New Gold-Stock Upleg
Adam Hamilton December 18, 2020 2535 Words
The gold miners’ stocks are rallying on balance again, following their recent multi-month correction. For several weeks now they’ve been carving both higher lows and highs, which sure appears to be forming a nascent uptrend. That increases the odds a new bull-market upleg is getting underway in this high-flying sector. While still dependent on gold’s fortunes, plenty of technical evidence supports a new-upleg thesis.
The leading and dominant gold-stock benchmark and trading vehicle is the GDX VanEck Vectors Gold Miners ETF. As of the middle of this week, GDX commanded nearly 2/3rds of all the capital deployed in gold stocks through all American gold-stock ETFs! GDX’s remarkable price action this year continues to boost its popularity among traders. The major gold stocks GDX contains more than doubled in mid-2020!
Like everything else, the gold miners’ stocks got sucked into mid-March’s extreme stock panic spawned by government lockdown orders attempting to slow COVID-19’s spread. That beat this contrarian sector to radically-oversold lows wildly disconnected from gold miners’ strong underlying fundamentals. GDX’s violent rebound upleg out of that huge anomaly proved a moonshot, the major gold stocks just skyrocketed.
In only 4.8 months between mid-March to early August, this leading gold-stock ETF soared a stupendous 134.1% higher! But such extraordinarily-big-and-fast gains naturally left gold stocks very overbought, so they rolled over into a major correction. These essential post-upleg selloffs keep bulls healthy, extending their longevity by rebalancing both sentiment and technicals. That process seemed to play out by late November.
From its euphoric early-August peak until then, GDX fell 24.9% over 3.6 months. A couple weeks ago before the major gold stocks’ new uptrend became apparent, I wrote an essay on the maturing gold-stock correction. GDX’s bullish technical action since really increases the likelihood that correction indeed gave up its ghost in late November. If that proves true, gold stocks’ next bull-market upleg has started marching.
GDX’s correction apparently culminated with a 2.7% drop to $33.42 on November 24th. That had the feel of a correction-slaying capitulation too, capping a 6.9% two-day plunge and a 12.1% seven-trading-day one! Prevailing sentiment deteriorated fast on so much pain, with bearishness flaring dramatically. This contrarian sector was deeply out of favor heading into Thanksgiving. That’s the stuff bottomings are made of.
In the several weeks since that ugly gold-stock trough, GDX has carved one higher low and two higher highs. In the first eight trading days after that bottom, GDX blasted 9.2% higher to $36.50. But such a fast V-bounce left gold stocks overextended, so GDX started selling off again to rebound at $34.29 five trading days later. Very importantly, that latest low this Monday was 2.6% above the late-November bottoming.
A capitulation nadir and subsequent higher low after a maturing correction form a rising lower-support line. That’s half of a new uptrend. The major gold miners again bounced sharply out of that, with GDX surging 5.1% this Tuesday and Wednesday. The resulting $36.03 mid-week close wasn’t a new high yet, but it was getting close. On Thursday as I penned this essay, GDX surged another 3.5% to close up at $37.29!
That second higher high since the correction bottoming was 2.2% above the initial bounce high. Those two higher highs together form a parallel rising upper-resistance line. So the major gold stocks are now in a new uptrend! And odds are mounting that it will grow into their next bull-market upleg. That portends more big gains coming in gold stocks in the months ahead, increasing the importance of getting deployed.
Whether or not GDX’s budding uptrend blossoms into a major new upleg depends on two things. Most importantly is how gold itself fares. The major gold stocks tend to amplify material gold moves by 2x to 3x. So if a new gold upleg is underway, gold stocks will follow it higher. My essay last week looked at gold’s own recent correction, which was right in line with its bull precedent in both total size and duration!
That gold analysis leaned on Relativity Trading indicators, looking at price levels relative to their baseline 200-day moving averages. That reveals when they are overbought and likely to sell off or oversold and likely to rally. Plenty of readers wrote in curious about how the gold stocks themselves were looking in Relativity terms. So here’s the latest Relative GDX chart, tracking GDX closes divided by their 200dmas.
The resulting multiples tend to form horizontal trading ranges over time. A Relativity chart effectively compresses 200dmas to flat at 1.00x, and then renders the price action surrounding them in perfectly-comparable percentage terms. That’s the light-red line here. Superimposed over this rGDX metric are this ETF’s normal technicals. Both support this new-gold-stock-upleg thesis, which is certainly bullish.
