Best of the Week
Most Popular
1. Climate Change Mass Extinction - Birds, Bees and Bugs: Going Going Gone - Richard_Mills
2.A Purrrfect Gold Price Setup! - Peter_Degraaf
3.Who Finances America's Borrowing? Recession Indicator for Independent Thinkers Part 2 - F_F_Wiley
4.America’s One-sided Domestic Financial War - Raymond_Matison
5.Gold Price Summer Doldrums - Zeal_LLC
6.Two Key Events Will Unleash Gold - Jim_Willie_CB
7.Billionaire Schools Teacher in NAFTA Trade Talks - Richard_Mills
8.Get Out Of Crypto Cannabis Bubble Before It Pops and Move Into Bargain Basement Miners - Jeb_Handwerger
9.Stock Market Could Pullback for 1-2 weeks, But Medium Term Bullish - Troy_Bombardia
10.G7 Chaos, Central Banks and US Fed Will Drive Stock Prices This Week - Chris_Vermeulen
Last 7 days
Trouble Spotting Market Trends? This Can Help - 22nd Jun 18
Financial Markets Analysis and Trend Forecasts 2018 - A Message from Nadeem Walayat - 21st Jun 18
SPX Bouncing Above Support - 21st Jun 18
Things You Need To Know If You Want To Invest In Bitcoin Now - 21st Jun 18
The NASDAQ’s Outperformance vs. the Dow is Very Bullish - 21st Jun 18
Warning All Investors: Global Stock Market Are Shifting Away From US Price Correlation - 20th Jun 18
Gold GLD ETF Update… Breakdown ? - 20th Jun 18
Short-term Turnaround in Bitcoin Might Not Be What You Think - 19th Jun 18
Stock Market’s Short Term Downside Will be Limited - 19th Jun 18
Natural Gas Setup for 32% Move in UGAZ Fund - 19th Jun 18
Magnus Collective To Empower Automation And Artificial Intelligence - 19th Jun 18
Trump A Bull in a China Shop - 19th Jun 18
Minor Car Accident! What Happens After You Report Your Accident to Your Insurer - 19th Jun 18
US Majors Flush Out A Major Pivot Low and What’s Next - 18th Jun 18
Cocoa Commodities Trading Analysis - 18th Jun 18
Stock Market Consolidating in an Uptrend - 18th Jun 18
Russell Has Gone Up 7 Weeks in a Row. EXTREMELY Bullish for Stocks - 18th Jun 18
What Happens Next to Stocks when Tech Massively Outperforms Utilities and Consumer Staples - 18th Jun 18
The Trillion Dollar Market You’ve Never Heard Of - 18th Jun 18
The Corruption of Capitalism - 17th Jun 18
North Korea, Trade Wars, Precious Metals and Bitcoin - 17th Jun 18
Climate Change and Fish Stocks – Burning Oxygen! - 17th Jun 18
A $1,180 Ticket to NEW Trading Opportunities, FREE! - 16th Jun 18
Gold Bullish on Fed Interest Rate Hike - 16th Jun 18
Respite for Bitcoin Traders Might Be Deceptive - 16th Jun 18
The Euro Crashed Yesterday. Bearish for Euro and Bullish for USD - 15th Jun 18
Inflation Trade, in Progress Since Gold Kicked it Off - 15th Jun 18
Can Saudi Arabia Prevent The Next Oil Shock? - 15th Jun 18
The Biggest Online Gambling Companies - 15th Jun 18
Powell's Excess Reserve Change and Gold - 15th Jun 18
Is This a Big Sign of a Big Stock Market Turn? - 15th Jun 18
Will Italy Sink the EU and Boost Gold? - 15th Jun 18
Bumper Crash! Land Rover Discovery Sport vs Audi - 15th Jun 18
Stock Market Topping Pattern or Just Pause Before Going Higher? - 14th Jun 18
Is the ECB Ending QE a Good Thing? Markets Think So - 14th Jun 18
Yield Curve Continues to Flatten. A Bullish Sign for the Stock Market - 14th Jun 18
How Online Gambling has Impacted the Economy - 14th Jun 18
Crude Oil Price Targeting $58 ppb Before Finding Support - 14th Jun 18
Stock Market Near Another Top? - 14th Jun 18
Thorpe Park REAL Walking Dead Living Nightmare Zombie Car Park Ride Experience! - 14th Jun 18

Market Oracle FREE Newsletter

5 "Tells" that the Stock Markets Are About to Reverse

Gold Stocks HUI Hits New Record High

Commodities / Gold & Silver Stocks Oct 08, 2010 - 12:12 PM GMT

By: Zeal_LLC

Commodities

Best Financial Markets Analysis ArticleInspired by gold’s relentless momentum, investors drove the flagship HUI gold-stock index to new all-time highs this week.  While great fun for all of us with capital deployed in this sector, seeing the best levels in history often spawns anxiety in those with a contrarian bent.  Following gold stocks’ run into record territory, are they in danger of an imminent correction?


