TSX Venture Exchange and Gold
There’s no way to “sugar coat” this – it was an ugly week in the markets and the Venture Exchange got whacked hard as the Dow suffered its worst week since March, 2009, on global economic growth concerns and U.S. and euro zone debt problems. We simply didn’t see this coming as the CDNX fell through important technical support and closed the week down 8.5% at 1,811. The Index dropped as low as 1,778 Friday before rebounding marginally near the end of the session.
The Dow declined 5.8% for the week, the Nasdaq fell 7%, the S&P 500 was off 7.2% while the TSX tanked 8.9%.
Depending on who you listen to, the U.S. is headed for either something worse than the Great Depression or will manage to maneuver through the troubled waters of a jobs and growth deficit as well as an enormous fiscal debt that has been allowed to pile up and get worse in recent years, forcing Standard & Poor’s to downgrade U.S. debt for the first time ever Friday after the markets closed. Canada had that happen in 1992 and it was actually a blessing – the country proceeded to get its fiscal house in order and a decade later regained its “AAA” status. And if you recall, 1992 was a great time to invest in Canadian stocks.
Last week’s market turmoil was not comfortable for anyone unless you were positioned in a bear ETF. The market clearly expressed concerns about the health of the global economy and the debt problems plaguing the United States, Italy, Spain, Greece and other countries. Those concerns cannot be easily dismissed and while the emerging market growth story continues, which is positive, how economic and political events unfold in the U.S. and the euro zone over the coming days, weeks and months will really be under investors’ microscopes.
The herd moved aggressively in one direction last week but following the herd is not usually a wise strategy. The best way to make money in the markets, of course, is to sell when the herd is buying and to buy when the herd is selling. So dumping stocks into this market right now out of fear is, in our view, a foolish move. Technicals show the CDNX, for example, is in heavily oversold territory though a final “capitulation” could still be in the cards. One has to brace for that possibility as John’s chart shows:
Overall, there are still strong arguments to be bullish regarding the CDNX and even the overall markets:
- The 28% drop in the CDNX this year (from an early March high of 2465 to Friday’s low of 1778) is still within the “normal” range for CDNX corrections. What is somewhat unusual is the duration (five months) of this correction, though one could argue we’ve witnessed two separate pullbacks – the initial 17% drop over just 7 trading sessions in March, and then a 26% correction from early April to early August;
- The CDNX 300 and 500-day moving averages are still rising and are in no danger of reversing anytime soon. What this confirms in our view is an ongoing bull market;
- The steep plunge last week is typically the sort of trading action that does occur at the end of a major CDNX correction – there are many examples going back over the last decade;
- Since the end of June, the CDNX has actually out-performed both the Dow and the TSX – the reverse of what occurred at the beginning of the ’08 Market Crash. The CDNX is an extremely reliable leading indicator. Its plunge in March – its severe under-performance vs. the broader markets – was a warning sign of trouble ahead which we stated at the time. The fact the CDNX is not leading other markets down at the moment is encouraging.
Other important points to keep in mind:
DO NOT FIGHT the Fed. Investors should have learned that by now. We do expect action from the Fed this coming week.
According to Stock Trader’s Almanac, August has been the second worst month of the year for the Dow Jones and the S&P 500 since the ’87 Crash. The 7.2% decline for the S&P was the worst week ever recorded during the month of August, beating out 1974.
Earnings do matter. Second quarter earnings for S&P 500 companies are up over 17% on a year-over-year basis. Many North American companies are sitting on a lot of cash and earnings growth has been impressive.
There are 7 billion people fueling the global economy. American media have a narrow focus and tend to forget that.
The United States, while it may be handicapped at the moment with one of its worst Presidents in history, is a resilient, entrepreneurial nation with a capacity for accomplishing great things and recovering from economic, social and political difficulties.
Gold
Gold was volatile last week, surging to a new all-time high of just over $1,680 an ounce before closing Friday at $1,664 for an increase of $37 for the week.
Gold hit and slightly surpassed John’s summer (June, July, August) target of $1,675 last week, so the possibility of a corrective pullback is significant. However, potential Fed intervention (“QE3”) could have very bullish implications for Gold, so even though the yellow metal has reached the top end of its trading channel (as John’s chart from Wednesday illustrates) and is technically overbought, it could still break out from that channel in the immediate future on new dynamics.
