Yesterday we saw the precious metals mining stocks offer a first glimpse of what euphoria feels like; there were many many stocks up 8, 9, 10, even 15%. The charts are looking good and the breakouts from the broad bases which have formed during the last few months are something for the textbooks. It feels good to own stocks that go up 10% each day. But don't get used to it....
While I believe there is some more upside left in the current rally it's hard to say just how much upside is available before the next major correction. The following valuation chart based on net asset values (NAV) from RBC has proven to be a useful timing gauge in the past:
A 20% premium to NAV (reached in August 2016 before miners corrected ~40%) has historically been a warning signal that it's time to lighten up substantially. The NAV is dynamic because it's based upon multiple factors including metals prices. While we aren't in the danger zone yet (10.2% premium to NAV as of yesterday's close), we could be there very soon if we keep having days like yesterday.
A couple more observations that came to me this morning morning:
- Uranium spot prices rose last week while the equities got clobbered. The correlation between spot pricing and uranium equities continues to be lagging at best and insignificant at worst.
- The Trump reflation trade is unwinding and this helps to explain the steady grind higher in precious metals and mining shares:
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