Monday, July 2, 2012
It's been a three-year round trip for junior resource traders...
Right now, commodities are in full "bust mode." The benchmark CRB index – which tracks oil, corn, gold, nickel, and 15 other commodities – is down 27% from its 2011 peak.
Today, we're looking at how that bust is playing out in the junior resource space... we're looking at the brutal downtrend in the Toronto Venture Exchange Index...
The Venture is the "Dow Jones of junior resources." Juniors are the "bloodhounds" of the resource industry. They scour the world, looking for energy and mineral deposits. It's a "hit or miss" business, which means these stocks can soar 300%, 500%, or even 1,000% in one year... and lose 50% of their value the next.
Well... they just crossed the "lose 50%" mark for the latest bust. As you can see from the chart below, the Venture boomed in late 2010 and early 2011. It ran from 1,400 to 2,400 (a 70% gain) in eight months. But as folks grew wary of riskier assets, they dumped resource shares.
Over the last 18 months, they've dumped enough of them to make a "round trip" run down to the 1,200 level. That's a 50% drop from the peak... and a low the Venture hasn't seen since 2009.
As our colleague Steve Sjuggerud pointed out in May, valuations in the sector now rival the 2008 bust in mining stocks. That was an epic time to buy... The Venture gained nearly 150% in a year. And many individual names returned quadruple digits.
But the latest breakdown in the junior resource sector tells us that despite some outstanding values out there, the sector hasn't reached a firm bottom.
We have no doubt this bust will be followed by another boom. But right now, the "juniors" are still in a downtrend.
Amber Lee Mason and Brian Hunt
Matt Badiali has been keeping close track of the trouble in the Venture. "With prices down so far," he wrote in May, "you might think it's time to bargain shop. But it's likely things will get worse before they get better..." See his chart here.
And earlier this month, he explained why things look so dire: "52% of the Venture needs cash and will have to raise money," he wrote, "If you own stock in one of these companies... you'll be diluted." Read more here: Why Your Favorite Gold Stock Might Fall 50% by September.
Energy stocks are trying to break their downtrend... big energy sector fund XLE surged 6% last week.
Big, dividend-paying drugmakers are in a slow and steady uptrend... fresh highs for Merck, Abbott, Eli Lilly, and Bristol-Myers Squibb.
"Boring" stocks are holding up in a volatile market... Coca-Cola, Verizon, Pepsico, and Colgate-Palmolive hit new 52-week highs.
Nokia and Blackberry maker Research in Motion sink to new multiyear lows.