Why Was GDXJ So Much Stronger Than GDX Today, 1/13/14?

Jan. 13, 2014 10:21 PM ETGDX, GDXJ, NUGT, JNUG, DUST, JDST4 Comments

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With gold marginally up today, 1/13/14, the gold mining ETF (GDX) was quite strong. Barrons attributed the strength in miners Monday, to merger and acquisition prospects (M&A) after Goldcorp (GG) snapped up Osisko Mining Corp. For the Barrons article, click here. At noontime the large mining GDX was up 1.2% when the Junior Mining ETF (GDXJ) was up 4.8%. With 90 minutes left of trading today, the three largest mining stocks that make up the GDX, were all down: ABX, NEM & GG.

I was watching these three big players today, and remained cautious as a result. What I was missing was the fact that the Goldcorp acquisition was sparking hope that other Junior miners could be purchased, and it was lifting all the miners, as a result. If the strength is in the small miners then that is the sector one wants to concentrate on, for the time being. In the aftermarket I bought GDXJ, and will concentrate my efforts there for the remainder of the week, at least.

Just posted is an excellent audio from Bloomberg News, featuring Eric Balchunas, click here. (You have to click on the microphone under the word Related). Balchunas points out that the GDX has 3 times the volatility of the S&P while the GDXJ has 5 times the volatility of the S&P. That means that the triple leveraged ETF (NUGT) has 9 times the volatility of the S&P while the tripled leveraged small miner ETF (JNUG) has 15 times the volatility of the S&P. GDXJ has a lot of volatility without being leveraged, so one does not have to worry about slippage like one has to worry when trading NUGT or JNUG. The small miners also have a short ETF (JDST) to correspond to the big miner short ETF (DUST). I favor GDXJ because you don't have to worry about leverage and there are weekly options to play on this very active derivative trading vehicle.

From the above chart you can see how on rallies, GDXJ would outperform GDX. Recently, GDXJ has underperformed, as the small miners fell much harder than the large miners in 2013. Now that strength is returning to the mining sector, the small miners should again overtake the large miners and be the out-performers. The move by Goldcorp (GG) today could spark rumors of other Junior miners being acquired, and help GDXJ move up more strongly than GDX, in the near-term.

Disclosure: I am long GDXJ.

Additional disclosure: I am also in and out of GDX, NUGT & DUST.

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