CDNX and Gold
The CDNX enjoyed a strong week as it gained 50 points or 3.4% to climb back over 1500 with a Friday close of 1503. What’s particularly interesting and significant is that the CDNX has outperformed all markets over the past five trading days since hitting a yearly low of 1393 May 21. The powerful intra-day reversal May 21 signaled, in our view, the end of a vicious 15 session correction that wiped 295 points or 17.5 off the value of the Venture. In historical terms, this was a fairly typical “major” correction within a CDNX bull market and almost identical in both magnitude and duration to the pullback in early January, 2008. Following that correction the CDNX jumped 20% within six weeks and we wouldn’t be surprised to see history repeat itself yet again – June could turn out to be a spectacular month for the CDNX. BMR’s technical analyst surprised a few investors the other day with his call for a new high on the Venture this summer of 1770 and we believe he’ll be proven correct (see John’s full chart analysis posted Friday, May 28).
Some will argue that what we’re witnessing now is simply a rally that doesn’t have much further to go and should be sold into before the markets totally collapse. We couldn’t disagree more and for the following reasons:
1. The nature of the May 21 reversal mirrored the reversals we’ve seen at the bottom of other major CDNX corrections over the past decade;
2. The CDNX reversed ahead of the major markets and is up 7.9% since May 21 vs. just 2% for the Dow, 4% for the Nasdaq, 4.4% for the TSX, and 6% for the TSX Gold Index. When you see the world’s most speculative junior resource market perform like that, the major markets aren’t about to collapse – in fact, just the opposite. The Venture is an extremely reliable leading indicator. It’s the first market to head south when danger is on the horizon and it moves just as quickly in the other direction when the outlook for the overall markets is positive;
3. Market sentiment, as guaged by the CBOE put/call ratio, reached extremely bearish readings a week ago, typical of a market bottom.
Gold continues to look strong. Its drop to $1,170 recently merely took it down to its rising 30-day moving average and it quickly recovered to get back over $1,200. Gold remains in a powerful uptrend channel as does the TSX Gold Index. In addition, the CDNX is telling us the outlook for Gold is positive.