Relativity trading ranges are defined based on the past 5 calendar years of data, updated late each year. During its secular bull, GDX’s 200dma multiple has mostly meandered between 0.85x to 1.50x. Those are the oversold and overbought levels, the highest-probability-for-success times to respectively buy and sell gold stocks. When GDX’s last massive upleg peaked in early August, this rGDX indicator ran 1.448x.
The major gold stocks as a sector were stretched 45% over their 200dma, nearing extremely overbought. So a healthy correction was necessary to rebalance the excessively-greedy sentiment and overheated technicals. I warned our newsletter subscribers about the mounting downside risks in late July, when we ratcheted up the trailing stop losses on our many open gold-stock trades to protect big unrealized gains.
Extreme overboughtness after a major upleg is always a serious warning of looming corrections, so it can’t be ignored. We had aggressively redeployed in fundamentally-superior gold and silver stocks in the weeks right after mid-March’s stock panic. Those relatively-low buys grew into huge gains during gold stocks’ last upleg. Tightening up stop losses as major uplegs grow too overbought locks in more gains.
Indeed GDX soon started correcting, which slammed 17 and 9 stock trades in our weekly and monthly newsletters down to their stops. But those exits came at awesome absolute realized gains averaging +81.3% and +83.6%, which annualized to amazing +303.9% and +334.9% averages! We did some gold-stock-short trades during the correction, gold-stock-ETF put options and inverse-leveraged gold-stock ETFs.
But I didn’t recommend a single gold-stock-long trade between late June to late November. We started our gold-stock redeployment for this next upleg in our weekly newsletter on November 24th, the very day GDX happened to bottom. Since then we’ve layered in 8 and 4 new gold-stock trades in our weekly and monthly newsletters, attempting to buy in relatively-low so we can later sell relatively-high after the next upleg.
The gold-stock technicals shown in this chart were a major part of my decision in late November to start actively gaming a correction bottoming and new gold-stock upleg. GDX had again retreated 24.9% over 3.6 months, falling back to 0.945x its 200dma. Back in early September when GDX still traded near $42 and few believed a correction was upon us, I wrote an essay warning gold stocks were in correction mode.
My correction downside target way back then was 25%, “But with gold stocks remaining very overbought technically, and greed still elevated after an insufficient selloff, a resurgent correction is likely. That could easily extend to 25% in GDX, another 20% lower from this week’s levels.” That was based on a normal 10%ish gold correction, which the major gold stocks again leverage by 2x to 3x to hit 20%-to-30% selloffs.
With GDX finally sliding 25% in late November, and plunging well under its 200dma, odds were the lion’s share of the necessary corrective work was behind us. That paved the way for gold stocks’ next bull-market upleg. But there was and is some doubt, as GDX’s correction metrics remained well under the averages from this gold-stock bull’s prior corrections. They proved severe, hammering gold stocks way lower.
Eviscerating this sector in late 2016, mid-2018, and early 2020, they averaged huge 36.5% GDX selloffs over 8.0 months plummeting to just 0.754x GDX’s 200dma! Late November’s 24.9% over 3.6 months to 0.945x looked anemic in comparison. But for several reasons, this latest gold-stock correction probably didn’t need to be so extreme to accomplish its mission. Gold’s own correction progress was the most important.
Gold bottomed a few trading days after the gold stocks, on the Monday after Thanksgiving week. That extended gold’s total selloff to 13.9% over 3.8 months, driving it back down to 0.989x its own 200dma. This gold bull’s fourth correction was running right in line with the averages from its prior three, which weighed in at 14.3% over 4.1 months. If gold’s correction was ending, so would the gold-amplifying gold stocks’.
A serious gold-stock correction also didn’t seem as likely since GDX wasn’t as overbought leading into this latest one. That leaves less selling work to rebalance sentiment and technicals. Again the rGDX only hit 1.448x when gold stocks peaked in early August, far lower than GDX’s 1.567x peak in early August 2016 after this bull’s maiden upleg. Gold-stock overboughtness had been even more extreme leading into that.
The rGDX soared as high as 1.646x in early July that year, the major gold stocks had skyrocketed 65% above their 200dmas! The resulting greed was much more potent and universal, necessitating more corrective selling. The less-extreme a preceding upleg topping, the less-extreme its subsequent correction needs to be. So 25%ish seemed more likely than 35%+ given the milder setup heading into this latest one.
