Name That Trade – $NEM, Left for Dead

by Enis March 19, 2013 10:53 am • Commentary

The gold miners have been totally decimated in the past 6 months.  The ETF is down from around 55 in Sept 2012 to 37 today, a 35% drop for the sector.  Meanwhile, gold and silver the commodities are only down about 12% and 20% respectively from their fall peaks.

I wrote about some of the reasons for this divergence back in Nov 2012 in this CotD post.  Here is an excerpt:

The natural question is, what’s the reason for the huge divergence?  I think there are several reasons.

  1. Gold the commodity is owned by a much larger, more diverse investor base.  People throughout the world buy or sell gold for numerous reasons, in many cases unrelated to the stock market.  In the current global environment of easy monetary policy, there is a large sticky investor base that views gold as insurance
  2. Gold miners, as stocks, have had a very poor earnings performance in the past year.  Their cash costs on their mining projects have risen while gold and silver are essentially flat, squeezing their margins.
  3. Commodity stocks often trade at lower multiples as the underlying commodity moves higher, as investors become more nervous about future losses from the commodity reversing those gains.


Fast forward to today, and the miners continue to underperform.  But there are subtle signs of excessive bearishness.  

Here’s the 5 year chart of GDX, the Gold Miners ETF:

[caption id="attachment_23833" align="alignnone" width="625"]5 year weekly chart of GDX, Courtesy of Bloomberg 5 year weekly chart of GDX, Courtesy of Bloomberg[/caption]

The lower panel shows the volume.  I’ve circled in red the capitulation low from May 2012.  The recent spike in volume 2 weeks ago, which I’ve circled in green, achieved as similar level of selling pressure, also potentially capitulation.

More evidence in favor of a recent capitulation in the sector comes from the Short Side of Long blog, who pointed out that fewer stocks in the sector are making new lows even as the ETF made a new low:

Screen Shot 2013-03-19 at 10.44.15 AM

Meanwhile, gold was able to hold its lows from May 2012, with some room to spare:

[caption id="attachment_23835" align="alignnone" width="630"]1 year daily chart of GLD, Courtesy of Bloomberg 1 year daily chart of GLD, Courtesy of Bloomberg[/caption]


I don’t have a strong opinion about the long-term outlook for gold, but in the short-run, I expect 150 to hold on GLD.

As for single names, NEM is the best of breed in the space in my view.  It’s a 10 P/E name paying a 4.25% dividend yield.  These miners can trade cheap given their leverage to volatile precious metal prices, but the technical picture on NEM looks favorable in the short run as well.  Here is the 1 year chart:

[caption id="attachment_23836" align="alignnone" width="632"]1 year chart of NEM, Courtesy of Bloomberg 1 year chart of NEM, Courtesy of Bloomberg[/caption]

The stock made a RSI momentum low (shown on the lower panel) on Nov. 15th.  Since then, the stock has continued to decline, but momentum has not made a new low.

So the recent low at 38.50 is a good area against which to put on long delta trades.

When I started writing this post this morning, NEM was trading below $40, and I intended to initiate a new bullish trade, likely by selling the Apr 40/38 put spread for around 0.75.  However, now that put spread is only worth 0.65, so the entry is not what I want, and I am going to sit tight for now, doing nothing.  But if NEM does make a move below 40 again this week, I will likely look to sell that put spread.  Why sell a put spread instead of buy a call spread?  When a stock or sector has such a dramatic move lower in only 6 months, it usually takes time to form a base.  As a result, I’m more confident that NEM might not move much lower from here, but less confident that it has a quick move higher in it.