 HUI Upleg
Daily Gains
Scott Wright
Zeal LLC
Mar 2, 2007
With the first two months of
this new year under our belts, the commodities lethargy seemingly
still has a grip on investor sentiment. The deep malaise that
has entangled the commodities markets resulting from a brutal
first couple weeks of January has caused many to lose sight of
the fact that we are still in the midst of yet another upleg
for the king of the metals.
Since its interim low in the
beginning of October, gold has soared over $100 per ounce. But
for gold-stock investors the ride hasn't been quite as exciting.
As measured by the elite HUI gold-stock index, the gold stocks
have indeed experienced a relatively lethargic journey by historical
standards.
Though the HUI is up 28% since
gold's low, for seasoned gold-stock investors who have been through
previous uplegs in gold's secular bull, 28% is chump change.
Now granted this is all relative in the span of the financial
markets as 28% in five months is quite impressive in any sector.
But we gold-stock investors are accustomed to much larger gains
when the metal the gold stocks are pegged to is powering higher.
Due to the dynamic nature of
the gold-mining business, the incredible positive leverage that
gold stocks have had to gold in each preceding upleg and cumulatively
bull to date has been a mainstay for investors. Though I still
believe we are in the early part of an upleg from a gains perspective
and that we should eventually see the gold-stock gains we are
accustomed to, this particular upleg hasn't yet won over the
usual crowd and seems to have folks sitting uneasy.
Though I am blessed to be able
to watch the markets all day and spend more time than the average
investor mulling over the facts and figures trying to view this
upleg objectively, I even find myself lacking enthusiasm in this
current environment and am greatly pondering the lagging gold
stocks.
And a common point of contention
with this current and 7th measurable HUI upleg that has been
bothering many folks including me surrounds this leverage concept
I touched on above. Since its early October lows, gold is up
an impressive 22%. Yet in this same time the HUI is up only 28%
to its recent highs.
Now bull to date the HUI has
positively leveraged gold's gains by 5.4x. So for every 10% gain
in gold the gold stocks have averaged 54% gains. But the leverage
we are seeing in today's upleg is just a hair above even money.
Even-money leverage does not
sit well with gold-stock investors, which is partially why this
upleg has warranted grumblings thus far. At Zeal we have received
a lot of feedback on this front and my business partner Adam
Hamilton wrote in detail about this pitiful leverage in a recent
publication of our Zeal Speculator newsletter to analyze and
address these concerns. This sorry leverage is indeed an anomaly
in this bull market.
These lagging gold-stock gains
are not only bothersome from a strategic perspective, but they
also seem to be causing daily angst among the gold-stock traders.
In recent discussions with my business partners, clients and
speculator friends, there has been a grand consensus on the gold
stocks. Gold stocks are greatly lacking the excitement we are
used to seeing in previous uplegs.
Globally poor sentiment created
by the commodities woes earlier this year has spilled over into
the gold-stock realm and folks are just not as excited as they
should be for this upleg. The gold stocks just haven't seemed
to hold the fuel to spark excitement. And of course excitement
manifests itself in the form of gains. Nothing causes more widespread
excitement than big daily gains, and lots of them, something
typical of an upleg.
So with undeniable evidence,
as supported by gold's rally since October, that we should be
in the midst of HUI upleg 7 in this secular gold bull, I thought
it would be prudent to tackle one of the obvious reasons for
this lack of gold-stock excitement.
And this reason comes in the
form of a question that is lingering in everyone's mind, where
are the gains? By taking a look at some of the previous HUI uplegs
we can get an idea of what we've been missing and perhaps see
what may be in store for gold-stock investors going forward.
The big daily upleg gains in
which higher highs power towards an apex is something we haven't
seen much of yet in upleg 7. Because this upleg is already maturing
in age as it passes its 100th trading day, I was hoping that
taking a look at the big daily gains of exciting uplegs 2, 4
and 6 could perhaps provide a guiding light for our current path.
To see these awesome uplegs in historical context, check out
these charts.
Now one of the reasons I'm
using uplegs 2, 4 and 6 as examples today is due to my perceived
nature of what upleg 7 should look like. Because a Stage
Two gold bull has altered the game a bit, the in-between
consolidation uplegs that were inversely pegged to dollar action
should lose their patterns as gold and the dollar continue to
decouple and global investment demand rises.
