The tech stock favourites of the stock market have fallen back and precious metals and the companies that produce them may pull back after a brief rally. Toronto-based Brian Hoffman, CPA, CA, is a member of the Canadian Society of Technical Analysts and a frequent contributor to Investor’s Digest of Canada. He names the U.S. tech stocks and Canadian gold stocks you should look to for the next major multi-year bull market rally.
In recent years, I’ve mentioned that the stock market bull is getting long in the tooth. Well, the tooth fairy has paid stocks a visit this year and it hasn’t been pleasant.
The current market malaise that is unfolding is similar to what we’ve experienced once every few years. The interval from one bull market top to the next top has generally occurred no more than seven years apart. In recent decades, serious stock market corrections occurred in 1987, 1991, 1998, 2001-02 and 2008.
The seeds for the current bull market top were sown last year. Since the spring of 2015, both Canadian and U.S. stocks have failed to make a new high. In fact, they recently breached their August lows. The bearish implications from that price action could result in an even steeper stock market slide.
Even though the broader U.S. stock market indexes only managed small losses overall last year, the technical outlook weakened considerably when volatility ramped up in August.
In fact, without the benefit of technology stocks, the performance of the S&P 500 Index would have been similar to the 11 per cent loss of the S&P/TSX Composite Index. After all, the so-called FANG stocks really experienced a run-up last year.
Tech stocks oversold
They comprise Facebook Inc. (NASDAQ─FB), Amazon.com Inc. (NASDAQ─AMZN), Netflix Inc. (NASDAQ─NFLX) and the former Google Inc., which recently changed its name to Alphabet Inc. (NASDAQ─GOOGL). Lately, the price changes in the shares of those technology stock darlings are biting investors.
After several losing days to start the year, the broader stock markets continued to weaken in February to the point that it became oversold – at least temporarily.
Given the seasonal strength generally associated with winter and spring, the stock market could rally until April, or perhaps into early May. However, the rally may not last beyond March before stocks return to correction mode.
Hopefully you’ve kept some powder dry in order to capitalize on stock market buying opportunities since what follows the bear market will be another multi-year bull market in both stocks and commodities.
For U.S. stocks, the short-term rally could take the S&P 500 Index to the 1,950 to 2,000 range. In terms of the downside risk, breaching the February low could bring about a free fall.
For Canadian stocks, a rally in the S&P/TSX Composite Index could run until it hits a wall of resistance at 13,200. On the other hand, if it fails to hold the January low of 11,500, more carnage will follow.
Precious metals resurgence
Something interesting is happening with precious metals. During last August’s stock market volatility, the prices for gold and silver bullion and the shares of the companies that produce those precious metals fell along with the broader stock markets.
However, this year, their performance has diverged to the upside. Does that mean that gold and silver bullion have, along with the miners of those precious metals, bottomed?
Despite the recent technical price strength, precious metal miners and gold and silver bullion became overbought in February. As a result, a pullback is in order and we’ll see whether it’s a healthy correction or something more concerning.
That’s because there’s still a risk that gold and silver may experience one final drop lower before a multi-year rally ultimately pushes their prices to all-time highs.
Gold bullion managed to push through resistance in the range of US$1,180 to US$1,200 an ounce. However, silver’s rise may stall at about US$16 an ounce, a key resistance level that it needs to penetrate before the longer-term technical outlook improves.
To the downside, gold and silver bullion could yet fall below US$1,000 and US$13 an ounce, respectively, or even lower.
Gold stocks acquired
Since my previous column, two of the gold mining stocks that I profiled in December were acquired.
Tahoe Resources Inc. (TSX─THO) is buying Lake Shore Gold Corp. (TSX─LSG). Meanwhile, Kirkland Lake Gold Inc. (TSX─KGI) has bought St. Andrew Goldfields Ltd. Both of the acquisitive miners paid fairly decent premiums to where their targets’ share prices were trading prior to the announcements.
The share price of Alacer Gold Corp. (TSX─ASR), the other gold stock that I profiled in my previous article, has bounced around but is little changed from its price in December. Should the precious metals sector experience a price correction, then Alacer’s share price will need to hold the $2 level. Otherwise, the technical outlook will weaken.
Two other gold stocks to consider are Sandstorm Gold Ltd. (TSX─SSL) and Alamos Gold Inc. (TSX─AGI). Both are well-financed and have very little debt.
Sandstorm is a gold streaming royalty company. That’s a fancy way of saying it provides funding to gold mining companies in return for rights to a share of those companies’ gold production.
By contrast, Alamos is a Canadian gold producer that operates one mine in northern Ontario as well as two in Mexico.
Pullbacks are likely to affect Alamos and Sandstorm’s share prices given the big run-up in the precious metals sector this year. Sandstorm’s shares have support at $3.30, whereas Alamos may find support at $5 a share.
Investor’s Digest of Canada, MPL Communications Inc.
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Investor's Digest of Canada •3/6/16 •