In June we saw the price of gold smash through $1350 and go over $1400. Some doubted the rally and those doubters proved to be wrong. Those that shorted got crushed.
And then this month gold hit $1550 and pulled below $1500. Many smart traders and gold bugs pointed out that the pace of the gold gains seemed to be unsustainable and therefore a pullback would happen.
Some of these people predicted a big drop for the rest of the year much like was seen in the fourth quarter of 2016.
It didn’t happen. Gold did pause, but the mining stocks barely dropped at all. On Friday many of them simply went to new highs for the year to defy those actually wanting a pullback so they could buy and now forcing those that sold in expectation of a pullback to buy back at higher prices.
Gold and mining stocks are now acting differently than they have for years and that’s why so many people are getting confused by the action. But this type of action has been seen before in the US stock market.
And what I’m talking about is action in which a market just goes up and up and when it gets overbought instead of dropping hard it simply pauses to consolidate and goes up again. Stocks like NVDA used to do this, but the S&P 500 itself did this in 2013, 2014, and 2017.
Back in 2013 and 2014 I jokingly wrote that stock market bulls were in a “stairway to heaven” rally, because the market was just floating up without ever seeming to have any significant pullback at all. It just would go up and up. On the chart above I have circled two time periods in which this happened.
On the bottom of the chart I have the 20-day rate of change indicator, showing how much the market moved on a percentage basis over 20 days. You can see that this indicator stayed very low in 2017, which was a year in which the DOW only went up and down more than a percent in a given day twice all year.
Now I have put a square on this indicator during a time in which this indicator spiked up and down. It is doing it this year as daily volatility in the US stock market is increasing. This last happened in 2011 and before that in 2009.
Historically times of high volatility in the stock market typify stage three topping markets and stage four bear markets.
Time of low volatility have marked big rallies in the US stock market and elsewhere since 2000. The US stock market acted this way in 2004 and 2006 too.
It seems to be the rise of trading robots and stock market buybacks that cause this.
If you look at the GDX ETF now what is fascinating is that it has experienced huge volume since June on a daily basis and yet individual investors and small traders have not been playing it. This would suggest that a lot of the GDX action is being driven by hedge funds with computer robots.
The GDX and big cap gold stocks are now trading the way NVDA and the SPX did back in 2016. They do indeed seem to be entering a “stairway to heaven” rally, but in this case the masses are ignoring it.
In such a move technical indicators such as the 50-day and 150-day moving averages become great buy points as they tend to act as support. But gold small cap junior and exploration stocks do not do enough volume to bring in the robot programs. This creates a space in which the individual investor does not have to compete with them to win.
And now many of these stocks such as Aftermath Silver are positioning to follow the action in the big cap mining stocks. That stock broke out in July and is now consolidating again. I own GDX, but there is more upside potential in individual stocks.
Right now there is no other sector as promising as the mining stocks to make money in as they are performing better than the stock market averages and even popular stocks such as NVDA, AAPL, and ACB. If you want get be a part of this trend I believe the best thing you can do is join my private Power Investor trading group. To do that go here:
http://wallstreetwindow.com/join-power-investor/
Now today at noon I am going to run a live discussion on my website. Just go to the homepage for WallStreetWindow.com at 12:00 PM EST and you will see a post titled High Noon Stock Market Live Discussion at the top of the page and join in.
-Mike
