Sunday, March 22, 2009
Road map - gold stocks versus S&P 500
The outperformance of gold stocks relative to the S&P 500 has just begun a new multi-year bull leg up, meaning gold miners will dramatically outperform the stock market for the remainder of this general stock cyclical bear market. Below is a 10 year monthly ratio chart of the $HUI gold miner index divided by the S&P 500 showing the "big picture" trend:
This new multi-year leg up in gold miners while the general stock market tanks should result in an even more dramatic outperformance than the 2000-2003 period, as the fundamentals are more bullish for gold miners and more bearish for general stocks than during the last general stock cyclical bear market in 2000. History is repeating itself again, as gold stocks shine during secular bear markets in general stocks.
By the way, gold stocks will outperform the gold price during this period as well, just like last time (i.e. 2000-2003):
The return for the S&P 500 (ignoring dividends) from the secular top of the last bull market in 2000 to Friday's close is roughly negative 50%. For the $HUI (ignoring dividends), it is positive 710%. Neither the secular bear market in general stocks nor the secular bull market in gold stocks is over by a long shot. In fact, the biggest gains for gold stocks during the last depression came during the first cyclical bull market after the 1929-1932 bear (see chart below, stolen from www.gold-eagle.com)!
One of the reasons I am trading gold miners is because though they will markedly outperform general stocks, they are not immune from big legs down in the general stock market and will have sharp corrections after bull runs up for this reason. I plan on getting out of gold stocks in the next 4-8 weeks, as I believe we have started the final short-term bull thrust for this intermediate-term leg up in gold stocks and the top will be in this April or May. An intermediate-term correction through the summer should then occur and lead to a new intermediate term leg up in gold stocks this fall.
Once I think the intermediate-term top in gold stocks is in this spring, which should correspond with an intermediate-term top in general stocks, I will be looking to short weak-looking stocks (and yes, I will short gold and/or silver stocks if they look ripe for it) in anticipation of a fresh bear market plunge in all equities.