Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
US Housing Market House Prices Momentum Analysis - 26th Feb 21
FOMC Minutes Disappoint Gold Bulls - 26th Feb 21
Kiss of Life for Gold - 26th Feb 21
Congress May Increase The Moral Hazard Building In The Stock Market - 26th Feb 21
The “Oil Of The Future” Is Set To Soar In 2021 - 26th Feb 21
The Everything Stock Market Rally Continues - 25th Feb 21
Vaccine inequality: A new beginning or another missed opportunity? - 25th Feb 21
What's Next Move For Silver, Gold? Follow US Treasuries and Commodities To Find Out - 25th Feb 21
Warren Buffett Buys a Copper Stock! - 25th Feb 21
Work From Home Inflationary US House Prices BOOM! - 25th Feb 21
Man Takes First Steps Towards Colonising Mars - Nasa Perseverance Rover in Jezero Crater - 25th Feb 21
Musk, Bezos And Cook Are Rushing To Lock In New Lithium Supply - 25th Feb 21
US Debt and Yield Curve (Spread between 2 year and 10 year US bonds) - 24th Feb 21
Should You Buy a Landrover Discovery Sport in 2021? - 24th Feb 21
US Housing Market 2021 and the Inflation Mega-trend - QE4EVER! - 24th Feb 21
M&A Most Commonly Used Software - 24th Feb 21
Is More Stock Market Correction Needed? - 24th Feb 21
VUZE XR Camera 180 3D VR Example Footage Video Image quality - 24th Feb 21
How to Protect Your Positions From A Stock Market Sell-Off Using Options - 24th Feb 21
Why Isn’t Retail Demand for Silver Pushing Up Prices? - 24th Feb 21
2 Stocks That Could Win Big In The Trillion Dollar Battery War - 24th Feb 21
US Economic Trends - GDP, Inflation and Unemployment Impact on House Prices 2021 - 23rd Feb 21
Why the Sky Is Not Falling in Precious Metals - 23rd Feb 21
7 Things Every Businessman Should Know - 23rd Feb 21
For Stocks, has the “Rational Bubble” Popped? - 23rd Feb 21
Will Biden Overheat the Economy and Gold? - 23rd Feb 21
Precious Metals Under Seige? - 23rd Feb 21
US House Prices Trend Forecast Review - 23rd Feb 21
Lithium Prices Soar As Tesla, Apple And Google Fight For Supply - 23rd Feb 21
Stock Markets Discounting Post Covid Economic Boom - 22nd Feb 21
Economics Is Why Vaccination Is So Hard - 22nd Feb 21
Pivotal Session In Stocks Bull Bear Battle - 22nd Feb 21
Gold’s Downtrend: Is This Just the Beginning? - 22nd Feb 21
The Most Exciting Commodities Play Of 2021? - 22nd Feb 21
How to Test NEW and Used GPU, and Benchmark to Make sure it is Working Properly - 22nd Feb 21
US House Prices Vaccinations Indicator - 21st Feb 21
S&P 500 Correction – No Need to Hold Onto Your Hat - 21st Feb 21
Gold Setting Up Major Bottom So Could We See A Breakout Rally Begin Soon? - 21st Feb 21
Owning Real Assets Amid Surreal Financial Markets - 21st Feb 21
Great Investment Ideas For 2021 - 21st Feb 21
US House Prices Momentum Analysis - 20th Feb 21
The Most Important Chart in Housing Right Now - 20th Feb 21
Gold Is the Ultimate Reserve Asset - 20th Feb 21
Is That the S&P 500 And Gold Correction Finally? - 20th Feb 21
Technical Analysis of EUR/USD - 20th Feb 21
The Stock Market Big Picture - 19th Feb 21
