Bullish Action in Junior Miners Augurs Well for Broader Markets

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 |  Includes: CLF, GDXJ, GGB, MT, MTL, PKX, RIO, SID, SLX, TX, VALE, X
by: Goombarh

Most pundits are calling for a pullback and regrouping, saying markets have moved too far, too fast. They are saying this both for the precious metals bull markets as well as for the general markets in particular. Witness these titles “Silver looks vulnerable to a short term price fall” and “The Calm before the Stock Market Storm”. Here is an excerpt from the second article:

The technical story is further confirmed by seasonality which points to October as the month most susceptible to steep declines and crashes while the fundamental picture is murkier.

The author posits that these are just indications of the market climbing the “Wall of Worry”; in other words, the markets are shrugging aside these uncertainties and is just chugging ahead, led by the demands for industrial commodities.

“Superman Steel” Stocks Showing Strength

Speaking of industrials, the leader of the pack are the Steel Stocks. The author uses the SLX ETF as a proxy for the steel sector. This ETF is a dog’s breakfast of large iron ore miners and diversified miners mixed with steel producers as listed below:


Following is a chart of the last eight months of the Steel ETF SLX: (Click to enlarge)

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Figure 1: Superman Steel - SLX Steels ETF

Note the push through resistance and the breakout happening.

Have we just witnessed SLX pushing through resistance and showing the beginnings of a break out? Do we know what we have just seen? This sure looks like a good beginning. Rather than talk, the “Superman Steel” stocks have just led with action and have breached the resistance “Wall of Worry”. With heavy industry leading the way, this bodes well for the overall general markets.

Canadian Venture Exchange Jumps at Month Start

An indication that the author looks for in determining the health of the precious metals bull is the appetite for risk as displayed by the Canadian Venture Exchange’s index. This index is a broad selection of 400 + companies of the 2300+ junior resources and technology companies that trade on this exchange. The key word here is junior, as most of these companies are small cap and do not meet the requirements for listing on a senior exchange. The chart of the TSX Venture index for the past 3 months is as follows:

Click to enlarge:

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Figure 2: TSX Venture Index

Note the increasing volumes and the long white candles.

The author penned an earlier article about cyclic price patterns observed in mining stocks during the fall of 2009. Essentially, in the fall of 2009, stocks were dipping near each month’s end and rising to peaks during the middle of the month. This does not appear to be happening in 2010.

What does appear to be happening is gradually increasing volume that seems to continue. Also another curious indicator is the rush for shares at the beginning of each month, pushing the index up in long white candles that are circled in the above chart.

Upon reflection, the author suspects this may be indicative of a bull market. In a bull market, demand keeps on increasing as displayed in the increasing volumes. Also in a bull market, as each month passes new participants rush in, creating long white candles. A bull market here for the juniors is indicating support for the precious metals bull and possibly good times for the overall markets ahead.

What is Doctor Copper Saying?

Copper, like steel, is a leading indicator of industrial activity. The price of copper usually leads the market in anticipation of the economic activities forthcoming. Following is the copper price chart for the previous eight months.

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Figure 3: Doctor Copper

Note the breaking through April highs that is presently occurring.

Unsurprisingly, even though the markets were generally red on Monday October 4th, 2010, copper was green, showing a 1% gain. From the chart above, it appears Copper is making a push through the April highs of this year. As related previously, the copper markets next year are forecasted to have a shortage, with mines unable to keep up with demand from Asia. This is mainly due to the Chinese not having sufficient copper production and having to buy from world markets.

Doctor Copper’s Conjecture

So both Superman Steel and Doctor Copper are in agreement: The markets are due for an economic upswing forthcoming. The TSX Venture exchange is showing a bull market is on for the junior cap companies. In a full bull market, there are scarcely any pullbacks; the markets just rise and keep on rising as more participants rush in. This is a good support for the Gold and Silver precious metals. Also, the bull market for junior small caps is an early indicator and may spread to the overall markets soon.

Disclosure: The author is long junior mining equities.

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