The Correction Within the Current Bear Market Rally: Will It End Soon?

And so the S&P 500 Index is trading right around a key resistance level of 1,220 and, if it can prove to hold above this level, this could be the breakout the market’s been needing. It’s been a tough go for the stock market over the last several weeks and we’re due for a little upside.

Bear Market

Along with more certainty on the sovereign debt issue in Europe, corporations now have to step up to the plate and deliver on earnings. Other than the financials, we’re seeing good numbers so far from big, brand-name companies—especially in technology, which is refreshing. In the last several quarters, the technology sector was a big disappointment, especially at the retail level.

Although the spot price of gold is somewhat being held hostage by the strength in the U.S. dollar, large-cap gold stocks are very attractively priced at this time and I think the marketplace has created a good entry point for new positions in this sector. I would also consider new positions in oil at this time. The spot price is ripe for an upward move as investor sentiment improves.

All this market needs is a little more certainty on Europe and the economy. It doesn’t need a lot of reassurance—just a little. With this improvement, stocks can rally throughout the fourth quarter and we could finish off the year with a nice little gain.

Helping the cause is the fact that the stock market is fairly valued currently and that a lot of reduced expectations for economic growth have already been priced into the market. Institutional investors have been chomping at the bit to buy stocks in this market, but they’ve been waiting for a catalyst. It’s possible that the catalyst won’t be anything definitive, but rather just a reduction of investment risk (caused mostly by the debt crisis). Everyone knows that the world is awash in debt and so does Wall Street. For the most part, Wall Street is okay with this, because they are used to operating in a world of debt and leverage. All capital markets require is a clear and actionable plan, with a time table, from European policymakers, and a lot of certainty will be restored in global capital markets. This doesn’t mean that Greece won’t default on its sovereign debt, but financial markets need to know that the rest of Europe and the world will stand behind a real restructuring plan for that nation’s finances.

Like I say, the broader stock market is going to face some resistance around 1,220 on the S&P. If corporations come through on earnings and visibility, and the debt crisis gets under control, I see no reason why the main stock market averages can’t pop higher by a solid 10% before the end of the year. The correction within the primary trend (a bear market rally since the March 2009 low) may soon be at an end.

Gold & Silver Setting up for an Attractive New Entry Point

By Mitchell Clark, B.Comm.

An opportunity is now being created in precious metals if the current correction continues. Most precious metals have been falling in price, as financial markets continue to reassess the expectations for economic growth. With lower expectations for global economic growth, the demand outlook for raw materials and spot prices are also going down.

The price of gold has, in my mind, been worthy of a correction for quite some time now. In fact, I think it would be a very healthy development for the long-term trend. It wouldn’t surprise me if the spot price of gold were to retreat and consolidate around the $1,600 level. It’s trading around $1,700 now and $1,600 should provide a good base.

Perhaps an even better commodity to concentrate on would be silver. This precious metal is more useful in terms of its industrial uses and many argue that it hasn’t kept up with the spot price of gold and could therefore be a better trade. The spot price of silver just broke the $37.00-per-ounce level and there’s no reason why it won’t retreat further to the $30.00-per-ounce level if the current trend in capital markets continues.

This is a very difficult stock market and individual investors are loath to participate. While expectations for the future continue to be reduced, the fundamentals for gold and silver remain mostly intact and are therefore worthy of new positions when spot prices find a new base.

It’s a wait-and-see stock market and a wait-and-see spot price market for precious metals. I think the focus for speculative investors should be on gold and silver and that risk-capital investors will have an attractive new entry point very soon.

As for the rest of the stock market, share prices remain very vulnerable before third-quarter earnings season begins. Over the last little while, equity investors have had to endure tremendous shocks to the system: sovereign debt problems in Europe; the downgrade of U.S. sovereign debt; natural disasters in Japan; no improvement in housing prices; and no improvement in employment…the list goes on. I think it’s fair to say that the equity market has held up quite well all things considered.

What we know is that mature economies are now in a period of very little to zero growth over the next 12 months. We also know that developing economies are slowing down and the probability of another recession is going up. The trading action in financial and commodity markets reflects falling expectations for economic growth and an expansion in the time horizon for recovery. Predicting outcomes in this environment is a crapshoot—nobody knows how or when the economy will get better.

With belt-tightening going on at the individual consumer level and at the government level in virtually all mature economies, we should be in a slow growth environment for quite a long time.

Precious Metals Sector Deal-making Padding Investor Wallets

By Mitchell Clark, B.Comm.

There have been a lot of mergers and acquisitions in the mining industry lately and the consolidation is only going to increase with gold over $1,800 an ounce and silver over $40.00. The buying and selling of entire companies adds to the attractiveness of the mining sector, with the bonus of a potential takeover of one of your holdings at a premium price.

According to Ernst & Young, which compiles a lot of research on the metal and mining industry, the first half of 2011 saw a total of 19 megadeals in the mining industry, each worth over a billion dollars. This is twice the number of deals compared to the first half of 2010 and the average transaction value has more than doubled. North American took the lead as the most attractive region for mergers and acquisitions. Ernst & Young cited that the average mining company debt is at an all-time low, while cash flow and profitability are at all-time highs. With good availability of capital and historically low debt levels across the sector, the firm expects robust third and fourth quarters for mining company mergers.

Precious metals is the one sector of the stock market in which I would consider taking on new positions with enthusiasm, even though as a group, share prices have already advanced significantly this year. We’ve seen this advance especially in smaller companies with established production. Small operations see their business model improve significantly when the spot price of the underlying commodity moves higher, largely because junior miners are typically unhedged. At $1,800 an ounce for gold, virtually any producer of the commodity is making money hand over fist as cash costs for production typically average around $500.00 an ounce.

There is a unique set of circumstances that have come together at the same time for precious metals (gold and silver in particular). A number of factors have contributed to the major move in spot prices. These include a declining U.S. dollar, the sovereign debt crisis in Europe, huge increases in the global money supply, interest rates at record lows, the U.S. sovereign debt downgrade, stagnant supplies of precious metals, and consistent demand for the commodities.

I think it will take some kind of catalyst for the spot price of gold to move above $2,000 an ounce and stay there. It’s likely that this catalyst will be related to sovereign debt, which is an issue that hasn’t gone away. All that’s happened so far is that European sovereign debt has been bailed out with another round of new debts. It’s a vicious cycle of debt that will probably be responsible for the breakup of the euro currency sometime this decade.

Accordingly, the fundamentals for gold (and silver) continue to be robust.