Could Silver "Do a Palladium"? - 19th Feb 21
Three More Reasons We Love To Trade Options! - 19th Feb 21
Here’s What’s Eating Away at Gold - 19th Feb 21
Stock Market March Melt-Up Madness - 19th Feb 21
Land Rover Discovery Sport Extreme Ice and Snow vs Windscreen Wipers Test - 19th Feb 21
Real Reason Why Black and Asian BAME are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 19th Feb 21
New BNPL Regulations Leave Zilch Leading the Way - 19th Feb 21
Work From Home Inflationary House Prices BOOM! - 18th Feb 21
Why This "Excellent" Stock Market Indicator Should Be on Your Radar Screen Now - 18th Feb 21
The Commodity Cycle - 18th Feb 21
Silver Backwardation and Other Evidence of a Silver Supply Squeeze - 18th Feb 21
Why I’m Avoiding These “Bottle Rocket” Stocks Like GameStop - 18th Feb 21
S&P 500 Correction Delayed Again While Silver Runs - 18th Feb 21
Silver Prices Are About to Explode as Stars are Lining up Like Never Before! - 18th Feb 21
Cannabis, Alternative Agra, Mushrooms, and Cryptos – Everything ALT is HOT - 18th Feb 21
Crypto Mining Craze, How We Mined 6 Bitcoins with a PS4 Gaming Console - 18th Feb 21
Stock Market Trend Forecasts Analysis Review - 17th Feb 21
Vaccine Nationalism Is a Multilateral, Neocolonial Failure - 17th Feb 21
First year of a Stocks bull market, or End of a Bubble? - 17th Feb 21
5 Reasons Why People Prefer to Trade Options Over Stocks - 17th Feb 21
The Gold & Gold Stock Corrections Are Normal - 17th Feb 21
WARNING Oculus Quest 2 Update v25 BROKE My VR Headset! - 17th Feb 21
UK Covid-19 Parks PACKED During Lockdown Despite "Stay at Home" Message - Endcliffe Park Sheffield - 17th Feb 21
How to Invest in ETFs in the UK - 17th Feb 21
Real Reason Why Black and Asian Ethnic minorities are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 16th Feb 21
THE INFLATION MEGA-TREND QE4EVER! - 16th Feb 21
Gold / Silver: What This "Large Non-Confirmation" May Mean - 16th Feb 21
Major Optimism for Platinum, Silver, and Copper - 16th Feb 21
S&P 500 Correction Looming, Just as in Gold – Or Not? - 16th Feb 21
Stock Market Last pull-back before intermediate top? - 16th Feb 21
GAMESTOP MANIA BUBBLE BURSTS! Investing Newbs Pump and Dump Roller coaster Ride - 16th Feb 21
Thinking About Starting to Trade This Year? Here Are Some Things to Keep in Mind - 16th Feb 21
US House Prices Real Estate Trend Forecast Review - 15th Feb 21
Will Tesla Charge Gold With Energy? - 15th Feb 21
Feeling the Growing Heat and Tensions in Stocks? - 15th Feb 21
Morgan Stanley Warns Gasoline Industry Is About to Become Totally Worthless - 15th Feb 21
Debts Lift Gold - Precious Metal Prices Will Rise on a Deluge of Red Ink - 15th Feb 21
Platinum Begins Big Breakout Rally - 15th Feb 21
How to Change Car Battery Without Losing Power, Memory, Radio Code Settings - 15th Feb 21
Five reasons why a financial advisor can make a big difference to your small business - 15th Feb 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Gold Stocks Bullish Volume

