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One of the Best Trading Setups I've Seen Since 2008

By Matt Badiali, editor, S&A Resource Report
Wednesday, October 29, 2014

Times are tough for junior mining companies...
 
The "Dow Jones Industrials" of junior miners – the S&P/TSX Venture Index – is down around 23% from its August highs.
 
Many junior mining companies are struggling to survive. And there's likely more downside ahead.
 
But the reason why is creating a great opportunity for speculative traders to make a lot of money...
 
As regular Growth Stock Wire readers know, the natural resource sector has been in "bust" mode – partly thanks to the recent strength of the U.S. dollar – for the past few months.
 
Precious metals, oil, and many agricultural commodities are all down double digits. Mining companies – especially junior miners – are also down.
 
Take a look at the below chart of the S&P/TSX Venture Index...
 
 
The Venture Index is down around 23% since the end of August. And it just hit 780 – its lowest value since it bottomed below 700 in 2008.
 
Now, many junior miners are struggling to survive. They're changing focus from exploration to self-preservation.
 
So they're reducing costs. For example, Hunter Dickinson, which holds several junior mining companies, laid off 40% of its employees last week.
 
They're also hoarding cash. Last week, I attended the New Orleans Investment Conference. It's a "must attend" event for junior miners. This year, several junior mining companies I know of opted not to attend to save cash.
 
But there's likely more pain ahead for junior miners.
 
Nearly all the experts I talked with at the conference think tax-loss selling will be heavy this year. That means many investors will soon be selling their underwater junior mining stocks – which will push the sector down further.
 
You see, U.S. and Canadian investors can sell underwater stocks at a loss to offset their total capital gains tax liabilities each year (this is called tax-loss selling). This reduces their overall tax bills. (Canadian investors can apply losses retroactively back a few years.) So there's an incentive for investors to sell stocks they've taken losses on at the end of the year – for whatever price they can get in the market. After all, they can always buy the stocks back.
 
Each year, many resource investors use tax-loss selling as a reason to dump any underwater junior miners.
 
With junior miners down so much this year, more investors than usual will likely dump them to lower their tax burdens.
 
But this creates an opportunity for contrarian investors to buy junior miners for extremely low prices.
 
And after a big tax-loss selloff, junior miners typically rally the following months.
 
That's exactly what we saw in 2008. Junior miners plunged in 2008 during the global financial crisis as worried investors sold riskier stocks. The sector bottomed in December after investors sold shares of their underwater junior miners – for extremely low prices – to minimize their tax exposure.
 
Then, things got better. Many investors who sold in November and December got back into the sector. The Venture Index rose from 680 in December to 900 in March 2009. That's a 32% increase. Investors who bought shares of junior miners in November and December made big gains.
 
We could see something similar this time around.
 
Investors will use November and December to dump their junior mining stocks – creating great bargains. One expert I spoke with in New Orleans said the period from November 25 to December 25 will be the best time to capitalize on tax-loss selling.
 
After the sector bottoms, junior mining companies will recover. Many investors who sell will get back in between December and March (March is typically the peak of the tax-loss-selling rally).
 
As my colleague Jeff Clark recently showed you, the U.S. dollar falling will also help resource stocks rally in the months ahead.
 
I'm not convinced there's a long-term bull market in store for junior miners yet. But we should see a short-term rally between November and March.
 
If you're looking to profit from junior miners, I recommend buying in November and selling in March. This setup is one of the best we've seen since 2008.
 
Good investing,
 
Matt Badiali




Further Reading:

If you plan to invest one dime in natural resources, this classic interview with master resource investor Rick Rule is a must-read. In it, he reveals everything you need to know to master the resource market's cyclicality. If you catch one of these big cycles at the wrong time, you can lose a fortune. But if you catch one early, you may never have to work again...
 
"Finding assets that have been hammered for some reason... be it a natural disaster, a broad market selloff, or a long industry downturn... buying them after the market has bottomed, and making tremendous returns when a bit of normalcy returns to the market... is the single greatest trading strategy on the planet," Editor in Chief Brian Hunt writes. Learn how you can spot these setups – and make massive returns – here.

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Market Watch
Symbol Price
Change
52-Wk
S&P 500 1975.24 +0.7% +12.1%
Oil (USO) 30.75 +0.4% -13.5%
Gold (GLD) 118.16 +0.1% -9.5%
Silver (SLV) 16.54 +0.7% -23.7%
U.S. Dollar 85.34 -0.3% +7.6%
Euro 1.27 +0.0% -7.9%
Volatility (^VIX) 15.32 -4.5% +15.1%
Gold Stocks (^HUI) 183.55 +0.8% -26.4%
10-Year Yield 2.28 +0.9% -9.2%

From The Crux
World ETFs
Symbol Price
Change
52-Wk
India (IFN) 26.85 +1.3% +37.2%
USA (SPY) 197.37 +0.6% +14.2%
Taiwan (EWT) 15.54 +2.0% +9.1%
China (FXI) 39.28 +3.1% +9.5%
Israel (ISL) 16.90 -1.5% +6.6%
Canada (EWC) 29.96 +1.1% +4.4%
S. Africa (EZA) 67.65 +2.1% +2.2%
Singapore (EWS) 13.15 +0.5% -1.7%
Japan (EWJ) 11.31 +0.3% -3.4%
S. Korea (EWY) 58.37 +0.8% -8.8%
Lat.America (ILF) 35.37 +2.9% -10.2%
Russia (TRF) 11.97 +2.1% -20.9%

Sector ETFs
Symbol Price
Change
52-Wk
Biotech (PBE) 49.40 +0.5% +37.9%
Semis (PSI) 22.19 +1.7% +29.0%
Health Care (IYH) 138.00 +0.3% +25.4%
Transportation (IYT) 156.20 +1.1% +25.2%
Big Tech (QQQ) 99.70 +1.0% +22.0%
Utilities (XLU) 44.28 -0.3% +17.4%
Defense (PPA) 32.88 +1.3% +15.4%
Real Estate (IYR) 74.05 -0.1% +13.6%
Financials (IYF) 84.71 +0.6% +11.7%
Consumer Svcs (IYC) 125.53 +0.5% +9.9%
Industrials (IYJ) 102.77 +1.3% +9.9%
Insurance (IAK) 47.69 +0.8% +7.8%
Basic Mat (IYM) 82.43 +0.8% +8.0%
Software (PSJ) 36.11 +1.4% +6.5%
Telecom (IYZ) 29.78 +1.1% +4.2%
Water (PHO) 25.40 +2.0% +3.8%
Media (PBS) 24.62 +0.7% +2.4%
Construction (PKB) 21.23 +0.8% +0.4%
Retail (PMR) 34.09 +1.3% -0.7%
Alt. Energy (PBW) 5.86 +3.4% -7.1%