the US Fed and US equity markets. 

There has been plenty of selling of the USD in the currency markets.  Hedge funds have dispensed with their huge long position in US Dollars and may even be net short.

There is an argument to be made that the Bank of Japan and the European Central Bank standing pat gives the Fed more manoeuvring room.  If Yellen doesn’t need to worry about Japan or the EU intentionally weakening their currencies she could feel more comfortable about raising rates.  That’s true but its not the only consideration.  

US economic metrics have continued to weaken.  The FOMC always puts a brave face on and promises higher growth rates just ahead.  They can’t be happy about a Q1 GDP growth of 0.5%.  That’s not a growth rate that screams “raise rates!”

New York markets continue to hold but have seen more weakness recently.  So far earnings look worse than estimated even though most are beating bogus “expectations”.   You all know my view.   I do not expect new highs on the SPX and think a mild recession in the next 12 months in the US is a real possibility.

The level of equity prices is supposed to be immaterial to the Fed but do any of us really buy that?   It’s very clear the Fed is afraid of spooking Wall St.  If NY continues to weaken the Fed would probably continue to hold off.  Obviously, the more dovish the Fed is the less likely we are to see a significant correction in the gold price.

The fact we’re in a new bull market for gold stocks may overwhelm gold price moves themselves for a while anyway. Lots of money is trying to position itself still and that is driving prices. China seems to be finding its feet which is helping base metals though I’m a bit less comfortable there.  Really good base metals stories will be fine but I’d like to see more good numbers from China’s economy and evidence I’m wrong about the US slowing.  Until then I’ll stick with the short list of copper explorers and developers we follow and leave it at that.

The junior market completely dodged the dreaded “PDAC curse” in March.  The next question traders are asking themselves is whether we should “sell in May and go away”.  In most years that’s not a bad idea.  Summer markets tend to be slow and news flow is lighter.  It’s often a good time to accumulate companies that will deliver news through the fall.

Sell (or at least “don’t buy too much”) in May is good advice most years but, again, the fact we are at the start of a new bull market could change things.

There are a couple of analogues to the current situation, namely 2008 and 2000.  I’ve borrowed a chart from my colleague Jordan Roy-Byrne at www.thedailygold.com that compares the HUI (gold bugs index) during the last two bull markets to the current one.  So far the current rise compares most closely to early 2009, even though the lead up – a very long bear market – is closer to the situation in 2000. 

In 2009 the HUI had several corrections but didn’t see a really large one until a year had passed.  In 2000 HUI flat-lined for a few months after an impressive six month start and then rose again and more strongly.  We didn’t see a major correction for 18 months.

I wouldn’t call either example conclusive but they are encouraging.  2000 seems like the more logical analogue to me because of the length of the preceding bear but the market never really acts the same way twice. 

The most encouraging aspect of the current market is the “outside money” I already noted.  This can change the equation because a relatively small increase in interest can have a large impact on this small sector.  While I expect long term traders in the resource space to be taking money of the table next month I don’t expect that much of a summer pullback.

We’re seeing increased merger and acquisition activity (see the Nevsun/Reservoir updates) and this too should continue.  With traders gravitating to exploration stories again a few good discoveries could also lead to a strong summer market.  Fewer will be paying attention and the moves will be more selective but discoveries can rapidly increase interest in both the discovery company and anyone nearby. 

The combination of horrible funding markets and simple bad luck meant it’s been a few years since the market has had a string of discoveries to trade off of.  Statistically, we’re overdue for a few discoveries based on the law of averages alone, plus the fact many companies are suddenly finding themselves with money on hand for drilling again.

Bull Markets Are Different:

One of the changes I’ve noticed in the past month is a marked increase new subscribers.  Welcome to HRA!  I have no idea what the level of experience or sophistication is for these new readers.  This is a new bull market though so this seems a good time for some general comments on trading junior resource stocks.

