The run-up in the gold stocks since the bottom last May has been both exciting and rewarding, leaving the mining stocks among the better performing sectors on an intermediate-term basis. It's almost surreal to see the gold stocks being treated as a "momentum play" by the growing number of investors whose interests normally lie outside the gold sector. But in this day and age it's all about chasing momentum (which of course only serves to feed it) and the leading gold and silver shares are having their day as bona fide momentum plays.
But with every strong momentum market comes a point where the market becomes "overbought" and the internal indicators flash warning signals to reflect this condition. The difference between what normally passes for "overbought" and an overbought condition in a momentum market is that in a market enjoying strong interim upside momentum can often stay overbought for a long period of time before the momentum fades. That seems to be the case in the gold/silver stock sector right now.
The gold stock market is an interesting case study at the present time. On the one hand, there is no shortage of stocks making higher highs on a recurring basis, yet on the other head the XAU gold/silver index is little changed for the month of January to date. Perhaps this is to some extent attributable to the historical tendency for January to be a weak month for the XAU. Another explanation for this could be found in the short-term momentum indicators for the XAU. For instance, while the 20-day oscillator has been at an overbought reading through a good part of the past month, the shorter 5-day and 10-day oscillators are coming off near-term "oversold" readings and have recently turned up again. This reflects to some extent the cross currents that can be seen in the gold stock market right now and shows that the shorter duration cycles are mitigating the effects of the longer ones (the ones that often conspire to make January a rough month for the XAU).
But what is even more important than just short-term price momentum is the rate of change in the new 10-week highs among the gold shares. The trend of the new highs has been expansive since last fall and continues to reflect the strong demand for the best performing gold shares by investors. Despite some recent hiccups in the short-term new highs measurements, the interim momentum in the gold share sector is still present. Perhaps the strongest measure of this strong upward momentum on an intermediate-term basis is the chart showing the 60-day rate of change in new highs minus new lows. I call this chart "GS HILMO" as it represents the hi/lo momentum (HILMO) of the 50 actively traded gold shares (GS) on a daily basis. Below is the chart of GS HILMO since December 15.
As a follow-through to our previous commentary entitled, "How much momentum is left in the gold stocks," let's take a look at the stocks we previously reviewed that have had good performances in recent weeks.
Among our leading indicator stocks, Freeport (FCX), Newmont (NEM), and Inmet (IMN:TSX) continue to show up on the list of new 10-week highs and are still above their rising 30-day and 60-day moving averages.
The leading silver shares have benefited greatly from the latest rally phase. Among the top performers we reviewed last time were Silver Wheat (SLW) and Western Silver (WTZ). Silver Standard Resources (SSRI) was mentioned in the previous two commentaries as being a high probability candidate to make higher based on momentum factors and has since then pierced above the December-January highs, most recently achieving a new high at $18.00. Silver Standard has joined the list of turnaround stocks morphing into momentum stocks over the past few weeks. Some profit taking would be in order after the sharp rally of last week.
Pan American Silver (PAAS), a decent performer since making the turnaround list early November, made a recent high at the $23.00 level last week. Be sure and keep an eye on the 60-day moving average for PAAS and the other gold shares during corrections.
