May 19 2008 3:27PM

Every year at this time the debate about selling in May and going away ensues. There is ample reason to take that advice in most years. Not every year though. Years in which the index has a rough spring, and this year certainly fits that bill, often see a rally that starts in early summer rather than mid fall. The summer doldrums still apply but these rallies that often last for several months, are some of the strongest ones recorded.

Do we see that sort of rally this year? We may, though a strong one would require the major indices to keep climbing. Wall St has gotten cheerier in the past month but it will have to sustain earnings growth which won’t be easy. With that caveat delivered we lay out a few reasons why we’ve been getting more positive lately.

The markets kept falling.

Like bull markets, bear markets sow the seeds of their own destruction. Selling has gotten to the point where holders are not willing to accept current prices and buyers smell real bargains.

We have seen the number of bids and the bid sizes increasing markedly in the past couple of weeks. Buyers seem more impatient and sellers are starting to hang offers rather then hitting bids. Small things perhaps, but market turns are made of small things like this.

Volumes are good.

Volume is critical in the junior markets. After being on the weak side through late March and much of April overall volume on the Venture Exchange has started to climb again. It’s not a trend yet but the pattern is there. After getting close the January and August lows the index is battling back. From a technical perspective, we want to see the index close solidly above 2600 a couple of times. That would establish a new uptrend that could be built on.

One-sided sentiment.

We’ve been surprised at the number of analysts that got negative in the past few weeks about resource stocks. Not just the usual non believers but metal friendly types as well. When we see a number of those analysts throwing in the towel we assume the bottom must be getting close.

Dollar, Oil, Gold.

In a similar vein, we’ve seen a lot of people suddenly get bullish about the US Dollar. We agree that it’s oversold but that doesn’t mean it can’t get more over sold. The European Central Bank’s refusal to cut due to inflation removes one of the main arguments for a higher dollar; narrowing rate spreads.

A slowing US economy will help the trade deficit (or should) but the rocketing oil price may drive up imports faster than consumers cutting back can winnow them down. Add a federal deficit that is likely to top $500 billion this year and it will be tough for Dollar to gain a lot of traction.

Gold appears to have turned again, following oil upwards. We’ve also noted days when metals prices are weak yet producers do well. There seems to be new money entering the sector, in a top down fashion.

The share overhang is lightening.

One side effect of the weak market so far this year is a big drop in financings. For the past three months, overall financings on the Venture exchange are less than half of last year’s levels. While this will mean funding issues for some, it also means much less free trading stock will be hitting the market this summer.

None of these things guarantee a rally but they are all supportive of one. Taken as a group, these may provide enough impetus to keep a market that appears to have turned moving higher through the next couple of quarters.

Not quite arm waving, but we’re not throwing in the towel either.

David Coffin and Eric Coffin
From the May 2008 HRA Journal

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David Coffin and Eric Coffin are the editors of the HRA Journal, HRA Dispatch and HRA Special Delivery publications focused on metals exploration, development and production stocks. They were among the first to draw attention to the current commodities super cycle and have generated one of the best track records in the business thanks to decades of experience and contacts throughout the industry that help them get the story to their readers first. Please visit their website at www.hardrockanalyst.com for more information.

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