Buy What's Working, Sell What's Not
Saturday, July 3rd, 2010Gold Mining stocks are outperforming the ailing stock market…
"DO MORE of what’s working, and less of what’s not." That’s what supertrader Dennis Gartman regularly writes, says Steve Sjuggerud in Daily Wealth.
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 Mining stocks are working.
While everything else has fallen, gold stocks held on. The biggest names in gold stocks – Barrick, Goldcorp, and Newmont, are all trading very close to new highs for 2010. The uptrend is in place here. And relative to the price of gold, Gold Mining stocks still look 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. That leaves them "cheap" relative to the price of gold…and need to catch up. Gold stocks are also ignored. Because 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 Mining 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.
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