Commodities / Gold and Silver Stocks 2013 Jun 21, 2013 - 06:58 PM GMT

By: Zeal_LLC

Commodities

Even before this week’s latest Fed-tapering scare, gold stocks remained firmly entrenched as the most-hated sector in all the markets.  They are as deeply out of favor as they’ve been in their entire dozen-year secular bull, hyper-oversold and radically undervalued.  Given such epic antipathy, I figured they were also suffering from low trading volume.  Turns out they are, with some surprises, which is a bullish omen.

It’s been several years since I’ve studied gold-stock volume in any depth, and I’ve been growing more curious about it as this year’s massive gold-stock rout wore on.  Trading volume is pretty ambiguous as far as technical indicators go.  While most indicators clearly flag excessive greed or fear, high volume can show both.  Volume tends to surge when traders get excited, when either kind of emotion is running high.


And prior to gold stocks’ latest Fed-sparked plunge this week, the dominant emotion in this sector was certainly despair.  After a brutal 2013, investors and speculators have pretty much universally abandoned all hope in this sector.  With the sparing exceptions of abnormal days like this week’s Fed aftermath, gold stocks are generally way past fear.  In a left-for-dead sector, trading volume ought to be dismally low.

In years past I used the flagship HUI gold-stock index in my volume studies.  But sadly I fear the HUI is dying.  The last time its custodian (NYSE Amex) reported this index’s component stocks was way back in December 2011.  We’re even now seeing divergent component listings on major financial websites, they don’t agree which stocks are even in the HUI!  This isn’t a good sign, the benchmark HUI is fading away.

Of course the universal loathing for gold stocks is a big factor.  If investors don’t care about an obscure sector, index custodians also neglect it.  But a bigger reason is probably the rise of ETFs.  The HUI is never mentioned on CNBC, instead whenever analysts talk about gold stocks they use GDX as their sector metric of choice.  That of course is Van Eck’s widely-known Market Vectors Gold Miners ETF.

GDX is indeed a fine gold-stock ETF, and worthy of being a sector benchmark.  Born in May 2006, I started studying it in depth in late 2007.  And its component stocks and their weightings mirrored the HUI’s very closely.  While GDX’s annual 0.5% expense ratio makes it less clean than a pure index for long-term measuring, GDX is still increasingly replacing the HUI as the gold-stock metric of choice.

While the large majority of gold-stock trading doesn’t happen through GDX, its volume is still very representative of this sector as a whole.  When traders are buying and selling gold stocks, they are also buying and selling GDX proportionally.  And GDX’s enormous trading range in recent years reflects gold stocks’ huge volatility.  This ETF traded from the mid-$60s in September 2011 to the mid-$20s this week!

This means raw volume isn’t particularly comparable over time thanks to GDX’s broad range.  A 20m-share day now represents far less capital changing hands than the same volume a couple years ago when gold stocks weren’t despised.  A concept called capital volume bridges this disconnect and restores comparability.  It simply multiplies raw GDX shares traded each day by this ETF’s intraday average price.

The result is how much money is moving in and out of gold stocks daily.  Ignoring inflation, there’s no difference between a billion dollars moving through gold stocks today or a couple years ago.  This first chart looks at GDX capital volume over the past several years or so.  The raw capital volume is in red, and is super-volatile.  So I applied a yellow 21-day (average trading days per month) moving average to smooth it.

As always with Zeal weekly essays, the data cutoff for getting them researched, charted, written, proofed, and published on time is Wednesday’s close.  So Thursday’s wild Fed-tapering-scare action isn’t reflected here.  Nevertheless, it isn’t relevant to this study of the gold-stock capital-volume trend in place so far this year as gold stocks spiraled ever lower.  As I expected, widespread despair led to low GDX capital volume.

This past Monday, the money changing hands in GDX trading fell to a paltry $244m per day.  This is exceptionally low.  The collective market capitalization of the old HUI component gold stocks that day was around $116,347m.  So in GDX alone, only about 0.2% of major gold stocks were being traded.  Once again GDX is not the majority of gold-stock trading, but it is certainly representative of this whole sector.

When investors and speculators have abandoned a sector and walked away, low capital volume is the natural result.  With fewer traders left, and virtually no enthusiasm, there’s neither a large-enough remaining constituency nor any motivation to buy or sell rapidly.  Thus after a long selloff, when stocks are exceptionally oversold and deeply out of favor, low volume is a very bullish contrarian buying indicator.

