https://www.stockhouse.com/Columnists/2011/Apr/26/Coming-junior-stock-eruption
Current lag in the TSX Venture Index happens every spring and it has a simple explanation
The junior market is on the verge of blowing up like a “Coke geyser.”
If you’re not one of the 13 million views of what happens whenMentos are dropped into a bottle of Diet Coke, you should know itcreates an eruption of foam reaching as high as 20 feet.
That’s exactly what the junior market is set to do soon.
Could it get any better?
The junior market hasn’t performed as well as should be expected over the last few months.
There are, as always, the few special situations that have done very well.
The overall market, however, has lagged significantly while thefundamentals say it should be setting new highs along with gold, silverand oil. But it hasn’t.
The table below breaks down the return of various assets since the start of the year:
This should be “Prime Time” for junior stocks that are often sohighly leveraged to the prices of the gold, silver, and oil. But juniorstocks have performed more poorly than almost any other related asset.
There are a number of factors one could easily point to for this lag. The Japan earthquake and financialfallout devastated junior stocks. Mr. Market believes gold and silverhave run too far, too fast. Overall economic sentiment has taken a turnfor the worse.
But they’re all wrong. The TSX Venture Index has fully recoveredfrom the post-Japan sell-off. Gold and silver prices are still wellbelow their inflation-adjusted historical highs and low for the current(and widely expected) negative real interestrates. Economic sentiment has never fully recovered from 2008.
The real reason for the lagging performance, I believe is much simpler. And it’s creating a great and predictable opportunity.
History repeats
Every year the TSX Venture goes through a similar seasonal cycle.
For example, last year the TSX Venture Index fell 19% between Marchand July. Meanwhile, gold, silver, and oil fell 3%, 2%, and 8%,respectively, over the same time period.
The current lag in the TSX Venture Index happens every spring and it has a simple explanation - financings.
Junior resource companies issue new shares year round, but mostdeals are completed in the late fall and winter. November throughFebruary is the peak financing period.
The trend hasn’t changed this year either. The only real differenceis that the total value of financing deals completed was much higher.
The table below shows how TSX Venture financings between Novemberand February increased by 80% compared to the same period the yearbefore:
The massive amount of financings (most with four month hold periods)is the most critical drag on the overall TSX Venture market.
With more than $5 billion worth of stock (that’s excluding anincrease in value of shares and value of attached warrants) coming freetrading, there’s a lot to soak up. After all, the total marketvalue of the TSX Venture market is about $80 billion. So a $5 billion wall creates a big hurdle.
What’s happening right now is the financial equivalent of droppingMentos into a bottle of Diet Coke and putting a cap on it. The cap isgoing to hold for a while, but it’s going to explode higher and fasterwhen it does. That’s why we’re seeing this as buying season forjuniors.
Catalyst for change
There are multiple catalysts to blow the lid off of the junior market.
There are major new discoveries being made every at the rate of once or twice per year.
Drilling season in the Yukon is about to get started and if anotherdiscovery is made, there’s going to be some big speculative premiums onalmost all Yukon-focused junior gold companies.
Also, as time goes by, there will be less shares coming on themarket. TSX Venture financing deals peaked last December. Those arejust coming free trading now. January and February were lighteractivity months and have left a smaller wall. In the end, all of thesedeals will be unlocked by July anyways. It’s just a matter of time.
Any way you look at it, the junior market is poised to explode overthe next few months and finish the year incredibly strongly if gold andsilver prices hold together.
Even if they don’t correct too hard (imagine $1450 gold and $40silver), conditions would be exceptionally positive for junior resourcestocks to do well.
Remember, oil, gold, and silver prices fell between 2% and 8% during the same period last year while the TSX Venture fell 19%.
Currently the inverse is about to happen – only an order ofmagnitude larger. Gold, silver, and oil prices are up significantlybetween 9% and 50%. But the TSX Venture index is actually down despitethe most optimal conditions.
Everything is in place for a big jump in junior resource stocks andconditions will likely continue to be in the coming months (more reasons why available here).There may be an inclination to sell in May and go away, but theseasonal nature of the junior market is making it a much better time tobe a buyer.
Andrew Mickey, Chief Investment Strategist,has quickly emerged one of the world’s leading publishers of investmentideas and recommendations. Never one to get caught up in the herd, hehas made his mark finding investment opportunities long before the restof the pack catches on.
Andrew, a contrarian to the core, has made extremely successful calls oncoal, gold, silver, oil, potash, and technology stocks resulting intriple-digit gains for his readers. He is best known for urginginvestors to get out of ethanol stocks and buy fertilizer stocks duringthe height of the ethanol boom in July 2006.
His expertise and investing acumen his highly sought after. He currentlysits on the advisory boards of two venture capital firms that havejointly controlled almost half a billion dollars in assets.