While Few are Watching …

Over the years we have made many notes of small things we observe in various market sectors, as they often come in useful when pondering trading decisions. In the bear market of the highly cyclical gold sector in recent years, one of the things that seems to be happening with unwavering regularity, is that as year-end approaches, many of the stocks that have been beaten down the most will suddenly begin to recover and often rally sharply for several weeks.

Inside the Kusualethu Mine

Photo credit: Anglo Platinum

Partly this is due to tax loss selling effects wearing off. Most institutional investors finish their tax loss selling shortly before the end of October, while individual investors will as a rule tend to engage in tax loss selling until December. Traders know that beaten down small cap stocks that are especially weak into year-end will tend to outperform early in the new year, as tax loss sales are often reversed as the new year begins. As an example, consider the action in the junior gold miners ETF GDXJ in late 2014 – early 2015:

GDXJ during the 2014 tax loss selling period and the rally thereafter into late January 2015. Almost 45% were gained in the space of five weeks – this is not to be sneezed at – click to enlarge.

Naturally, movements in the gold sector are also driven by the action in the precious metals, but the strong influence of the tax loss selling period is undeniable, especially if one considers the action in gold mining stocks relative to gold in the time period shown above:

GDXJ relative to gold in the 2014-2015 tax loss selling period and its aftermath. This nicely illustrates the impact of tax loss selling and strategies trying to profit from it – click to enlarge.

Since traders try to anticipate this effect, it usually starts and and ends earlier than one would normally expect. Thus, as soon as anticipatory buying aimed at benefiting from the rebound in January outweighs the remaining tax loss selling pressure, the price low is put in and prices reverse. The lead and lag times vary slightly, but have been quite similar in recent years.

However, the title of this post says “Marginal Gold Producer Takes Off”, which brings us to a specific stock, the action of which we have (we think) a fairly good handle on, and which we have actually often used as a leading indicator when it started behaving in an unusual manner.

Please note that this is emphatically not a recommendation to chase this stock, especially as it has just risen so much in such a short time that it seems quite ripe for at least a short term pullback (which may came now or later – we simply don’t know). Readers must decide for themselves how they want to use the information presented here. However, we will provide links to more background information at the end of this post for those who wish to research the situation further.