Bull markets can be frustrating for someone in my position.  Due diligence and writing takes time and a number of stocks we follow are moving fast, even though no news is expected near term.  You’ll see plenty of charts in the update section that show steep price increases lately.

If that puts you off a particular stock that’s fine.  First and foremost, you shouldn’t be buying anything you’re not comfortable about.  If the chart is keeping you up nights, sell it. 

A number of the stocks that have moved most are either delivering results or starting drill programs soon.  Some have really captured the attention of the market. 

That’s something I look for in an exploration play.  Ideally your entry is early enough that you get to ride the stock higher as anticipatory buying kicks in as field work starts. 

It’s tempting to swing for the fences but I think retaining some of the hard won lessons of the bear market is a good idea.  One of those is taking some money off the table ahead of results if there has been a big price move. 

Getting your carrying cost down to a fraction of its original level ahead of results is rarely a bad idea.  This lowers your risk significantly.  Remember that early stage exploration stories are the high risk end of a high risk sector.   Most projects don’t make it. That’s just how it is.  If you can trade your costs down enough ahead of results you can sell if the results are poor and come away unscathed.  Being able to do that a few times more than makes up for the time a company delivers big news and you wish you’d held every share.  You have to play the averages.

HRA covers a number of companies at different levels of development and, all other things equal, more developed companies/projects will have a lower risk profile.  They will be less volatile and, maybe, less nerve-wracking. 

The higher up the food chain you go the more the price will be impacted by the price of the metal(s) it’s focused on.  An early stage explorer can, and will, have huge moves based on exploration results almost regardless of short term metal price moves. A near production or production stock moves more closely with the price of its product.

Nothing goes straight up.  Don’t be afraid to bid and be patient, especially on deals that have seen big moves.  Partial corrections of consolidations of big moves are common.  If news isn’t expected for weeks you’ve got time.  Buying any stock at a good price increases your odds of success. 

Check recent releases to see if there are large placements or other low priced stock that become tradable soon. That will create a good window to accumulate.

If you own an explorer that finds something extraordinary the market will usually tell you, especially in a bull market.  The price reaction can be large and it’s not unusual for the price to move for a few days before exhausting itself.

There is no such thing as a “must own” stock.  Don’t feel like you missed anything if a stock runs away from you.  In a bull market there will be plenty more where that came from.

If you own a stock its worth getting on the company’s news dissemination list.  It never hurts to call the company and get updates directly.  There are often details left out of or poorly communicated in news releases you only get by talking to the company.  Conferences are good for this purpose too and there are a couple a year in most major centres.

Junior resource stocks can be highly rewarding in a bull market or on the back of a discovery but they’re not ATMs that you should be putting money into you can’t afford to lose. 

We’re not trying to lose money of course but markets are fickle and move fast. We don’t know in advance what exploration results will look like. That’s why its called exploration. I guarantee you will have a few clangers trading explorations stocks.  Everyone does.  The key is to manage your trading so the gains outweigh the losses and the average return is high.

Good luck and good trading.  I think we’re due for some fun again.

The HRA–Journal and HRA-Special Delivery are independent publications produced and distributed by Stockwork Consulting Ltd, which is committed to providing timely and factual analysis of junior mining, resource, and other venture capital companies.  Companies are chosen on the basis of a speculative potential for significant upside gains resulting from asset-based expansion.  These are generally high-risk securities, and opinions contained herein are time and market sensitive.  No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer, solicitation or recommendation to buy or sell any securities mentioned.  While we believe all sources of information to be factual and reliable we in no way represent or guarantee the accuracy thereof, nor of the statements made herein.  We do not receive or request compensation in any form in order to feature companies in these publications.  We may, or may not, own securities and/or options to acquire securities of the companies mentioned herein. This document is protected by the copyright laws of Canada and the U.S. and may not be reproduced in any form for other than for personal use without the prior written consent of the publisher.  This document may be quoted, in context, provided proper credit is given. 

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