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Do More of What's Working... But What's Working?

By Dr. Steve Sjuggerud
Wednesday, June 30, 2010

"Do more of what's working, and less of what's not." That's what supertrader Dennis Gartman regularly writes.
 
This is the right advice. As Dennis has explained over the years, you'll get half of the gain of a bull market in the last 10% of its duration (i.e. in the last year of a 10-year rally).
 
Whether it's dot-com stocks or commodities, you never know what is heading straight up. But if you do more of what is working – if you buy into the uptrend – you have a chance at capturing big gains.
 
 
The problem is, it seems like nothing is working right now. For example, I wrote about big drug companies on Friday. The sector is cheap and ignored – two of the things I look for. Drug giant Pfizer is trading at just six times this year's estimated earnings.
 
But the problem with Pfizer (and the drug companies) is there's no uptrend yet. I'm buying at record cheap prices. But I know I'm swimming upstream to start... and that's not where I really want to be. We can do better...
 
So where's an uptrend now? What's working today?
 
Gold stocks are working.
 
While everything else fell yesterday, gold stocks held on. The biggest names in gold stocks... Barrick (ABX), Goldcorp (GG), and Newmont (NEM), are all trading very close to new highs for 2010. The uptrend is in place here.
 
Also, relative to the price of gold, gold stocks are still cheap right now...
 
When gold rises, the profits of gold mining companies rise even more. So when gold goes up, gold stocks should soar.
 
But get this... Gold is up 30% in the last two years. Based on the tried-and-true rules, gold stocks should be up 60% or more. But gold stocks are only up 10% in the last year.
 
Gold has soared. But gold stocks haven't. They're cheap relative to the price of gold... and need to catch up.
 
Gold stocks are ignored too... While there's plenty of talk about gold out there, the average man on the street doesn't own a gold stock. Heck, the average investor probably doesn't own a gold stock.
 
We have what I like to see... Gold stocks are cheap relative to gold. Most people don't own them. And, importantly, gold stocks are working right now. Remember, you want to own more of what is working and less of what is not. Gold stocks fit that bill.
 
An excellent way to get exposure to a handful of the top gold mining stocks is through shares of GDX, the Market Vectors gold mining stocks fund. The three gold stocks I mentioned above make up over a third of the holdings in GDX.
 
True Wealth subscribers are already up nicely on this one... but gold stocks still meet our criteria... If you're not in gold stocks yet, get in now. GDX is a great place to start.
 
Good investing,
 
Steve




Further Reading:

The last time we were this excited about gold stocks was back in October 2008. At that point, major gold stocks were down 60% in six months and they were outrageously cheap compared to gold. Since then, the big gold stock fund is up 141%... but the same argument still holds. Read more here: Once-in-a-Lifetime Buying Opportunity in Gold Stocks.
 
If you're worried about what will happen to your gold stocks in a general selloff, don't miss this recent essay by Brian Hunt here: A Must-See Chart for Gold Stock Investors. And his follow-up here: The Gold Stock Divergence Continues...

Market Notes


CHINA PLUMMETED AGAIN

Remember the "must hold" 2,600 level for the Shanghai Composite? It just broke...
 
We began predicting lower prices for Chinese stocks back in April this year. As expected, they fell later that month and into May. And just weeks ago, we updated you on a vital number in this downtrend... the 2,600 level on the "Dow Industrials of China," the Shanghai Composite.
 
China is the world's largest exporter... so share prices of its biggest companies are important gauges of manufacturing activity. The Shanghai's 2,600 level is the area where it stopped falling and found a toehold. But on Tuesday, the Shanghai composite fell 4.3%, blew through 2,600, and closed at a 14-month low.
 
This is a bad sign for the global economic recovery. Stocks tend to "price in" what's coming a few months down the road. Considering Europe makes up about 20% of China's overseas sales (its largest market), we take the Shanghai's failure as a signal the global economic recovery is getting weaker... even "getting dead." If you still have money in the reflation trade, you need this index to rally.

Bearish: Shanghai's must-hold level just broke

In The Daily Crux



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