This Blue-Chip ‘Secret Signal’ Says Buy Resource Stocks Now

Australian Resource stocks have kick-started 2013 with a explosively bullish ‘secret signal’.

It’s telling you that the 24-month bear market in resource stocks is over.

It signals that rather than the recent leg up being yet another quick bounce on the way down, it is in fact be the foundation block of the next big rally for mining stocks.

I dearly hope so – because after two long years in the trenches, the mining sector is littered with beaten-up bargains.

And with cheap resource stocks on offer, and a new bull market starting…this ‘secret signal’ could mean that NOW is the best time to enter the resource market in a very long time.

So, what is the secret signal that makes me so confident?

Well the ‘Metals and Mining index’ which tracks all Australia’s main resource stocks has just formed a primal technical signal called a ‘Golden Cross‘.

If this means nothing to you, ‘Investopedia’ describes it like this:


‘The Golden Cross indicates a bull market on the horizon and is reinforced by high trading volumes. Additionally, the long-term moving average becomes the new support level in the rising market. Technicians might see this cross as a sign that the market has turned in favor of the stock.’

A Golden Cross forms when the short-term moving average breaks above the long-term moving average. When this happens, it tells you the trend is firmly on the way back up again.

You can see this in the Metals and Mining index in the chart below. The long-term is the mean of the previous 200 days’ prices, and is the red line. The short-term average is the mean of the previous 50 days’ prices, and is the blue line. This has just broken above the red line for the first time in years.

The trend has changed up at last.

First golden cross for mining stocks since 2010
 

First golden cross for mining stocks since 2010
Click here to enlarge

 

Source: Slipstream Trader

This doesn’t happen often.

In fact it’s the first golden cross for the mining index since mid- 2010.

It’s a great start to the year for resource investors. To illustrate why, you just need to look at the last few times we saw a golden cross.

The first one in the chart above was back in May 2009.

The mining index rallied 35% from there. And this rally went for a full 11 months, before the index pulled back.

The next one in the chart above was in September 2010. This time the rally went for eight months, gaining 20%.

So you can see that this powerful technical signal, the golden cross, has been a very reliable signal when it comes to the mining sector.

Small-Cap Mining Stocks Outperform the Blue-Chips

But if the scope for a 19%, or even a 35% gain, doesn’t get you going, then bear in mind this index is mostly made up of the so called ‘blue-chip’ mining stocks like BHP (ASX:BHP) and RIO (ASX:RIO). BHP is $120 billion in terms of market capitalisation – which makes it bigger than the GDP of South Australia and Tasmania combined – and stocks this big tend to move more slowly.

But when the blue chips could be set to gain 35%, this is the time to look at the smaller stocks. Small-caps or mid-caps can often as much as double or even triple the gains seen in the blue chips.

It’s essential to be selective of course. There are around a thousand mining stocks in the Aussie resources sector now, and many should come with a health warning! In fact there are simply too many stocks out there for the capital available.

In December 2012 ASX stocks raised $3.8 billion. Compare this to December 2008, when they raised $13.1 billion. The stream of capital looking for resource opportunities has slowed.

This means that many of the small-cap mining stocks are running very low on cash. Some of them will simply run out and cease to exist as companies.

The markets follow the process of evolution as closely as the wild animals on the plains of Africa do. And just the fittest companies will pass the test. The best companies with the best projects, people, and best location will attract the cash, and they will survive.

And this is where the opportunities now lie.

After a two year long down swing in the cycle of the mining sector, we are now ready to see the next leg up. Those genuine contenders beaten up, and hidden amongst the thousand could realistically make some triple-figure percentage gains in the next 6-12 months.

Iron ore, copper or gold?

But it will be essential to know which sectors to go for.

It’s been a long while since I’ve said anything kind about iron ore or metallurgical coal, the two main ingredients of steel, but stocks tied to those industrial commodities could do very well this year. Iron ore has obviously had a huge run already, but there are still many iron ore juniors that are yet to feel the sun on their face.

Copper is another industrial commodity that is starting to look very interesting again too. Chinese demand is picking up again, and global supply is still dragging its heels.

The Aussie copper sector is smaller than ever since bidding started for Discovery Metals (ASX:DML). This was a D&D tip back in 2010, with readers making 108% on this one. Copper will be an obvious beneficiary of a recovering mining sector, so it looks like a good time to take another look to find a hidden gem in the sector.

A big part of the reason that the mining sector’s chart looks so attractive from here is that China is coming back to life – and quickly. Not everyone in the office agrees with me on this one, but it’s what I believe. This is something I am writing about for Diggers and Drillers readers right now, ready for the next newsletter.

China is the biggest importer of gold globally now. They just announced a monthly import of 100 tonnes of gold, worth around $5.5 billion. And when the Chinese are feeling wealthy, they buy more. So a recovering China is good for gold too.

Also consider that the Aussie gold sector is worth only $30 billion in total. That makes it tiny compared to BHP, which is four times the size. When china is importing over $5 billion in gold a month, you can see that it wouldn’t take much in terms of global capital flows to get Aussie gold stocks going!

But with a swag of freshly tipped gold stocks on board already, I’m looking more to the industrial commodities next – being careful of course to pick the companies with the best projects, with the best people, and in the best jurisdictions.

Picking stocks is just part of it.

It’s about timing too, and I’m wagering the next upward cycle in mining stocks has just begun.

Dr Alex Cowie
Editor, Diggers & Drillers

Money Morning Australia