Interestingly, the history of today’s secular gold-stock bull suggests the answer is they’re not.  The manner in which the HUI achieved its new record highs this week has always led to big surges historically.  And if today’s upleg holds true to this extensive precedent, the gold stocks have a lot farther to run yet before a healthy correction arrives to rebalance sentiment.

Since mainstreamers are largely just starting to discover gold stocks, a lot of people assume this bull is fairly new.  This couldn’t be farther from the truth.  The HUI bottomed in November 2000, a whopping 10 years ago, at 36.  As of this Wednesday, this index has enjoyed a stupendous 1375% bull run since those humble beginnings!  For comparison, the benchmark S&P 500 lost 16% over this exact span.  Gold stocks have easily been one of the best-performing sectors, if not the top one, of this entire past decade.

Now 10 years is a great deal of time to observe the behavior of anything.  Whether you’re watching your kids, prairie dogs, or the financial markets over such a long span, definite patterns and tendencies emerge.  And in gold stocks’ case, these can be traded with great success.  In our popular Zeal Intelligence monthly newsletter, we realized our first gold-stock trade in March 2001.  Nearly 100 gold-stock trades later in this publication alone, ZI’s average annualized realized gold-stock gain (including all losing trades) is +58.8%.

One of the HUI’s patterns that helped us achieve such stellar returns over the past decade is its drift-surge tendency.  Periodically gold stocks rocket higher in massive new uplegs, leading to enormous gains for investors and speculators.  But these mighty runs leave this sector super-overextended.  So gold stocks need to drift sideways and consolidate for a year or two after these surges, giving traders time to digest and ultimately accept the new prevailing price levels.

New record highs in the HUI are seen at a couple distinct times in these drift-surge cycles.  The first is during a surge, within the gigantic uplegs.  The second is after a drift, a year or more into a high consolidation.  When record highs are seen late in surges, it is definitely a warning sign of an approaching top that traders should heed.  But when they’re seen late in drifts, they herald the birth of major new uplegs.  Thankfully this week’s HUI records fall into the latter category.

As a good chart is worth far more than a thousand words, all of this is much easier to understand visually.  This first chart superimposes the HUI (blue) and some of its key technicals over the gold price (red).  This sector’s drift-surge tendency that is so incredibly profitable to exploit is crystal-clear from this long-term perspective.  And provocatively we are finally exiting the biggest and longest drift of this entire bull.

Massive gold-stock uplegs catapult their definitive index to major new highs, which are marked by numbers above.  The HUI’s entire 1375% gains since late 2000 were achieved exclusively during these mighty runs.  Following these surges, this index drifted sideways for a year or two in high consolidations.  But eventually gold keeps powering higher in its own secular bull, and traders get comfortable enough with prevailing gold-stock levels to start bidding them higher again.  And the next surge emerges.

While the heights of the surges and lengths of the subsequent drifts varied a bit, this greater drift-surge cycle worked like clockwork.  For our purposes today, let’s start with the fourth major surge on this chart.  It ultimately carried the HUI to new all-time record highs back in March 2008.  There are many parallels between this last major surge and what certainly appears to be the next one already underway today.

That fourth surge technically began in mid-August 2007 when the HUI bottomed during the precious-metals summer doldrums.  It started gradually gaining ground in August but really took off in September.  It didn’t exceed its previous surge’s record high from May 2006 (number 3 on the chart) until late-September 2007.  After that milestone the HUI was off to the races, powering higher on balance until March 2008’s record high of 515.  This fourth surge’s top was 31% above the previous one’s peak.

All of this ought to sound familiar.  This year, the HUI bottomed in late July also during its summer doldrums.  It rallied in August and September, but didn’t exceed its March 2008 record high until just this week (early October).  And this wasn’t a late-surge record far above anything yet seen, it was merely a slight advance over a previous record set about 2.5 years earlier.  Today the HUI is hitting new record highs emerging from a long drift, which means we are almost certainly in the next major surge!

