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Dead Cat Bounce or Sustainable Bottom?

Commentaries & Views

(Kitco News) - “A dead cat bounce is a price pattern used by technical analysts. It is considered a continuation pattern, where at first the bounce may appear to be a reversal of the prevailing trend, but it is quickly followed by a continuation of the downward price move. It becomes a dead cat bounce (and not a reversal) after price drops below its prior low. Short-term traders may attempt to profit from the small rally, and traders and investors may try to use the temporary reversal as a good opportunity to initiate a short position.” – Investopedia.com

The precious metal miner consolidation process continues to frustrate participants as we head into the all too familiar “summer doldrums” period, which is now being anticipated by most sector pundits.

I vividly recall many of these same pundits predicting a miner sector “roll-over” last year based on the same seasonality factors just before “Brexit” provided the catalyst to take the miners higher into summer.

The major miner fund GDX is attempting to put in a bottom around the $21 level, as the gold price appears to be flagging below the $1225 area after falling quickly from the early April lower high of $1297.

The initial action during this bounce in the GDX has been taking place with low volume, while the gold price has been trading sideways after a sharp $80 move down in three weeks.

The current action may possibly be a short-cover “bull-trap” in the miners. Earlier this week, the number of bulls had fallen to 51 percent, just 9 percent off the 2015 bear market bottom. A solid bottom, followed by a sharp move higher, is more likely to take place once the sentiment gets down to the levels of the major low in December of 2015.

It is my contention the miners will continue to consolidate into Q4 2017 with a possible major bottom later this month. This GDX bounce may end near the $23 area, then head back down for a final push toward sold support at the $19-$20 level.  

The only scenario which would change my mind about the timing of this correction process, would be a lower low close below $18 on the GDX. If a close below this level were to take place, I would have to re-think my strategy going forward, as this consolidation would most likely drag out for an extended length of time before continuing higher.

Throughout the history of early stage bull markets, the bull does everything in its power to knock you off his back, then he entices you to chase strength to get back in as opposed to taking a large position early and sitting tight.

In the meantime, there is important news which could greatly affect the junior miner sector going forward. On Friday,

April 21st, I discussed the up-coming GDXJ re-balance in this column. Ironically, on the very day the article was posted, the Sprott Junior Gold Miners ETF, which I feel is a more genuine “junior miner” fund, began trading with much larger volume as the market continues to weigh the effects of the GDXJ re-balance. The symbol for this fund is SGDJ and is traded on the AMEX in the US. Sprott has a sister GDX-type fund named the Sprott Global Gold Miners ETF which also trades on the US AMEX under the symbol SGDM.

The SGDJ fund uses a very transparent, rules based methodology to identify between 30 to 40 junior gold stocks with market capitalizations between $250M and $2 billion. The fund’s aim is to exclude riskier early stage exploration companies whose historical success rate is low. 

Moreover, the Sprott Junior Gold Miners ETF is re-constituted on a semi-annual basis to incorporate the latest factor scores into the selection and weighing process. This is a very salient strategy, as to avoid similar future GDXJ-type re-balancing issues.

After reading my article, Vice President in Sales for Sprott John Feneck reached out to me this week with information regarding the 3x direction ETF series that trade in relation to the Van Eck miner funds.

Just after Direxion Funds suspended daily creation orders in the 3x GDXJ daily direction derivative fund JNUG in April, the company approached Sprott because they sought an alternative junior gold mining ETF that is not dealing with the capacity and concentration issues which have impacted GDXJ. The firm is also partial to RING, which is the iShares ETF equivalent to GDX.  

During the trading periods between April 12th, through May 8th, Direxion Funds 3x trading vehicles JNUG & NUGT have had $884m in redemptions.

Due in part to these redemptions, the firm had Solactive (index provider) create a custom gold index swap that the counterparty banks are now using instead of GDX/GDXJ as the underlying exposure to NUGT/DUST, JNUG/JDST, while using RING and SGDJ to provide alternate exposure to the senior and junior mining segments. NUGT has moved $1B into the index swap and RING/JNUG has moved $300M into the index swap and SGDJ.

These are very important changes in the sector, and I will keep my readers posted on the developments going forward.
Meanwhile, the rebalancing of the MVIS Global Junior Gold Miners Index, tracked by GDXJ, will take place on Friday, June 16. RBC Capital Markets posted a 19-page note this week, highlighting what the new portfolio might look like and which names might be added or deleted from the index.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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