The daily gains we'll look
at are interday gains which are those gains witnessed from daily
closing price to daily closing price. If the market price of
an asset closes on day 1 at 100 and closes on day 2 at 104, then
from day 1 to day 2 there was an interday gain of 4.0%. And it
is the 4.0%, 5.0% and 6.0%+ days in the HUI that really draw
investors into the market and breed excitement within an upleg.
It is days like these where gold stocks' leverage to gold shines
and the risks of investing and speculating in these volatile
vehicles are forgotten.
Let's first take a look at
upleg 2 which was the most powerful of the HUI uplegs to date
in percentage terms. I wanted to see not only what kind of big
daily gains this upleg offered to investors, but when within
the upleg some of the larger gains occurred.
As you can see in this chart
I pinpointed the top-ten biggest interday gains during this upleg
and identified them numbered one through ten with one being the
largest single interday gain. And in order to provide a visual
depiction of where these big gainers fell in the timeline of
this upleg I also identified a midpoint.
As you can see 80% of the top
gains occurred in the latter half of upleg 2. Upleg 2 indeed
had a very impressive second half in which the HUI broke 100
for the first time in nearly four years. For those of us who
were active back in this upleg, excitement was indeed present
as the average gain for these top-ten-upleg-2 daily gainers was
a staggering 6.21%.
Also exciting was that of the
127 trading days in upleg 2, 13 days, or 10% of the time, the
HUI experienced a greater than 4.0% interday gain. And the average
daily gain for this upleg was an incredible 0.74%, the best of
any upleg to date. What an exciting upleg!
Now if we scrub upleg 7 to
upleg 2 we can begin to get an idea of where some of the excitement
is lacking. With HUI upleg 7 now 100 trading days old and yielding
a sluggish upleg-to-date gain of 28%, it is logical that it won't
be host to the same types of numbers we see in upleg 2.
In fact, upleg 7 is currently
sporting an average daily gain of only 0.20%, about a quarter
the daily strength of upleg 2. Even more dismal is that upleg
7 has only seen a grand total of three days where we've had an
interday gain exceed 4.0% so far. No wonder there is such a lack
of excitement!
Well if upleg 7 has a prayer
of measuring up to upleg 2, the second half is sure to be quite
exciting. And when viewed in isolation, upleg 2 can be encouraging
for the future tidings of upleg 7. Upleg 2 had excellent strength
in its second half, and big rallies in the second halves of uplegs
do make some logical sense.
It is typically toward the
end of an upleg when euphoria sets in and greed becomes rampant.
This sentiment provides one last surge of capital that sends
the HUI to the moon before it inevitably peters out. We'll see
if this will be the case for upleg 7.
In this next chart I give the
same examination to HUI upleg 4. This upleg turned out to be
a fantastic run in gold stocks that rewarded its investors with
remarkable 2003 gains and vaulted the HUI above 200 for the first
time since its 1996 inception. Upleg 4 was also pivotal in solidifying
the case that gold and gold stocks were indeed in a secular bull
market.
With upleg 2 selling me on
big interday gains littering a strong second half, I partially
expected upleg 4 to look the same. But as you can see in this
chart, the big interday gains in upleg 4 sang a different tune.
Interestingly, these gains were spread remarkably evenly throughout
the upleg.
The top ten interday gains
are clustered in groups in the beginning, the midpoint and toward
the end of this upleg. The exciting daily gains in upleg 4 also
ended up providing 13 trading days that resulted in greater than
4.0% interday gains, of which the top ten averaged an exciting
5.76%. And in the 173 trading days that spanned this upleg, there
was an average daily gain of 0.49%.
As seen by its overall gain
and average daily gain, upleg 4 was not as sharp and fast as
upleg 2. But its numbers still dwarf what we are seeing in upleg
7 thus far. For upleg 7 to get on par with upleg 4, again it
is going to need to have a stellar second half.
So now with mixed results in
these first two massive HUI uplegs, let's take a look at what
the latest massive HUI upleg reveals from a big-daily-gain perspective.
Upleg 6 is shown below, and it is this upleg that vaulted the
HUI close to 400, a nearly 1,000% gain from its late-2000 low.
