Oldtent Archives 2007 - 2008

The young new year has not been very happy at all for the stock markets. In the first five trading days of 2008 alone, the S&P 500 bled a brutal 5.3%. This sharp slide nearly doubled the SPX’s losses since early October to 11.2%. Once a general-market correction exceeds 10%, Wall Street gets nervous.

These growing fears have been very apparent on CNBC, which reflects general stock-market sentiment as efficiently as a weathervane reflects prevailing winds. Hosts and guest commentators alike on this premier television network for traders have been universally wringing their hands in disgust. Not only are they worried, but they are lamenting that “all sectors” are being crushed by the “universal selloff”.

But this perception, while understandable given the broad carnage, is incorrect. One sector overlooked by mainstreamers is not only bucking the heavy selling pressure, but thriving despite it. It is the precious-metals miners and explorers, which are represented by their flagship HUI unhedged gold-stock index.

During the very same first five trading days of 2008 when the SPX plunged 5.3%, the HUI soared 10.9%! This is a tremendous gain for any sector in such a short period of time, but it is all the more amazing considering the heavy headwinds of general-stock selling pressure. The gold and silver stocks, of course, were bid up on the record-breaking gold prices and the parallel sharp silver rally.

So if you invest or speculate in PM stocks, 2008 has been a very happy new year indeed! As of the middle of this week, the HUI actually hit a new closing high 52.7% above its latest interim low of mid-August. Over this same five-month period to the day, the SPX was merely dead flat. Clearly the PM-stock sector is marching to the beat of its own drummer, general stocks be damned.

While I am thrilled with my own big gains in this young HUI upleg, as a student of the markets I find it much more satisfying on an academic front. It helps to shatter a pervasive myth that crippled PM-stock investors in 2007. While this particular debilitating myth has been around since this PM-stock bull began way back in November 2000, its popularity swelled last year due to a few isolated events.

The myth states that PM stocks are just another typical general-stock-market sector. Therefore if the stock markets succumb to a sharp selloff or a real ravenous bear, the PM stocks will get dragged down in sympathy. The baby will be thrown out with the bathwater and no sector will escape the hungry bear’s wrath. So if you believe this and you also expect a general-stock bear, you’ll want nothing to do with PM stocks.

The primary spark that resurrected this old fear last year was a sharp selloff in the SPX in late February driven by a Chinese stock-market plunge. The SPX plunged 5.2% in five trading days, very similar to this past week. But the poor HUI fared much worse, amplifying general stock losses by 2.5x for a vicious 13.0% plunge over this same period of time. In another late-July selloff, the HUI fell 1.5x as far as the SPX.

Myopic PM-stock traders witnessed these events and their fears consumed them. If the HUI could take such big hits on this degree of stock selloffs, then surely it would get annihilated in a bear market. They were succumbing to the innate human tendency to take one or two events and extrapolate them out into infinity in the future. They allowed the tyranny of the present to blind them to the precedent of the past.