- Abbreviated Market Update 22nd December 2017

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The Stock Market

The US stock market, as represented by the S&P500 Index (SPX), has continued along its upward path. It may feel like the upward path is never-ending, but the extension of the rally is potentially setting the stage for a substantial decline from a high at around year-end or during the first half of January.

Based on current chart patterns, it's likely that the first sign of serious weakness will occur in Europe, not in the US.

The EURO STOXX 50 Index (STOX5E) has now spent 26 trading days oscillating within a horizontal range, the bottom of which lies at 3525. It closed at 3571 on Thursday 21st December.

A daily STOX5E close below 3525 would be a sign of serious weakness and could be a timely prompt to establish a new bearish speculation focused on the more highly-priced US market, while a daily STOX5E close above 3620 (the top of the range) would suggest that the market was temporarily out of danger.

Gold

In the latest Weekly Update, we wrote:

"...there has been a big improvement in the sentiment situation. The question is: has there been a sufficient flushing-out of leveraged speculators to set the scene for what we would deem a tradable rally (a rally lasting more than two months and adding at least $100 to the price)?

The answer is: possibly, but until a reversal is signaled by the price action or there is at least a further 50K-contract reduction in open interest it will be prudent to assume that a short-term decline to the low-$1200s is still on the cards.

A definitive sign of a trend reversal would be a weekly close above $1300, but it's likely that an earlier sign would take the form of substantial strength in the gold-mining sector relative to gold as indicated by a strong rebound in the HUI/gold ratio. The fact is that the HUI/gold ratio usually doesn't lead the bullion market at important price bottoms, but in most cases it moves sharply upward during the 2-week period immediately after an important price bottom.

...the HUI/gold ratio rebounded from a 12-month low last week, but if last week's low for gold and the associated mining indices was THE bottom then there should be significant additional strength in the HUI/gold ratio this week."

In other words, a trend reversal would be clearly signaled by either a close above $1300 or a sharp up-move in the HUI/gold ratio. Neither of these has happened yet. The US$ gold price has risen steadily and broken above initial resistance in the low-$1260s, but it remains about $30 shy of trend-defining resistance at $1300. The HUI/gold ratio has also risen steadily but is yet to demonstrate the sort of strength that would typically be seen near the start of a substantial rally. Consequently, the market still has a way to go to provide the reversal evidence we seek.

At the same time, the fundamental backdrop has turned gold-bearish due to shifts in interest rates over the past few days.

The upshot is that our overall assessment has not changed. Until a reversal is signaled by the price action or there is at least a further 50K-contract reduction in open interest it will be prudent to assume that a short-term decline to the low-$1200s is on the cards.

Gold Stocks

Tax-related selling could have been a factor in the gold-mining sector until the end of this month. However, with many of the beaten-down junior gold-mining stocks having rebounded strongly over the first four trading days of this week it seems that tax-related selling had mostly run its course by the end of last week.

The highest-profile gold-mining indices and ETFs have broken above initial trend-line and/or lateral resistance, but each one ended Thursday's session at moving-average (MA) resistance. Specifically, GDX and the XAU are now challenging their respective 200-day MAs and the HUI is now challenging its 50-day MA.

These indices/ETFs are not yet short-term 'overbought' and are poised to make additional gains before reaching multi-week tops, but the tests of MA resistance may lead to some 'corrective' price action over the next few days.

As mentioned above, the gold-mining sector is yet to demonstrate enough strength relative to gold bullion to confirm that we are dealing with something more than a multi-week rebound.

The Dollar Index (DX)

The DX has traced out a pattern that looks like a "head and shoulders" top with a "neckline" at 92.5. The pattern is so obvious that it is not predictive. That being said, if support at 92.5 is breached on a daily closing basis then a quick decline to below the September low (91) will be likely.

Sentiment and fundamentals remain supportive for the DX. We therefore doubt that a break below the September low would be sustained.

