Gold Miners Bottoming?

The S&P500 ended the week down very slightly….about 0.2% on slightly higher volume. Volatility, as one would expect in a losing week, rose, but it only inched a little higher and still ended the week at levels that are associated with extreme complacency. In other words, not much happened in US equity markets over the last five trading days.

Technically, the S&P500 is still very over-stretched. Not only have prices been hugging the upper Bollinger band for the last year, but they have now started to trace out a parabolic pattern, a pattern that usually ends in disaster—when the strong and final upswing in the parabola is followed by an equally strong downswing. Sentiment is still extremely bullish; in fact it’s almost off the charts. And bearishness has almost vanished. Valuations are also off the charts….if one understands that earnings are near record levels. Why? Since earnings always revert to historically normal levels relative to sales and GDP, today’s stock market price-to-earnings ratio is far above normal levels. And if earnings simply revert back to normal, instead of dipping below normal, then the market is about 50% over-valued.

The US economy is showing no signs of strong growth. While retail sales beat expectations, much of that came from auto and gas sales. Producer and consumer inflation, as reported by the government, is not picking up. The Philly Fed survey beat expectations, as did the Empire State manufacturing survey. But the consumer sentiment reading registered its biggest miss in eight years. Once again, as Wall Street cheers, Main Street struggles.

And while the party on Wall Street rages on, there are a few sectors that have not only been dismally under performing,  but also have recently shown signs of rebounding.

Two of the most hated sectors in the investment world over the last two years are gold and gold miners.

Gold miners in particular, have  been hit hard. The gold miners index, or GDX, lost about 70% of its value between its highs in 2011 and its lows last month, in December. But while Wall Street has all but written off gold miners, GDX has started to trace out a classic technical bottoming pattern on the weekly charts, which are more important to long-term investors than the daily charts. As GDX touched new cyclical lows in December, several technical momentum indicators (such as MACD and RSI) failed to hit new lows. Technical analysts call this a bullish divergence, and it could form the foundation of a meaningful rebound.

GDX has yet to pass some more conservative tests, namely trading above its 200 day moving average, and more definitively, changing the slope of the 200 day moving average from a downward sloping line to an upward sloping line.

So gold and gold miners should be watched more closely.  As most of the rest of the stock market traces out a huge topping pattern, these two smaller markets could be at the beginning stages of a meaningful bull run.

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