This last drift was obviously much longer and messier than most, because it happened to straddle an epic once-in-a-century stock-market panic.  Just like in all sectors, extreme fear drove traders to dump gold stocks at a frightening pace during this crazy episode.  Between July and October 2008 alone, the HUI plummeted a sickening 68%!  It was a bloodbath.  But it was also an unsustainable anomaly as I pointed out often at the time.  And indeed the HUI quickly recovered.

By autumn 2009, this index had fully regained its pre-panic drift zone.  In terms of the greater drift-surge cycles in this gold-stock bull, the panic’s impact is ultimately irrelevant.  Gold stocks plunged far too low relative to gold prices and their own fundamentals, but immediately after that they started soaring back up again to completely unwind these irrational losses.  You could erase the stock-panic anomaly and post-panic recovery from this chart, it was just a temporary distortion that soon righted itself.

This epic anomaly did serve to lengthen the HUI’s latest drift cycle though.  Its high consolidation that started in early 2008, the basing zone from which its next surge is launching, was essentially mothballed between summer 2008 and autumn 2009.  But over the past year since this index regained its pre-panic drift range, it has resumed its high consolidation as if the panic never happened.  So ex-panic, traders have had a couple years or so to get comfortable with higher gold-stock prices first seen in early 2008.

And after a high-consolidation drift, a new surge is due.  This week’s marginal new record highs in the HUI offer strong confirmation that this next surge is already underway.  And this one ought to be exceptionally large.  Gold prices are much higher today than they were in March 2008 ($1000) when the HUI originally hit these levels.  Since the gold price drives gold miners’ profits, and long-term profits drive stock prices, eventually the gold stocks will have to rally far to reflect today’s much-higher gold levels.

A couple weeks ago I wrote an essay chronicling the massive undervaluation of gold stocks relative to gold.  For 5 years prior to the panic, the HUI traded in a well-defined range relative to gold.  The panic threw this all-important HUI/Gold Ratio into total disarray.  And though the HGR has recovered much, it still remains way too low.  In this entire secular bull, we’ve never seen a HUI surge start at such an undervalued level relative to gold.  Thus gold stocks probably have a lot farther to run than usual.

While longer-term cycles like the HUI’s drift-surge are very powerful trading tools, it is always critical to consider short-term technicals as well.  If gold stocks get really overbought, they are bid up too far too fast, they need to correct to rebalance sentiment (eradicate excessive greed) regardless of where they happen to be in their longer-term cycles.  So it’s important to consider whether or not this week’s records occurred in a wildly-overbought HUI.

My favorite way to measure oversoldness (lows, time to buy) and overboughtness (highs, time to sell) is through a trading system I created many years ago.  I called it Relativity, as it looks at prices relative to a gradually-following baseline.  When they get stretched too far beyond this baseline, they have rallied too far too fast, they are due for an imminent correction.  The baseline that Relativity employs is the venerable 200-day moving average, which slowly rises throughout a bull yet still filters out all the chaotic daily noise.

The Relative HUI (rHUI) is derived from dividing the HUI’s close by its 200dma.  When charted over time, this multiple creates a horizontal trading range.  It shows how far gold stocks as a sector tend to advance beyond their flagship index’s 200dma before they are simply too overextended to continue higher.  And today, despite the HUI’s recent rally and its new record highs, this index isn’t even close to being overbought yet!

The light-red line here is the rHUI multiple, and it is simply the result of dividing the blue HUI line by its black 200dma line.  In Relativity-based trading, I generally consider the latest 5-to-6 year span to define a trading range.  And in the rHUI’s case, most of its activity falls between 0.95x on the low side to 1.40x on the high side.  Think of this range as a probability band.  The lower in the range, the better the odds the HUI is going to rally.  The higher in the range, the better the odds the HUI will soon correct.

Note that back in late July when this current HUI surge started, this index fell under its 200dma (0.982x) to approach the bottom of its relative range.  This was a strong buy signal I shared with our subscribers.  And despite the HUI’s nice 23% run higher since late July, even at this week’s record highs the rHUI still remains low in its trading range.  As of Wednesday, the HUI at 531 showed an rHUI reading of only 1.185x.  In other words, the HUI was trading just 18.5% over its 200dma baseline.