In a truly literal sense, stock prices are a popularity contest.  When stocks are in favor traders love them and flood into them, bidding up their prices to new highs.  Eventually the greed this sparks balloons to unsustainable levels, and a major top occurs.  Conversely when stocks are out of favor traders hate them and steer clear, so their prices fall to new lows.  Major bottoms happen after fear and despair finally peak.

And with GDX already plummeting 41% year-to-date even before the Fed scare, there is no arguing it was in a brutal selloff.  And everyone knows gold stocks are despised, the vast majority of traders have convinced themselves that markets move in one direction forever so gold stocks will never materially rally again.  So the sub-$250m-per-day GDX capital volume earlier this week was a major bottoming indicator.

Major new uplegs in any sector are always born in fear or despair.  When the majority of traders are the most bearish, everyone susceptible to being spooked into selling low has already fled.  That leaves only buyers, who stealthily start bidding up the battered sector in an effective volume vacuum.  Nearly every major upleg and even significant rally in gold stocks was born in low volume, as you can see in this chart.

Pick virtually any low point in GDX before a multi-month rally, and then look at its red capital-volume line.  It is always low as post-selloff pre-upleg despair reigns, and often near that $250m-per-day line which has effectively proven a hard floor in recent years.  Most of these times the yellow 21dma of GDX daily capital volume is low too.  Very low volume after major selloffs is a harbinger of an imminent new rally.

I was well aware of this low-volume and major-bottoming connection after decades of intensely studying the financial markets.  I expected to see volume very low given the universal antipathy towards gold stocks these days.  But what I didn’t expect at all was the surprising uptrend in GDX capital volume in recent years!  That is highlighted above bracketing the 21-day moving average of this volume metric.

Traders naturally get excited during both steep rallies and steep selloffs, stoking highly-motivating greed and fear respectively.  So the huge capital-volume spike into GDX’s September 2011 highs makes perfect sense.  It’s hard to believe now, but gold stocks were actually on the verge of being exciting back then!  Fortunes were being won as they rallied higher.  But volume changes dramatically in corrections.

We all remember the outsized down days that punctuate corrections from time to time, like the carnage this Thursday.  During these big selloffs fear flares dramatically, and volume spikes accordingly as traders rush for the exits to end the pain.  But the great majority of corrections are not dramatic down days, but slow, demoralizing grinds lower.  This eventually breeds despair, leading to declining volume.

And indeed between GDX’s September 2011 peak and its May 2012 trough, a more normal 8-month correction span, capital volume fell off dramatically.  This is particularly evident in its 21dma line.  With the exception of those occasional big down days that ignited fear-driven selling, volume faded with traders’ interest in gold stocks.  It didn’t recover again until gold stocks started surging in the middle of last year.

As GDX rallied rapidly, capital volume rocketed higher.  These high-volume rallies were a very encouraging and bullish sign for gold stocks.  High volume reflects high interest and strong conviction.  Incidentally one of the biggest complaints about 2013’s general-stock-market melt-up was it happened on low volume.  Low-volume rallies are suspect with a weak foundation, while high-volume ones are strong.

Gold stocks as represented by GDX indeed started climbing higher, carving the nice support line shown above that would normally announce a major new upleg.  But then 2013 arrived, with a super-low-probability event that short-circuited gold stocks’ advance.  American stock traders started to dump their shares in the flagship GLD gold ETF to use that capital to chase the levitating general stock markets.

I can’t emphasize enough how anomalous, unprecedented, and unsustainable this GLD mass exodus has been.  As explained in depth in our current monthly newsletter, the entire reason gold has been weak in 2013 was capital rotating out of gold ETFs utterly dominated by the US GLD.  The extreme differential selling pressure in their shares dumped too much gold supply onto the markets too fast to be absorbed.

