Shockingly, it happened again—the S&P500 did not rise last week. In fact, it slipped almost 1.7% to log in one of its largest weekly losses of the year. Volatility, as one would expect, jumped a bit, but still not to any levels that would signal that complacency has been replaced by fear. Also, volume was light, which means that the selling last week was not one backed by strong conviction. Most investors stayed put, and continued to ride the trend in hopes of even more gains.
It was a light week in terms of economic reports. Wholesale trade was somewhat stronger than expected. Retail sales also beat expectations, but only slightly. Initial jobless claims, on the other hand, surged to one of the highest readings on the year. Producer prices, both headline and core, just met expectations, which proved that upstream prices seem to be under control. And finally, business inventories beat expectations.
Technically, nothing has really changed with the over bought condition of the US equity markets. Sure, the stretched condition has eased slightly on the daily charts, but then again, prices on the daily charts have not even touched the 50 day moving average, perhaps the first sign that the over stretched condition is easing. On the weekly charts, last week’s decline looks like a mere blip on the horizon. Until the 200 day moving average is broken, and even better, until the 200 day moving average turns down in terms of slope (the last time this happened was in 2011), then the bull market move from 2009 is still in tact.
On the other hand, there is one sector within the stock market that’s been in a cyclical bear market since the end of 2011, or two full years. That’s the gold and silver mining industry. Using the same rationale applied above to the whole equity market, the gold and silver miners index fell below its 200 day moving average (decisively) in the middle of 2011, and has for the most part traded below this moving average since. More importantly, the 200 day moving average began to slope downward at the end of 2011. And this moving average has been falling ever since….for two straight years.
How far have prices fallen? Well, they’re now almost at their 2008 lows, when the global financial system was melting down and all stock markets, in the US and abroad, were down about 50%.
So does this mean that investors should rush in to buy gold and silver miners….today? There are two answers to this. One, if you don’t mind incurring some more near-term paper losses (which may or may not happen), then you’d be buying into the sector at prices 65% below their 2010 and 2011 highs. Two, if you do mind possible near-term losses, then a safer approach would be to wait for prices in this sector to first jump above the 200 day moving average, and then for the moving average itself to turn and become upward sloping. You’d miss the first 15%-20% of the upward move, but you’d have a lower risk of incurring intermediate paper losses.
So while most of the US equity markets are hovering at or near all-time highs, it’s nice to know that there are some sectors within the overall market that are truly on sale and could thus offer prospects of higher returns. Gold and silver miners, by virtue of dropping so far in percentage terms, may just be one such opportunity.