Compare this to past rHUI levels at major highs after massive surges or even big rallies.  In June 2002 (top 1 above) the rHUI hit an astounding 1.821x!  In December 2003 (2) the rHUI was running 1.554x when the HUI peaked.  In May 2006 (3) the rHUI ran 1.438x as the HUI challenged 400 for the first time in history.  In March 2008, even in a surge that never reached its full potential thanks to some Fed actions and the subsequent bond and stock panics, the rHUI still hit 1.302x as the HUI peaked at 515.

And then last autumn, which wasn’t the end of a surge but deep into the HUI’s extraordinary post-panic-recovery rally, the rHUI peaked at 1.397x in December 2009 when the HUI hit 511.  At less than 20% above its 200dma today, the HUI is certainly not very overextended like it was at the ends of past major surges and rallies where it usually ran 40%+ above its 200dma.  The HUI is simply not even remotely close to being overbought yet despite its new record highs!

This is wonderful news for gold-stock investors and speculators.  It clears the way for this latest surge to continue powering higher in the months ahead.  And it could be quite a run, ultimately peaking next spring at levels that most traders today would scoff at.  In addition to gold stocks remaining far undervalued relative to prevailing gold prices today, seasonals remain very favorable on balance until May.

A lot of mainstream traders don’t realize that gold is heavily influenced by seasonal demand spikes.  This gold seasonality leads to strong rallies between September and May that erupt each year like clockwork.  A fascinating series of income-cycle and cultural factors combine to drive much-higher-than-average gold investment demand over this span.  And naturally, rising gold prices drive very similar HUI seasonality.  So the stars are certainly aligned for the HUI’s next big surge to continue powering higher.

At Zeal, we’ve spent an entire decade studying this gold-stock bull and successfully trading gold stocks through every kind of environment imaginable, including the panic.  Our resulting knowledge, wisdom, and experience is second to none.  And we keep relentlessly expanding our expertise.  We recently finished a 3-month deep-research project that investigated all the junior gold producers trading in the US and Canada.  The timing is great since elite junior gold stocks will really leverage the HUI’s gains.

We published comprehensive fundamental profiles of our dozen favorites (whittled out of a starting universe of nearly 100 stocks) in a new 27-page report.  It represents the fruits of several-hundred hours of expert world-class research.  While these stocks are already moving, we haven’t seen anything yet if the HUI indeed proves to be in its next surge cycle.  For the bargain price of just $95 ($75 for Zeal subscribers), you can learn about these high-potential junior gold producers.  Buy yours today!

And of course we also publish our acclaimed weekly and monthly subscription newsletters.  In order to intelligently trade our own capital in high-probability-for-success scenarios, we have to continuously research and analyze the markets.  All of this is distilled down into Zeal Speculator and Zeal Intelligence for our subscribers, so they can learn from and capitalize on all our hard work.  If you want to know what to expect in the markets before it happens when opportunities to profit are greatest, subscribe today!

The bottom line is despite this week’s record highs in the HUI, the rally in gold stocks is probably just getting started.  The HUI appears to be finally embarking on the next big surge in its long series of drift-surge cycles, which will likely carry it to dazzling new record highs before it gets overextended.  The technical signature today is very bullish and matches what history shows early in new surges.

As if this wasn’t exciting enough, gold stocks remain deeply undervalued relative to prevailing gold prices which ought to supercharge their surge.  And despite their run over the last couple of months, the HUI is nowhere close to looking overbought yet by historical standards.  With such an extraordinarily bullish setup so early in gold stocks’ seasonally-strong months, traders shouldn’t delay in getting deployed.

By Adam Hamilton, CPA

So how can you profit from this information? We publish an acclaimed monthly newsletter, Zeal Intelligence , that details exactly what we are doing in terms of actual stock and options trading based on all the lessons we have learned in our market research. Please consider joining us each month for tactical trading details and more in our premium Zeal Intelligence service at … www.zealllc.com/subscribe.htm

Questions for Adam? I would be more than happy to address them through my private consulting business. Please visit www.zealllc.com/adam.htm for more information.

Thoughts, comments, or flames? Fire away at zelotes@zealllc.com . Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I will read all messages though and really appreciate your feedback!

Copyright 2000 - 2010 Zeal Research ( www.ZealLLC.com )

Zeal_LLC Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules