Precious Metals moved higher this week, so we believe you might be wondering whether or not the bottom has been put, and if you should get back in with your speculative (as you may recall, we already suggested getting back on the long side of the market with your long-term holdings) capital.
Generally, there are several reasons to believe that the bottom MIGHT be in:
- Metals moved higher in the last few days,
- USD Index is at the moment very important short-term driver of PM prices and the cyclical tendencies suggest that we are very close to the next turning point.
- Mining stocks (GDX ETF) have been up on a relatively strong volume.
Yet, we do not consider this situation to be a no-brainer as far as going long is concerned. Here's why:
- The cyclical tendencies (here: USD Index) are more likely to work on a "near/close" basis than "exactly now"
- These were literally the first sessions of the year, which means that all the orders that were placed during the very long weekend were executed on Jan 1st. Additionally, many investors, who sold their assets earlier due to tax savings, have now bought back their favorite stocks. All of this caused the volume to be higher than one would expect it to be if that was not the beginning of the new year. Consequently, high volume in PM stocks right now does not need to be a proof that this (up) is the true direction in which these companies will go in the short-term.
- Finally, we've checked precious metals stocks' (HUI Index) performance at the beginning of each year since the beginning of this bull market in 2000 (as you may know we usually use data that goes back to 2002 when we're referring to the beginning of the bull market, but this time we decided to make an exception), and here's what we found:
2000 - HUI declined after declining and correcting
2001 - HUI rose after an upswing
2002 - HUI rose after an upswing
2003 - HUI declined after INITIAL small upswing
2004 - HUI declined after INITIAL small upswing
2005 - HUI declined after declining and correcting
2006 - HUI rose after an upswing
2007 - HUI declined after declining and correcting
2008 - HUI rose after an upswing followed by a sharp correction
2009 - HUI declined after an upswing
Therefore, in the early part of January HUI declined 6 out of 10 times, which is not very informative, because it's too close to the 50/50 odds.
However, if the HUI Index declined previously / there was just a small initial upswing in the first days of the year, like it's been the case recently - in 2000, 2003, 2004, 2005, 2007 - it declined 5 out of 5 times.
In statistical terms we would need to have more data to say (over 30 years in this case or so) with a considerable certainty that this is a strong rule that PM stocks decline in early January if they declined previously and rose only temporarily. However, we don't need to construct a PhD thesis to trade markets, and 5 out of 5 efficiency certainly provides us with additional insight, especially that it is just one of the factors suggesting that this may not a good time to go long with ones speculative capital. By the way, if we had 30 years of data and it would in fact turn out that this is a very strong near-certain rule, it would become widely known and it would soon stop working. Since everyone would know about this phenomenon, it would cease to be valuable, because it would be discounted in the price.
Summing up, it MAY be the case that the bottom is behind us and the risk being left behind is too big for one's long-term holdings - at least in our view. However, there are still several points that make us wait for better opportunities to initiate a speculative position, or to say that it is unprofitable to wait with ones speculative capital on the sidelines. This situation creates an opportunity to rebalance your portfolio, as it lets you check your own risk/volatility preferences. In other words - if you feel very bad about not having bought several days earlier, and you have a very hard time "letting go" of this particular trade ("I can't be left behind, I have to get back in with all my money now!"), this is an indication that the "speculative" part of your portfolio is simply too big. In this case, it would be better to use less money for speculation and move some of the "currently speculative" capital into "long-term holdings" category. For instance, if you trade with 50% of your portfolio and you notice that you feel very uncomfortable (which is not profitable/safe, because emotionality on the market causes losses in the long run) with your position, it means that perhaps you should trade using not more than 10-30% of your capital.
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