Not even big physical demand out of Asia could overcome it.  And as gold prices ground ever lower, gold-stock traders fled.  The levitating stock markets sucked capital out of GLD, gold was hit on GLD bullion flooding the market, and the gold stocks were crushed on falling gold.  This dynamic is slowing and reversing, and the totally anomalous carnage it wreaked in gold stocks will reverse along with it.

One of the biggest mistakes investors and speculators make in markets is to assume hyper-overbought or hyper-oversold markets are at fundamentally-righteous levels.  As I warned aggressively back in mid-May as the general stock markets were euphoric, they were far too high and due for a major selloff.  And I continue to pound the table on the incredible bullishness of gold stocks, the ultimate contrarian trade.

As this sector drifted and sometimes plunged lower in 2013, I expected capital volume to continue to fade as despair set in.  And indeed we saw raw GDX capital volume fall near or slightly below that $250m-per-day floor several times this year.  But what really surprised me is the continuing uptrend in the 21dma of GDX’s capital volume.  That flies in the face of all my expectations, and has intriguing implications.

This uptrend began back in mid-2010, as GDX was slowly climbing towards new all-time highs in a strong upleg.  It should have failed as GDX corrected, and indeed if you draw a resistance line from the tops of 21dma spikes between GDX’s September 2011 peak and early 2013, average capital volume was declining.  But it has actually picked up again in 2013 despite the worst gold-stock action since 2008’s stock panic.

Why is the cash changing hands in gold stocks still growing on balance despite the universal despair plaguing this hyper-oversold sector?  I don’t know.  It could be a massive distribution, the remaining gold-stock investors dumping shares low en masse to forever spurn this sector that has been so miserable in 2013.  It could also simply be a GDX-specific thing not representative of this sector, as this ETF grows more popular.

It’s hard to believe, but hedge-fund managers have increasingly been buying sizable long positions in GDX in recent months.  These professionals recognize excessive greed and fear, and know when a sector is too overbought or too oversold.  And since researching individual gold stocks is so challenging, time-consuming, and expertise-dependent, many have decided to let GDX’s custodians do it for them.

But there is a third possibility that intrigues me.  As a newsletter writer, I receive a never-ending stream of countless e-mails from individual investors, speculators, and money managers all over the world.  While the vast majority have naturally been very down on gold stocks this year, there is a small minority that are getting really excited.  They see the extreme oversoldness and are buying for the inevitable mean-reversion rally.

If there is indeed a lurking remnant of hardcore contrarians now out there stealthily buying, the moment gold turns decisively higher gold stocks are likely to explode higher.  GDX’s own capital volume shows huge spikes higher on rallies since last spring, a bullish sign.  This continuing capital-volume uptrend in 2013 despite unbelievable pain may show far more underlying psychological strength than most imagine.

Since I was looking at GDX capital volume, I decided to check out its smaller cousin too.  GDXJ is Van Eck’s Market Vectors Junior Gold Miners ETF.  It has become the benchmark way to track gold’s explorers and small producers.  Using the same methodology as above, this GDXJ chart is exactly what I expected to see in GDX.  As prices tumbled and despair mounted, volume dried up and trended considerably lower.

GDXJ is far smaller than GDX, so note the different scales here.  While the first GDX capital-volume chart showed daily trading up to $2250m, that same axis on this GDXJ chart merely goes to $300m.  Unlike GDX which is mentioned and shown anytime gold stocks are discussed in the major financial media like CNBC, GDXJ is relatively unknown.  The junior-gold-stock total abandonment makes gold stocks look popular!

While these charts again go to Wednesday, as of Thursday after this latest Fed scare GDXJ was down an astounding 78.8% since its December 2010 peak!  This compares to “merely” 63.2% for GDX.  So junior gold stocks have suffered far more than major gold stocks as this entire sector fell deeply out of favor.  This makes sense, since juniors are far riskier in general than larger established gold miners with multiple mines.