Investors should stay focused on the “big picture” which remains very bullish long-term for Gold. As Frank Holmes so effectively illustrates at www.usfunds.com, Gold is being driven by both the Fear Trade and the Love Trade. The transfer of wealth from west to east, and the accumulation of wealth particularly in China and India, is having a huge impact on Gold. September is also the beginning of the gift-giving season for the yellow metal which drives up demand. It’s really now becoming just a question of when, not if, Gold hits $2,000 an ounce. Ultimately, $3,000 or more is very possible.
The fundamental case for Gold remains incredibly strong – currency instability and an overall lack of confidence in fiat currencies and governments in general, an environment of historically low interest rates and negative real interest rates (inflation is greater than the nominal interest rate even in parts of the world where rates are increasing), massive government debt from the United States to Europe, central bank buying, flat mine supply, physical demand, investment demand, emerging market growth, geopolitical unrest and conflicts, and inflation concerns…the list goes on. It’s hard to imagine Gold not performing well in this environment. The Middle East is being turned on its head and that could ultimately have major positive consequences for Gold.
Silver was down $1.58 or the week, closing at $38.32. Copper got hit hard, dropping 32 cents to $4.13. Crude Oil got slammed, falling $8.82 a barrel to $86.88, while the U.S. Dollar Index gained three-quarters of a point to 74.52.
Hello Jon, you say ” dumping stocks into this market right now out of fear is, in our view, a foolish move”. I understand and partially agree depending on the circumstances. If the correction looks relatively short lived then it may be a mistake to sell. However, if one does not have the cash to average down and stocks drop then surely it is common sense to sell (not necessarily dump, because this is a rational decision)and once things look brighter to buy back at presumably a much lower share price? AGE has previously done okay in corrections this year, sometimes actually gaining but this time it looks like it is heading lower. Perhaps it is an advantage that some of the portfolio holdings are about to release drill results and also that some are not widely held and have a small market cap – the share holders may hold longer than some blue chip stocks? RIC has been volatile in the sell off and for someone wishing to stay in the Venture perhaps a stock to hold as it is a gold producer. I’m not trying to be negative, just cautious and sensible with my investment. I haven’t sold anything yet but I am in the red and need to cut losses which may mean selling or using stop losses. That, I feel, is judicious management and not fear. ETFs would seem, to me, to be the way to go for the foreseeable future.
Comment by Andrew — August 7, 2011 @ 12:24 pm
If we know the stocks are going to slide, we need to dump and buy back… this is the way of having more stocks but keeping the same value. GBB …. I dumped a few times and bought back…. I played this way since it came down at 55 cents to 32 cents…. I like GBB very much but it does not mean that I need to keep a portfolio all the time. I sold this stock 5-6 times and manage to scoop back … my total share value went down by 10% but my share holding with 30% increase…. We all know that GBB is not going to jump now as we may really see some movements by the 4th quarter…. I am holding 50,000 shares are 55 cents level but now I am having 64,000 shares at 39 cents level…. Think about it if I just hold 50,000 shares of GBB without buy/ sell…. now my value will only be $19,500. But now, I have $24,960…. I lost about $3,000 value only comparing to $8,000 if I just sit there and watching… . I do not put all the cash into the market … does not matter it is going up or down…. this is my theory….
Comment by Theodore — August 7, 2011 @ 1:07 pm
Israel was trading today & was off 6% & some were using this as an example of what may come, when the
markets open tonight/tomorrow. Whomever, needs to be reminded that Israel only trades from Sunday to
Thursday & was closed last Friday when all the damage took place. The question now remains, do the
European, Asian & North American markets have all the bad news factored in. It will be interesting to
see what the Asian markets have in store for us later tonight & of course, the U.S. futures, but
whatever, trading can change to the positive before the end of the trading day anyway, so keep the faith.
Now here’s where the gambling part comes in, do we sell, or do we hang in there to play the game, to make
or lose our cash, i am holding til death do i part, move over Kenny Rogers. R !
