When investing, I like to take a top down approach. On a macro level we are in a secular bull market in precious metal securities. In order to prop up economies around the world, central bankers are and continue to paper over their debt obligations. With the problems of Greece and Italy temporarily solved by additional stimulus, it now appears Spain is heading for the same type of crisis. In order to keep the economic machine going one may assume that the same stimulus will be continued to be applied to Spain. Fiat currencies around the world are in a race, and the race is to zero. Zimbabwe may be leading, but it is only matter of time before other countries follow suit. From a macro perspective this presents a compelling reason to own or continue to own precious metal producers.
On a micro level, there may be further weakness in precious metals stock valuations. Having said that we are starting to get in a range where precious metals stocks are presenting compelling valuations. Please read on below:
Before putting assets to work I like to look at the Bullish Percent Indices. I use the BPIs to determine if it is appropriate to run offensive or defensive plays.
The below is the Bullish Percent Index for the NYSE.
State: Bear Alert
- The Bullish percent index has gone from Bull Confirmed to Bear Alert. Above 70% the market is considered overbought and in the red zone. “This is not a sell signal, but rather an alert to be prepared for a decline or market weakness.”
- Because the market is Bear Alert, odds favour weaker markets and Defense should be coming onto the field if it hasn’t already.
- Strategy: The field position is not ideal for new long positions. Caution should be exercised; Move a portion of the portfolio to cash; Wait to deploy Cash; Consider Short Strategy
The below is the Bullish Percent Index for the Dow Jones Industrial Average.
State: Bull Correction
- Although not a sell signal, as markets can remain overbought for a long period of time; The DJIA Bullish Percent Index at 86% and over 70% is deep in the red zone and overbought, odds favour weaker markets and Defense should be coming onto the field.
- Strategy: The field position is not ideal. Caution should be exercised; Move a portion of the portfolio to cash; Wait to deploy Cash; Consider Short Strategy.
The below is the Bullish Percent Index for the Gold Miners.
State: Bear Confirmed
- Because the Gold Miners index is made up of fewer stocks, it is more volatile and the range could reach 0% or 100%. The Gold Miners BPI is Bear Confirmed, and as such could remain in this state for a period of time. Because the index is below 30% and at 10%, it is deep in the green zone, it can be considered oversold.
- Strategy: Precious Metals Securities are oversold and are starting to present good valuation. Because the BPI for precious metals has not yet turned up there is still some downside risk. For the brave: Begin Scaling into positions (¼ to ½ positions)
Markets can be like tides and may rise and fall like tides, i.e. together. Because the overall market appears overbought and heading lower, caution should be exercised with any new long positions.
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