The Big Gold Signal No One Talked About

Crazy can't even come close to describing what happened last week. The Dow had four 400-point swings in a row for the first time in its 115-year history. Trading was a complete sideshow all week. The yield on the 10-year Treasury note hit a record low. Gold hit $1,800 per ounce. And nearly every one of the 500 stocks in the S&P index ended down midweek.

You want a better breakdown? The Dow dropped 634 points Monday, rose 429 points Tuesday, plunged 519 points Wednesday, then surged 423 points on Thursday. Despite the fear, we ended Friday in the green. Believe it or not, it was the first time since early July that the Dow and S&P index rose for two consecutive days.

Bear Market Territory?

Since the market highs of April 29, the Dow is down 12 percent. The S&P 500 is down 13.5 percent. No shallow bear market yet. But there's still a lot of pessimism in the market with everything that's going on around the world.

If you read last week, I said the bottom for the market's recent sell off was forming and to buy on the dips. If you would've bought on the dips, I think you're going to be happy (if you're not already). As a matter of fact, because many of my investments (and probably yours) are Canadian-listed stocks on the TSX, you would've more than likely made some money.

The S&P/TSX index had posted its best week in more than a year, up 6.26 per cent while its little brother, the S&P/TSX Venture, was up 4.85%. Buying on the dips could've netted you more than that.

But as I said before, I can't predict political events. I still don't know what Europe has in store for us or what Bernanke's breakfast will be next week. I am still looking for a catalyst on August 26 when Ben speaks at Jackson Hole, but I don't know what he'll say. That's why it's always better to focus on what we do know, instead of what we don't know.

What We Know and What We Don't

We don't know if this is the bottom, but what we do know is that if you look at stocks and treasuries the evening of August 10, the S&P 500 closed cheaper relative to treasuries - cheaper than any time in the last 36 years, since 1975. That means for the first time in the last three decades, the yield on the S&P exceeded the yield on the 10-year US Treasury.

We know that once the yield on equities relative to Treasuries exceeds 4%, equity markets tend to do very well in subsequent months. So while there is a lot of risk out there, there is also a lot of risk factored into the prices of bonds and stocks.

We know confidence in our markets is very low. But again, we know for a fact that when confidence hits a trough over a 12-month time period, we typically get double digit returns on stocks. So while I don't know if this is the bottom, I do think stocks are cheap.

We know insiders are buying at a pace not seen since the market bottom of March 2009, when the rally began. They are buying big time. According to Vickers Weekly Insider Report, the long term average of the ratio of insider sells to buys falls in the 2:1 and 2.5:1 range. In other words, the norm is that insiders sell more than they buy. Recently the ratio was 1.68:1, which is bullish.

After last week's 513-point plunge, the ratio was 0.33:1, extremely bullish. Just weeks ago, the Vickers report had the sell-to-buy ratio at 6.43 to 1. This is higher than 95% of other weeks' readings over the last decade. The insiders sold, forced the market downward and are now buying back millions upon millions worth of stock at much cheaper prices.

We know that when you see stocks that have been badly battered more on fear and panic than fundamentals, you tend to see a strong rebound over the following few months. The way the markets tanked was a clear indication to me of panic selling over the last 7 trading days.

We know this isn't 2008. A week before that I said.

The phones of my brokers haven't stopped ringing - but they're not phone calls from retail clients - those are dead. They're phone calls from deal makers and institutions. That means deals are being done and some hot issues are being worked on in anticipation of the next rally.

Trading ideas and projects are still being pitched to money managers. In 2008, no one would even try to pitch anything because everyone had gone into hiding. Not so today. Pitches are still being thrown around, and in Canada at least it's clear that many are acting on them. This is not 2008.

The Bottom Line

With all that being said, I remain cautiously bullish - especially towards the gold miners and the juniors. If I see a bigger dip, I am looking to buy. There's a reason I haven't sold any of my mining shares lately.

My current portfolio is clearly focused on emerging production stories and strong exploration plays. Almost all of my stocks or stocks I plan on buying have a resource in hand or have drilled into something special. These are the projects I think will really flourish way when the rally begins.

I am expecting a very strong rally in the gold sector so if you see something that's good value with good management, I'd be picking away at it. Don't stay out of the market because the media says it could go lower. Why? Because aside from the history-making volatility last week, there was one signal that mattered more to my portfolio than any others.

The Big Signal No One Talked About

When the indices plunged mid-week, gold hit a record high of $1800. That's hardly a surprise for me and if you have been reading the Equedia Letter for a long time, you would know this. I think gold will continue to go much higher.

But that's not what caught my attention. When the indices plunged mid-week and gold hit a record high of $1800, guess what companies soared? That's right, all of the gold majors. For the first time in a long time, I saw gold stocks rally with the price of gold. Every gold major surged when gold hit $1800: Barrick (ABX), Goldcorp (GG), Kinross (KGC), Freeport McMoran (FCX), Yamana (AUY)...you name it.

Just take a look at the Market Vectors Gold Miners ETF (GDX) which surged 4 out of 5 days, ending up nearly 6%. Even the Market Vectors Junior Gold Miners ETF (GDXJ) soared, ending up just over 7%. This is a big signal - one I am shocked that media outlets and other prominent newsletter writers failed to mention. All they saw was the volatility.

The gold mania is beginning and gold stocks are going to be a lot higher soon as gold looks to crack the $2000 threshold. The gold producers climbed significantly when gold rallied to $1800 last week. Imagine what they will do when gold hits $2000. Imagine where gold will go once QE3 is announced. Imagine where gold will go once Europe spends its way out of trouble. Just imagine.

Once the majors get rolling, the juniors will follow as buyouts and takeover rumours begin. The majors will take advantage of beat up juniors and this will fuel speculation into that market segment. Then the triple digit returns will begin.