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Juniors vs. Senior Mining Stocks

Based on the May 4th, 2012 Premium Update. Visit our archives for more gold & silver analysis.


 

One of the questions that we receive on a regular basis is whether one should invest in junior or senior mining stocks. The answer is that diversification is the way to go, but that's not the full reply as weights in the diversified portfolio can still favor either juniors or senior stocks.

The reply to this question depends on when the question is asked - there are times when juniors outperform and there are times when they underperform the senior mining stocks. Before providing you with a chart of the junior-senior ratio, let's take a closer look at the situation in the general stock market, ale the latter is highly correlated with juniors in the long term (charts courtesy by http://stockcharts.com.)

$SPX (S&P 500 Large Cap Index) INDX

In the long-term S&P 500 Index chart, we have much the same outlook as we saw last week. The recent correction appears quite similar to the one of 2010 and the consolidation seen in RSI levels is also similar. Back then, prices rose nearly 15% in about three months following the small correction. Self-similar patterns (like this one) are quite reliable, so at this point, stocks appear ready to move higher.

SPY (S&P 500 SPDRs) NYSE

In the short-term SPY ETF (proxy for the S&P 500 index) chart, the situation is somewhat mixed. This week could be viewed as a few days of rally followed by consolidation (with another rally just around the corner) or the beginning of another move to the downside. The 50-day moving average continues to be within range as a support line and may continue to hold declines in check. Note, however, that it was been broken temporarily on several occasions late last year.

$XBD (Broker/Dealer Index - AMEX) INDX

In the Broker Dealer Index chart (proxy for the financial sector) we see that a key support line has held. This line is at the first key Fibonacci retracement level and is also close to the high seen in the financials last October, slightly above 95. Support levels are in check and the bottom may be in. The rally seen since late 2011 has corrected and it now appears that the financials are ready to move higher and perhaps take other stocks with them.

Consequently, the situation for stocks appears mixed for the short term and bullish for the long term. Overall therefore, the outlook is bullish as long-term signals carry more weight than short-term ones. The impact on the junior-senior ratio is positive.

As indicated earlier, we will now move to the performance of the whole junior sector and compare to the senior mining stocks.

$GDXJ:GDX (MV Jr Gold Miners/ MV Gold Miners) NYSE/NYSE

As you can see on the above chart, the juniors-seniors ratio (GDXJ to GDX ratio) corrected from February to the end of April. We call this correction instead of decline because this 3-month move didn't erase the previous monthly rally (January 2012). As all corrections come to an end eventually, it seems to be the case also with this one. The ratio moved sharply higher in the recent days and the correction appears to be over as the resistance line has been broken. The implication is that another wave of juniors' outperformance is likely underway. This chart yields also other implications, interesting for the precious metals investors. These are discussed in greater detail in the premium version of this essay.

Summing up, at this time juniors appear to have greater upside potential than senior mining stocks.

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Thank you for reading. Have a great and profitable week!

 

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