Wednesday, June 12, 2013

S&P 500 vs. gold stocks: 3-year performance chart

S&P 500 (SPX) versus gold stocks (HUI), June 2010 - June 2013. 

This relative performance chart shows SPX decoupling from the HUI Gold Index (aka the NYSE Arca Gold BUGS index) in 2011 and greatly outperforming the gold stocks up to mid-2013. Since June 2010, SPX is up around 51 percent while the HUI is down 41 percent for the same period. 

Whether you're a "gold bug" or not, it pays to take note of the price action in gold stocks, which may run in tandem with the gold price or take their own separate course at times. 

Although we did see a nice bounce in the gold mining shares (see HUI, XAU indices and the leading ETF, GDX) recently, it remains to be seen if the longer-term trend is changing. It may simply be an oversold bounce within a downtrend that started in the fall of 2011.

Over the past 3 years, the major US stock indices have shown continued strength (helped along by QE) and various leading stocks and industry groups have emerged, and rotated or fallen off, within that time. 

However, even at this late date, I find there are still people riding out the continued weakness in precious metals mining shares (some may have added to losing positions in an effort to "average down"). You've probably seen this type of behavior before. Instead of taking a loss and regrouping or focusing on stronger long candidates, investors stay anchored to a weak sector or weak stock, tying up their capital (and drawing on their emotional capital) to support a losing trade or investment.

From a trend trading approach, you want to be long the strongest stocks in the strong groups and short the weakest names in weak groups. A reminder: trade what you see, not what you hope to see.