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Where We Are in the Huge Junior Resource Trend

By Matt Badiali, editor, S&A Junior Resource Trader
Wednesday, May 11, 2011

After seven months of relentless price increases, the small-cap resource space is finally cooling down...
 
Back in February 2009, March 2009, and again in October 2010, I highlighted how owning small companies included in the Toronto Stock Exchange's Venture Index is an incredible way to increase your trading account. After all, these are the companies that can soar thousand of percent after finding a big deposit.
 
We think of the Venture Index as the "Dow Industrials of small resource companies." It's the most widely followed gauge of small companies that explore for commodities, like gold, silver, copper, oil, diamonds, etc. It's also one of the biggest boom and bust sectors in the market.
 
As I expected, the Venture "boomed" off its 2008 credit crisis bottom. It more than doubled from late 2008 to early 2010 (the elite companies I highlighted here have returned an AVERAGE of 124%). After taking a break in mid-2010, the Venture surged another 60% to its recent high.
 
But as you can see from the chart below, the Venture has turned lower...
 
 
The blue line on the chart is the Venture's 120-day moving average. I use this moving average to "gauge" the general trend of the Venture. If the index is above the line, the trend is considered bullish. If the index is below the line, the trend is considered either sideways or bearish.
 
After staying above this moving average since September, the Venture has sunk below it... which is a sign the uptrend in small resource stocks has stalled... and you should be cautious now.
 
I'm bullish on commodities over the long term. The falling U.S. dollar makes the nominal price of commodities rise... and increasing demand from emerging markets like China and India will provide a huge tailwind for raw materials.
 
I think the downturn will be temporary. But when it comes to trading these super-volatile stocks, you can't know the future. You can only stay aware of the risks, ride the up moves, be wary of the down moves, and protect your gains with trailing stops.
 
We're in one such "be wary" environment right now.
 
Good investing,
 
Matt Badiali




Further Reading:

Canadian stocks aren't the only ones facing a downturn. Yesterday, Jeff told us the S&P 500 could soon correct lower, too...
 
"...Last week's selloff in stocks isn't just a one- or two-day affair," he said. "It's probably the start of a several-week correction that should push the S&P 500 below its March low."
 
See how you can use this downturn to your advantage here: Copper's Price Action Is a Bad Sign for Stocks.

In The Daily Crux
Market Notes
Silver rallies more than 13% from last Friday's lows.
 
U.S. stocks on top so far in 2011... S&P 500 up almost 8% while major foreign indexes are up less than 3%.
 
The semiconductor uptrend holds steady... sitting less than 2% off its 52-week high.
 
Natural gas engine-maker Westport soars 62% in three months.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1335.10 -0.9% +14.5%
Oil (USO) 41.08 +0.5% +10.3%
Gold (GLD) 147.90 +0.4% +25.8%
Silver (SLV) 37.52 +1.5% +107.2%
U.S. Dollar 73.12 +0.0% -13.2%
Euro 1.45 -2.0% +13.5%
Volatility (^VIX) 15.91 -7.3% -44.8%
Gold Stocks (^HUI) 540.84 -0.7% +17.4%
10-Year Yield 3.19 +1.6% -9.9%

World ETFs
Symbol Price
Change
52-Wk
S. Korea (EWY) 66.80 +0.9% +34.3%
Taiwan (EWT) 16.02 +0.8% +32.2%
S. Africa (EZA) 72.41 +0.9% +29.0%
Singapore (EWS) 14.26 +1.3% +24.2%
Canada (EWC) 32.79 +0.4% +20.5%
Russia (TRF) 21.99 -0.1% +19.4%
USA (SPY) 135.87 +0.9% +19.3%
Israel (ISL) 17.43 +0.6% +18.9%
Lat.America (ILF) 52.39 +0.9% +16.1%
China (FXI) 44.29 +1.0% +11.5%
India (IFN) 30.23 +0.4% +7.7%
Japan (EWJ) 10.61 +0.5% +4.5%

Sector ETFs
Symbol Price
Change
52-Wk
Internet (HHH) 79.79 +1.2% +39.3%
Basic Mat (IYM) 82.06 +0.6% +35.5%
Oil Service (OIH) 152.11 +0.8% +35.1%
Semis (PSI) 18.41 +1.1% +34.8%
Telecom (IYZ) 25.20 +1.7% +33.2%
Biotech (PBE) 23.50 +0.5% +25.7%
Industrials (IYJ) 72.64 +0.9% +25.0%
Big Tech (QQQQ) 59.19 +0.9% +24.9%
Software (PSJ) 27.29 +1.3% +24.4%
Transportation (IYT) 100.35 +1.2% +24.1%
Consumer Svcs (IYC) 74.43 +1.3% +22.1%
Retail (PMR) 22.20 +1.9% +22.0%
Real Estate (IYR) 62.07 +1.4% +21.8%
Health Care (IYH) 74.88 +0.6% +20.8%
Media (PBS) 15.62 +1.2% +20.4%
Big Pharma (PPH) 71.86 +0.8% +18.0%
Utilities (XLU) 33.84 +1.4% +17.7%
Water (PHO) 20.15 +1.7% +16.4%
Insurance (PIC) 17.02 +0.8% +16.2%
Defense (PPA) 20.65 +0.9% +12.7%
Construction (PKB) 14.14 +1.7% +12.0%
Alt. Energy (PBW) 9.96 +0.3% +5.2%
Financials (IYF) 59.09 +1.0% +4.4%
Nanotech (PXN) 9.46 -0.1% -4.0%

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