Wednesday, April 25, 2012
The rout in junior resource stocks continues...
The Toronto's Venture Exchange is home to over 1,700 small resource companies. These stocks are capable of incredible, hundreds-of-percent booms... and brutal, 75%-plus busts.
I spend hours each week poring over information on junior stocks, trying to sleuth out the best... And I've learned one critical fact over the years: When the overall trend is bearish, it doesn't matter how good the company is or how great the deposit. In the end, they all bust.
And right now, the overall trend is bearish...
From 2009 to 2011, the Venture Exchange Index boomed, rising more than 250%. After its 2011 peak, it busted back down 45%. It hit bottom in October... and looked like it was reversing course...
By this past January, the Venture had climbed back over its 120-day moving average (DMA). By plotting this indicator, we filter out market volatility so we can gauge the general trend. When the market is trading above its 120-DMA, we consider it to be in a bull trend. When it trades below its 120-DMA, we consider it to be in a bear trend.
And by late last month, we were back into "bear trend" territory. Now, the Venture is stretching toward its October low, another major bearish milestone. Take a look...
Keep in mind: there's nothing "magic" about the 120-DMA indicator... or the October low. They simply give us a rough idea of which way the "trend wind" is blowing. And right now, junior resource investors are facing a major headwind.
While I'm a long-term bull on commodities and commodity stocks, I also never want to fight against a huge downtrend in any market. When a big trend heads lower, no stock – no matter how good its assets or management are – will do well.
That's why it's best to stay extremely conservative toward speculative resource stocks right now. The trend could turn higher in a week or two. It could turn higher in six months. We can't know for sure. By waiting for a bit of price strength here before buying, we'll avoid big losses if the downtrend continues.
Earlier this week, Matt warned commodity investors away from a dangerous "income trap" in the market. "I still believe in the safety of trading resources at rock-bottom prices," he said. "But I don't believe the worst case is priced in to these stocks yet... And they carry too much risk." Be sure to read this can't-miss essay here.
DailyWealth's Brett Eversole agrees resources will bounce back up in the long term. "Stop worrying about gold," he says. "Based on history, we can expect to see a new high in gold prices in 12 months or less."
"Inflation hedge" chocolate-maker Hershey breaks out to a fresh all-time high.
Utilities are still in a slow and steady uptrend... fresh 52-week highs for NextEra Energy, Calpine, and Wisconsin Energy.
For-profit education stocks continue downtrend... Apollo Group and DeVry sink to fresh 52-week lows.