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Tuesday, February 19, 2013

The Building of an Epic Rally

When a sector of stocks plummet, they have two destinies.

One is the sector has shifted, one to a long term lull that will wiggle around at a level substantially lower than   before their decline.  This is a common pattern.  Think of gogo 90's for tech, and after the bubble burst, although some tech has done very well, few from before the boom recovered their all time highs.

The second is selling exhaustion.  One has to look back to March 2009, when the S &P index hit 666.  Around that day, I did a post called Preparing for Anarchy, and a post only a couple of weeks later The Bull is here.

In Preparing for Anarchy post, it was a bit of tongue in cheek that the market was very unlikely to continue downward.  Reflecting back, it is obvious what happened that month.

Whoever sold at S&P 500 hitting 1000, then 900, then 800, then 700, well, anyone who could hold onto their longs are the same people who would hold on if S&P 500 hit 600.
Basically, overall the market ran out of sellers.  There was left only the people who hold and those who bought on the way down.

Looking back, I wish I really dumped my entire life savings and borrowed money to buy the stocks from my post just one day before to preparing for anarchy post, called "time for lottery tickets".

So what does this have to do with today's market?  In 2008 crash, the gold miners crashed WITH the market.  Now, they are taking, rather hard core, (GDX at 39.37) when the market is rallying.  This is very unusual.  The market sentiment of the gold miners after watching for years it do really poorly, now doing extra poorly.
Frankly, this is the time when the sellers are running for the door.

What I am expecting is the same thing with miners, at some point the sellers will be few, and that will build a base for a multi-year rally.  

There are two very unfortunate realities around this statement.
First, it may not happen, precious metal mining sector in its entirety could go the way of long term lull.  I don't think so, but it is very possible.

The second is we maybe in for a CRUSHING sell off, one with a market decline.  This would mirror what happened in late 2008.  The miners got crushed, and then started to rally AS the overall market got CRUSHED worse into March 2009.  

So its easy to look back and say, boy I wish I bought those lottery tickets, or bought options 3 years out to make a killing.  At the time of the crushing sell off, there are three kinds of people.  Those not in the sector, those holding blindly, and those trying to trade and find a bottom.

Any of those 3 options may be the best strategy, depending entirely on the next two years for the sector.
Your guess is as good as mine, I think hold is better than dump.  I don't see this sector as dead, I still believe in my post The Big Picture.

Ps. Special thanks to Gary for a similar post, for sparking my own twist.

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