Wow! I certainly hope you were watching the markets this week. My forecasts came to fruition in spades.
In fact, just last week I showed you this powerful chart of the mining sector, via the Market Vectors Gold Miners ETF (GDX).
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Here is the same chart again, but with this week’s trading action included. Look at the huge breakout in mining shares.
Your typical mining share is now up 27.1 percent since the August 7 cycle low.
The more leveraged junior miners — as measured by the Market Vectors Junior Gold Miners ETF (GDXJ) — are up even more: An astounding 32.9 percent, in just six trading days.
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At the same time, gold and silver have staged rallies too. Not nearly as strong as the mining shares, but that is to be expected.
Based on previous work I showed you, it appeared that mining shares would bottom in August, while gold and silver could pop higher in the short-term, but within the confines of a downtrend that has not yet ended.
So where do mining shares stand now? Where do gold and silver stand? What action should you take?
First, all of my indicators and models suggest that the two-year crash in mining shares is over.
My recommendation: Consider buying the Market Vectors Gold Miners ETF (GDX) and the Market Vectors Junior Gold Miners ETF (GDXJ) — but on pullbacks. Place a protective sell stop, good-till-cancelled, under the August 7 low for each, which are $23.89 for GDX and $35.56 for GDXJ.
Second, although gold and silver have indeed rallied, importantly, neither one has given a major buy signal — and both metals remain vulnerable to sliding back down heading into September. New lows in both gold and silver — below $1,178 in gold and $18.15 in silver — remain quite possible.
I know, you think I’m crazy. How could gold and silver fall to new lows and mining shares hold up?
But precisely as I have been warning you, mining shares and the underlying metals can and often do bottom at different times and in different ways.
With the stock market falling hard last week — and mining shares soaring in the face of it — that bolsters my view: It appears that savvy investors are now opting for mining shares over gold and silver, which is to be expected, given mining shares have been beaten up so badly over the last two years.
|The two-year crash in mining shares is over.|
In other words, to many big investors, mining shares represent better value than the metals right now, and offer greater upside potential. I agree.
So what to do then in gold and silver bullion? Wait for my signals. The coast is not clear yet in the metals, but will become very clear as we head into September.
Now, let’s take a look at another major sector I’ve been watching and warning you about: The U.S. sovereign bond market and interest rates. Bonds are plunging anew.
As a result, the yield on the 30-year bond surged from a low of 3.601 percent on August 12 to as high as 3.838 percent on August 15. That’s a surge of 237 basis points, in just three days. Bond prices, which move inversely to yield, are plunging.
My recommendation: Stay out of U.S bond markets. Period. The only U.S. bond investments you should own are AAA corporates. That’s it. No U.S. Treasuries and no municipals.
Now let’s take a look at the stock market. I have been warning of a pullback for some time. A pullback that would test longer-term support and set up the Dow for a slingshot move to 21,000+ in the years ahead.
As to the pullback, the timing has been difficult, and not as accurate as I would like. Nevertheless, I now have all the evidence I need to confidently say that it is finally here.
Last week’s downside action in the Dow Industrials, on increasing volume and with exceptionally weak breadth — with more than 10 stocks declining for every one ticking higher — confirms it.
Based on my models, we should see the Dow fall to the first major support level which spans from 14,373.32 to 14,520.86.
If 14,373 gives way, then expect the Dow to fall all the way back to 13,100 to 13,500 before bottoming.
For the S&P 500, we should see it slide to the 1,608 level. If that gives way, I expect to see the S&P 500 slide even lower, to major support at the 1,444 to 1464.25 range.
My recommendation: Consider buying shares in an inverse index ETF. My suggestions are ProShares Short Dow30 (DOG) and ProShares Short S&P500 (SH).
These are not leveraged ETFs, but they give you nice upside exposure to the downside now present in the stock market. Manage your risk on both by placing protective sell stops, good-till-cancelled, beneath the August 2 low for DOG ($28.12) and the August 5 low for SH ($27.72).
Now, bear in mind, this column is not a trading service. So I cannot update you between my weekly Monday columns. Manage your risk appropriately, using my suggested stops and do not overtrade.
Lastly, my models have several turning points coming up in late August, and in early and late September. That means we should expect to see some very wild action and big moves in virtually all markets.
We also have the budget battles in Washington hitting full tilt soon, and German elections coming September 22, an important inflexion point for the euro area.
So get ready for some wild market action, and a lot of profit potential.