Since the market open last Friday when BREXIT fears were fully setting in and panic was in the air the gold miners as represented by the GDX have actually sold off significantly. Since Friday’s market open GDX is down nearly 4%. Yes you read that correctly. Sentiment on the sector is hot and the talking heads are bullish on gold and mining shares, yet we have actually seen a significant amount of distribution in the last 3 trading sessions:
GDX (Daily)
‘Distribution’ is another term for professional selling, or shares changing hands from institutional traders to retail investors & traders. Opening gaps are often emotionally driven (especially following a major event such as BREXIT) and only so much volume gets traded on the opening cross and in the first few minutes of a trading session. Institutions need to spread their buying and selling throughout the entire trading session so as to not adversely affect the prices at which they buy and sell. The last 3 trading sessions in the gold miners have all the hallmarks of a significant amount of institutional liquidation:
GDX (5-minute)
Lower highs as price continues to compress near support ($26.40-$26.60) with open gap below at $25.22. Also notice the number of large red volume bars (at bottom) relative to green volume bars.
Why might professional traders be selling the gold miners when conditions (both micro and macro) seem almost as if they couldn’t be any better for the sector? The answer is that a ~120% rally in the space of five months probably factors in much of the good news. Moreover, major market inflection points tend to coincide with emotional events such as the BREXIT. After all the BREXIT is now in the past, the vote is known, what else is there to look forward to? Buy the rumor, sell the news.
Seasonality also plays a role, we happen to be entering the hands down worst month of the year for the gold miners historically:
Arca Gold Bugs Index Seasonality (1997-2016)
Since 1997 the gold miners have fallen during July nearly 3/4 of the time for an average performance of -3.8%.
Perhaps most interesting will be how GDX trades during the final two trading sessions of the 2nd quarter. Portfolio managers have two days to conduct quarter end rebalancing and window dressing; how they act will be telling.
Subscribers of the Trading Lab over at CEO.CA have been long DUST (3x bear gold miner ETF) for the last couple of days and remain long as of the close of trading today. Send an email to ceotechnician@gmail.com if you are interested in subscribing to the Trading Lab and receiving our daily morning market emails.
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