is the junior sector dead or epic buying opp..

Is the Junior Sector Dead, or is This an Epic Buying Opportunity?


By Przemyslaw Radomski
Dec 23 2008 5:54PM

www.sunshineprofits.com



Before I proceed with a long-term analysis of the junior market, I would like to comment on last week’s developments on the market with regard to my previous essay. A week ago I summarized that ‘we are at a critical point in many markets, and most of them influence the prices of the precious metals stocks’. I was talking about gold and the major world stock indices. So far the breakout from the downtrends has not been invalidated and therefore charts favor strength in the general stock market as well as in the precious metals market.

It seems that the HUI Index will now be testing its previous declining trend line. Once it is verified as a support, we should head upward again. A breakdown below the trend line on a strong volume would be needed to make the chart look bearish in the medium term, and currently I don’t expect this to happen. Many investors are still skeptical about the current rise in the general stock market and in various gold stocks. Although I cannot say that this was the final low, I do view further short- and medium-term strength in the PM market as highly probable.

The above statement goes double for juniors, as they are the most emotional part of the precious metals market. Although they offer higher gains and have more speculative potential at times, juniors are also bound to react stronger to fear. Ultimately, this is a positive factor for the precious metals investors and speculators, as we are in the secular bull market which has many more years to go. In the end the leverage will therefore multiply our gains, not losses. However long-term is one thing, and the fact that the junior sector has suffered enormous losses in 2008 is another thing. Please take a look at the charts below to see how different parts of the precious metals market performed since the beginning of 2002. More information on what we use as a proxy for juniors can be found in one of the previous essays about juniors.




As indicated in the previous essays, juniors tend to outperform seniors, when the general stock market rallies. The opposite has been the case lately and junior’s performance has been really disappointing, which corresponds to that theory. There is also another key characteristic of this sector. It lags at the beginning of a particular big upswing and thrives when the rally’s end is near. There is a reason that points to this type of behavior.

Juniors' exploration activities are financed through equity offerings, and as such depend to a large extent on the investors' 'willingness' to finance them. If investors get optimistic, they finance juniors -> juniors find/develop deposits -> juniors create value -> juniors' share prices rise -> investors gain -> investors get optimistic again and the whole things starts over again.

This process takes some time to fully materialize and once it does, it also takes time before it runs out of steam. Of course the same works the other way around and this is what we are currently experiencing. This sector is therefore extremely vulnerable to changes in investors' sentiment. When investors fear losses (housing crisis, credit crunch and bear market in general equities makes them very risk-averse), they are reluctant to finance juniors, especially as their price decreased dramatically.

The big picture is that ultimately people will get excited about high prices of gold and silver (this IS a bull market) and this will trigger the abovementioned mechanism that will drive juniors' prices very high. This is why I like juniors as a long-term investment.

If we know that the junior sector is very emotional, then how can we turn this to our advantage? I believe that using the technical analysis might be a good way to go. It seems that the default tools and indicators are used by everyone and their brother, and this makes their usefulness limited. This is why I am always looking for new tools to analyze the market. This time I focused on the long-term, and developed the SP Junior Long-term Indicator



The purpose of this indicator is to emphasize the moments when it makes the most sense to switch juniors for seniors and vice-versa. When the thick dark line goes above the dashed line it means that juniors are temporarily overbought relative to the big, senior gold stocks. Going below the lower dashed line has the opposite meaning. This time selling seniors and buying juniors with the cashed raised in this way, could be the way to go. That is if one wishes to stay invested in the precious metals sector all the time.

The thin red line has more temporary and less probable signals. On the other hand there are more signals than in the case of the thick line. This makes the red line useful as a leading indicator, which only signals that one should be alert for other factors. The thick line on the other hand, can be used as a confirmation of the first signal.

Currently the abovementioned indicator signals a substantial undervaluation of the junior sector. Anyone brave enough to enter the market at this moment should be therefore able to gain massive profits in the long run.

Is the junior sector dead? No, the fundamentals of the gold market are still in place and are favorable to the junior sector. Juniors with enough money in the bank to survive in this disappointing environment, should prove a very lucrative investments if purchased at the levels that we have today. The question is not if, but when the juniors will regain their strength. The overall sentiment on the market is extremely low, the general stock market, gold stocks, and juniors themselves declined very dramatically in the previous year. The current sentiment, positive fundamentals and improving technical picture is a very bullish combination.

Summing up, if the bear market in general equities continues, it will delay juniors' rise, but will not stop in from a long-term perspective. However, the charts now favor a short- or medium-term upswing in the general stock market, which should positively impact all precious metals stocks.

Of course the market might prove me wrong, as nobody can be right 100% of the time. Should my view on the market situation change substantially, I will send an update to the registered Users along with suggestions on how to take advantage of it. Register today to make sure you won’t miss this free, but valuable information. You’ll also gain access to the Tools section on my website. Registration is free and you may unregister anytime.

P. Radomski
Editor
Sunshine Profits