Finally this gold-stock bull’s prior three corrections were all dragged much lower than they needed to go due to anomalous unrepeatable market events of those times. Nothing similar threatened to extend this current correction. Back in late 2016, it was Trump’s surprise election victory. Stock markets soared on hopes for big tax cuts soon as Republicans fully controlled the government, hammering gold and its miners.
In mid-2018, a crazy-extreme gold-stock forced capitulation snowballed as cascading gold-futures selling sequentially triggered gold-stock stops. That magnitude of self-reinforcing selling is very rare, yet GDX’s total selloff still only extended to 31%. Finally in early 2020, a super-rare stock panic on the first-ever national economic lockdowns to fight an emerging virus sucked in gold and its miners. There’s sure no panic now.
So GDX’s total correction deepening to 25%ish, and forcing GDX back well under its baseline 200dma, seemed sufficient given the circumstances today. Whenever a bull-market sector is pounded back under its 200dma, it is oversold. And falling as low as 0.945x it in late November, the rGDX plunged well into that strong-buy territory. This gold-stock correction might not be over, but the odds sure support it being done.
As always, gold is the key. If its late-November $1775 correction low holds, gold stocks shouldn’t suffer a new one of their own. And with central banks still printing money like there’s no tomorrow, the bullish case for gold is stronger than ever. Last week Bank of America published some fascinating research on this. It found global central banks had monetized $1.3b in assets every hour since March, and cut rates 190 times!
In the US alone, between mid-March to early June the Fed monstrously expanded its balance sheet by $2,857b. It literally skyrocketed 66.3% in just 3.0 months! Other major central banks around the world panicked too, adding the equivalent of trillions more dollars of money. Gold is the ultimate hedge for big monetary inflation, an essential portfolio diversifier that every investor needs to really up their allocations in.
The biggest risk for gold and thus gold stocks remains the oversold US dollar and speculators’ bullish positioning in gold futures. I discussed all this in a mid-October essay. But if big gold investment demand comes back online, that will easily overpower whatever the futures guys do with their comparatively-paltry capital. If gold continues marching higher on balance in a new upleg, the gold stocks will amplify its gains.
So is a new gold-stock upleg really getting underway? It certainly appears so. GDX has been marching higher on balance since late November, with higher lows and highs in the several weeks since forming a nascent uptrend. Before that GDX fell 25% over several months, which should be plenty to rebalance away the greedy sentiment and overbought technicals from early August’s upleg topping. That’s all gone.
And this GDX selloff extended well into oversold territory under this leading gold-stock benchmark’s key 200dma technical baseline. So the evidence in favor of gold stocks’ correction being over and a new upleg underway is certainly growing. Absolute correction bottomings and upleg toppings are never known for sure until well after the fact, only proven by subsequent price action. But this latest bottoming looks promising.
The prudent way to game a probable correction bottoming is to gradually redeploy your capital over time in fundamentally-superior gold stocks. The idea is to add new trades straddling the likely actual absolute low. The earlier ones could grind lower before the next upleg really starts, while the later ones could get added after it is underway. But layering in new trades over time lowers risks and ups odds of catching a bottom.
Buying low and selling high can only be accomplished if there is plenty of uncertainty when those trades are being executed. By the time major correction bottomings or upleg toppings are readily apparent to all well after they’ve passed, the best gains have already been won. So even if gold and its miners’ stocks haven’t fully transitioned into their next bull-market upleg yet, their corrections have accomplished their missions.
At Zeal we walk the contrarian walk, buying low when few others are willing before later selling high when few others can. We overcome popular greed and fear by diligently studying market cycles. We trade on time-tested indicators derived from technical, sentimental, and fundamental research. That’s why all 1178 stock trades recommended in our newsletters since 2001 averaged hefty +24.0% annualized realized gains!
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The bottom line is a new gold-stock upleg sure looks to be underway. The major gold stocks have spent the last several weeks carving a new uptrend, as evident in their leading GDX benchmark. This bullish price action came right after a major gold-stock correction climaxing in a capitulation plunge. That forced GDX back well under its baseline 200-day moving average, hammering the gold stocks to oversold levels.
That naturally crushed sector sentiment, breeding widespread bearishness. All this is a textbook setup for a correction bottoming paving the way for the next bull-market upleg. As always everything hinges on gold, which also corrected right in line with bull precedent in both size and duration. And the bullish case for gold is stronger than ever with global central banks spewing out endless trillions of dollars of new money.
Adam Hamilton, CPA December 18, 2020 Subscribe at www.zealllc.com/subscribe.htm