Comment by bert — August 7, 2011 @ 1:12 pm
Standard & Poor’s have downgraded the U.S. a notch & it it appears the World is ending, but no
one seems willing to argue that Moody’s & Fitch have retained their AAA+ rating for the U.S.
I feel that the biggest problem may be Italy & Spain. Anyway, meetings are ongoing as i type,
so we patiently wait for the outcome. R !
Comment by Bert — August 7, 2011 @ 2:42 pm
News at the touch of your mouse & good news at that
European Central Bank to purchase Italian & Spanish debt.
Geithner to stay on with U.S. treasury
The above bodes well in calming the market.
R !
Comment by Bert — August 7, 2011 @ 3:36 pm
Thanks for the update, Bert – I’ll check it out, it certainly does sound positive. 🙂
Comment by Andrew — August 7, 2011 @ 3:50 pm
US Futures down around 2%. Looks ugly for now…
Comment by Bruce — August 7, 2011 @ 4:04 pm
From Monday’s Irish Times: irishtimes.com/newspaper/world/2011/0808/1224302025925.html
Currently Gold up 2.1%, Silver up 2.8%
S&P500 -1.67%
30 yr Treasury -.98%
Oil -2.5%
Comment by Andrew — August 7, 2011 @ 4:39 pm
Lot of time left but the good news is, the Nikkei is well off it’s low for the evening.
As well, the U.S. futures are off it’s low. No doubt, we will have a knee jerk reaction
as each market’s open, but there’s a good chance we may escape without too much damage. R !
My boss reminded me that he was the Boss. I then asked, who am i then?
YOU ARE NOTHING he replied. I was quick to respond, then you are the boss
of nothing.
Comment by Bert — August 7, 2011 @ 4:50 pm
Bert – keep up the good work.. 🙂 BTW DOW futures down 211 points as of 10 pm or so…. gold up 32 bucks silver up 2… oil recovering.. QE3 in desguise coming.. EU buying debt,.. G7 agreed to calm markets.. what ever it takes..
we should be in good shape…
I remember BMR calling for 1820ish back in March…. ummmmmmmmmm hate it when they are right:)
Comment by Jeremy — August 7, 2011 @ 6:42 pm
Hey Readers,
For what it’s worth, INK Research came out with this on Aug 2
August 02, 2011 – Our sentiment readings remain unchanged this week as Canadian insiders continue to signal that the long-term bull run in commodity-related stocks remains on track. While concerns over global growth may very well limit gains by equity markets in the coming days and possibly weeks, insider buying over the past two months suggests that resource-oriented Canadian stocks should soon rally.
Our INK Indicator peaked at 130% in early July propelled higher by buying in the Energy and Materials sectors. Normally, a peak in insider buying roughly coincides with a bottom in stocks. In late June the S&P/TSX Composite Index briefly dropped to 12,764. The Index came back within 94 points of that level on Friday. If stocks weaken further, a failure of insiders to
resume their bargain hunting would be a warning sign for Canadian equities.
Barring such developments, we will assume that the usual pattern prevails and share prices should start to move higher as we head towards Labour Day. A weak US dollar should help boost the attractiveness of commodity stocks. Short of a potential banking crisis in Europe, there are few fundamental drivers supporting the greenback right now.
In particular, if the US Congress really does cut spending as promised, American growth will suffer in the short-term, lowering the global dollar demand for private-sector investments. Meanwhile, foreigners buying US bonds may require a cheaper dollar to compensate for low interest rates offered on Treasuries. On the other hand, if Washington reneges on its spending cuts, the US dollar could see a flight of confidence.
Generally, trends do not usually last forever, the long term decline of the British Pound being a notable exception. So, eventually fortunes could turn in favour of the greenback. If American politicians eventually chose the right pro-growth and fiscally-responsible domestic policy mix, a positive secular reversal in the US dollar could well take place. Before that happens, we will have to go through a debate this fall on how to find another US$1.5 trillion in savings under the debt ceiling agreement. Once that hurdle is cleared, investors will have to brace for the mother of all ideological battles over the future of the Bush tax cuts which expire in 2013. Given such an uncertain back drop, insiders do not appear to expect a meaningful turnaround in the US dollar any time soon.
Comment by Marc — August 7, 2011 @ 8:05 pm