GDXJ’s capital volume reflects what the gold-stock sector feels like in terms of universal despair.  Volume has shriveled to virtually nothing, levels so low they’ve only been seen in recent years right as major gold-stock rallies have started.  Low volume after long selloffs reflects widespread despair.  And once that peaks and all susceptible sellers have exited, only buyers remain.  So that’s when new uplegs are born.

The 21dma of GDXJ’s capital volume is also down considerably, with a downtrend that has lasted for gold stocks’ entire correction (or probably severe cyclical bear market is a better label now).  As prices grind ever lower, more and more investors and speculators capitulate and sell low.  With fewer traders left, and less excitement among these remaining contrarians, there is simply lower trading volume in general.

But this GDXJ read on junior volume and interest also has bullish components.  The downtrend in junior-gold-stock capital volume is actually relatively modest considering the sheer magnitude of their losses.  And just like in larger gold stocks as represented by GDX, we’ve seen high junior trading volumes during rallies.  This implies there is plenty of capital waiting on the sidelines ready to flood in when gold decisively turns.

So despite the horrendous carnage in gold and gold stocks this year, the volume profiles in the leading gold-stock and junior-gold-stock ETFs show lots of bullishness.  And it is incredibly hard psychologically to be bullish on gold stocks these days.  Wall Street has somehow convinced itself that record global central-bank inflation, with no unwinding (just slowing), is bearish for gold!  This has crushed gold stocks.

They’ve become the most hated sector in the world, plunging to hyper-oversold deeply-undervalued levels reflecting gold prices radically below current levels.  But gold isn’t going anywhere, and neither are its miners.  This metal has been an essential asset class for all portfolios for millennia, and it absolutely will recover from its extreme anomalous 2013 selloff.  This mean-reversion rally is going to be huge.

So as hardcore contrarians, we continue to be bullish on this hated sector.  There is blood in the streets in gold stocks, they are trading below panic levels.  Mocked, ridiculed, and despised, they are the ultimate contrarian play.  And compared to the larger miners, the juniors are seriously contrarian within this sector.  The greatest gains by far as gold and gold stocks inevitably recover will absolutely be in elite junior golds.

At Zeal we’ve continued to diligently research this sector everyone else has abandoned.  We just finished our latest 3-month deep-research project whittling over 600 junior gold stocks down to our dozen favorites with the best fundamentals.  All are profiled in depth in a fascinating new 24-page report.  For just $95, a steal for the product of hundreds of hours of expert research, you can share in the fruits of our hard work.  Junior golds won’t be insanely cheap for long, buy your report today!

In these markets plagued by Wall Street groupthink, prudent contrarian analysis is essential for all investors and speculators.  That’s what we do at Zeal, long publishing acclaimed weekly and monthly subscription newsletters.  In them I draw on our vast experience, knowledge, wisdom, and ongoing research to explain what is going on in the markets, why, and how to trade them with specific stocks as opportunities arise.  Contrarianism ultimately pays off big, since 2001 all 637 stock trades recommended in our newsletters have averaged annualized realized gains of +33.9%!  Subscribe today!

The bottom line is gold-stock volume as represented by the popular GDX ETF is very bullish.  Low volume after long selloffs flags peak despair, the sentiment extreme right before major new uplegs are born.  And despite horrendous pain in 2013, gold stocks are still enjoying high-volume rallies and their average capital volume is still rising.  This suggests lots of traders waiting on the sidelines eager to buy when gold turns.

And turn gold will, its 2013 selloff was a total anomaly driven by stock traders aggressively dumping GLD shares and super-leveraged futures traders suffering a couple forced liquidations.  These are temporary events having nothing to do with bullish underlying global gold supply-and-demand fundamentals.  As they pass, strong world physical demand will retake the gold driver’s seat.  And it and its miners will soar.

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 - 2013 Zeal Research ( www.ZealLLC.com )

Zeal_LLC Archive

© 2005-2019 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