Updates on Stock Selections

Notes: 1) To review the complete list of current TSI stock selections, logon at http://www.speculative-investor.com/new/market_logon.asp and then click on "Stock Selections" in the menu. When at the Stock Selections page, click on a stock's symbol to bring-up an archive of our comments on the stock in question. 2) The Small Stock Watch List is located at http://www.speculative-investor.com/new/smallstockwatch.html

Company news/developments for the week ending Friday 22nd December 2017:

  *Almaden Minerals (AAU) has confirmed, via additional drilling, the discovery of significant gold mineralisation at its Ixtaca gold-silver project in part of the modeled PFS pit that was previously considered waste material. The new zone of mineralisation will be included in future mine plans and its discovery highlights the expansion potential of the project.

AAU's stock price plunged between late-October and early-December for no valid company-specific reason, prompting us to describe the stock as "dirt cheap" in the 11th December Weekly Update. The stock price is now about 35% higher. It still offers very good value, but some consolidation of the recent gains would be normal.

  *Alio Gold (ALO) reported three exceptional intercepts from drilling at its Ana Paula project in Mexico. The first was 112.0m of 3.85 g/t gold, the second was 33.1m of 7.07 g/t gold and the third was 54.6m of 7.19 g/t gold. These results confirm the high-grade nature of the deposit, but beyond that they don't have great significance. This is because -- as was the case with even better results reported about two months ago -- the associated holes were twins of earlier holes and were drilled for metallurgical testing purposes. The results of the metallurgical testing will be incorporated into the FS, which is scheduled to be complete in Q2-2018.

The next market-moving news related to the Ana Paula project probably will be the results of the 6-hole 4,000m drilling program designed to test the extension of the high-grade breccia mineralisation below the PFS pit. This program is scheduled to begin in early-January.

ALO expects to have gold production of about 100K ounces/year over the next few years from its San Francisco mine (also in Mexico), but the exploration/development-stage Ana Paula project is where the bulk of the company's value lies. If the FS indicates robust economics, which it probably will, and drilling indicates extension of the high-grade mineralisation below the proposed pit, then Ana Paula will make ALO an attractive target for an acquirer within the next 12 months.

  *Blackham Resources (BLK.AX) was halted from trading on 14th December pending new information regarding its refinancing and will remain halted until 27th December, but in the meantime there has been some news.

On 24th November BLK announced that it had agreed a $60 million Funding Package with Pacific Road Capital and that the "funding agreement is at executed term sheet stage, with formal legal documentation well advanced and expected to execute within one week". However, in a press release on 20th December the company advised that the transaction between itself and Pacific Road would not be proceeding as previously described.

We won't know exactly what that means until 27th December, but it seems that BLK's risk profile, having taken a turn for the better in late November, has just taken a turn for the worse.

  *Novo Resources (NVO.V) is not a TSI stock, but we've been following the story. It is a classic "story stock", in that its market capitalisation over the past few months has borne no resemblance to the value defined via drilling and sampling. Story stocks are valued in the present based on dreams of what the company could be worth in the future. The risk with such stocks is that it often doesn't take much in the way of negative news to cause the price to collapse.

The NVO stock price fell 28% on Thursday 21st December in response to drilling and sampling results that cast doubt upon the dreams of bullish speculators. Given that they were associated with only a small part of NVO's land package, the results that were reported on Thursday didn't kill the story. However, the results are significant and did not come close to matching bullish expectations.

At the end of the day NVO's stock price held support at C$3.90-$4.00 and may well rebound over the days ahead, but keep in mind that even after the recent shellacking the stock has a market cap of almost C$600M. This is a long way above the amount that could be justified by resource definition completed to date, which means that the downside risk remains high. At the same time, there is now scope for positive results from future sampling to give the price a hefty boost.

The NVO news affects the companies that have been riding on NVO's coat-tails, including Artemis Resources (ARV.AX). ARV and NVO are in a 50/50 JV covering a significant part of NVO's land package.

We suggested ARV as a way of participating in the NVO story without 'paying through the nose', and added it to the Small Stocks Watch List (SSWL) at A$0.14 several months ago. The lower valuation hasn't prevented ARV's stock price from tanking along with the NVO price, though, and after trading in the A$0.50s at its November peak the ARV price is now in the mid-A$0.20s.

Despite the recent price plunge, we don't think that either NVO.V or ARV.AX is a good candidate for new buying at the moment. It's not that the risk/reward is bad; it's that we can't quantify the risk/reward and that the hard evidence has begun to deviate from the bullish script.