Just when I was getting hopeful
that measuring big interday gains might reveal a strategic trend
that can be useful for future HUI uplegs, upleg 6 provides a
third look that runs the gamut of our options. Upleg 2 revealed
big up days in the latter half of an upleg. Upleg 4 revealed
scattered big days with a concentration right at the midpoint.
And now upleg 6 shows us big interday gains in the front half
of an upleg. What are the odds?!?
HUI upleg 6 was lengthy compared
to the average upleg duration of 156 trading days. In its 248
trading days, this upleg had an average daily gain of 0.38% while
being host to 14 big-interday gainers greater than 4.0%. And
70% of these top gainers occurred before the midpoint while two
happened at the very end just before the May collapse.
Now to place upleg 7 into further
context, consider that the average interday gain for upleg 6
top-ten big gainers was 5.26%. This is the lowest of the three
massive uplegs, but impressive nonetheless. Well in the 100 trading
days that upleg 7 has been limping along, not a single interday
gain has been in excess of 5.0%. And even though upleg 6 had
the lowest average daily gains of these three massive uplegs,
it was still nearly twice as high as our current upleg. Again,
no wonder there is a continuing lack of excitement today.
And to throw another wrench
in the spoke of upleg 7, just take a look at big-gainer frequency.
In these three previous uplegs an average of 1 of every 14 trading
days had an interday gain in excess of 4.0%. And 1 in every 7.5
trading days sported a gain in excess of 3.0%, which is still
an exciting day.
Well so far upleg 7 is having
4.0% interday gains a pitiful once every 33 trading days with
3.0% interday gains coming only once every 10 trading days. Either
this upleg isn't going to be as great as we hope it should be
or it has a very strong second half in store for it.
HUI upleg 7 is indeed not only
lagging its bull-to-date standard leverage to gold, but it is
also lagging the exciting pace of previous uplegs as measure
by big daily gains. But alas, I believe we can still look forward
with confidence. Even though we see the big interday gains scattered
all throughout previous uplegs, the bulk of the greater upleg
gains always happened in the second half.
In these three examples the
average first-half HUI gain is 47% while the average second-half
gain is 72%. So if upleg 7 is going to make some noise, as it
should following gold's awesome gains, we should see some nice
action in the latter half of this upleg as gold-stock investors
finally jump onboard. A strong second half with big interday
gains will definitely spark some long-overdue excitement in this
sector.
And given the lack of excitement
thus far and what looks like the largest gold disconnect that
the HUI has ever experienced, if upleg 7 is going to be strong,
we could see some fast and furious buying that would finally
provide some of the excellent interday gains on the magnitude
experienced in previous uplegs.
Sometimes it does take the
ever-skeptical gold-stock crowd a little longer to believe in
a gold rally and trust that it is indeed the real deal. And as
sentiment turns, as it always does, the gold stocks should catch
a bid and cause the HUI to work overtime to restore the leverage
I discussed earlier.
Seasoned gold-stock traders
will eventually give up their bearish ghosts and should aggressively
start buying gold stocks. Especially if gold continues to power
higher. And these steadfast investors should also be able to
use this rotten sentiment to their advantage. At these still-low
prices, there are far more buying opportunities than if this
upleg had already been exciting.
At Zeal we have been aggressively
buying gold stocks since gold's October lows and they have performed
quite well thus far. But we suspect that the gains we've seen
so far in HUI upleg 7 are just an appetizer for the main course.
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The bottom line is our current
HUI upleg really is lacking the excitement that previous HUI
uplegs have ignited. With gold carving a beautiful uptrend of
its own, the normally well-leveraged HUI is seemingly lifeless.
The gains have been sub-standard and there has been very little
daily excitement that gold-stock investors can build on.
If HUI upleg 7 is going to
power higher and connect with gold like in the past, gold-stock
investors should be in store for some big, fun and exciting interday
gains that will build momentum for an ultimately excellent Stage
Two upleg. And with sub-par performance thus far in this aging
upleg, a big move in the gold-stock sector ought to be right
around the corner.
Scott Wright
Mar 2, 2007
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Thoughts, comments, or flames? Fire away at scottq@zealllc.com. Depending on the volume
of feedback I may not have time to respond personally, but I will
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