While the rally in financial stocks is deservedly getting most of the spotlight, gold mining stocks have also made impressive gains since rallying from end of 2011 lows. Up well over 13% from its mid-December pullback are shares of stocks like Yamana Gold (NYSE: AUY). Gaining 8% in half as much time, including more than 1% on Thursday, stocks like Goldcorp (NYSE: GG) are trading at new, short-term highs.
The strength in individual gold mining stocks has helped earn exchange-traded funds like the Market Vectors Gold Miners ETF (NYSE: GDX) and the Market Vectors Junior Gold Miners ETF (NASDAQ: GDXJ) our lowest possible “consider avoiding” ratings of 1 out of 10. This suggests strongly that the sector, in the short-term, is very overbought and likely to underperform, if not outright reverse and trade significantly lower, over the next few days.
The last time either of these ETFs were earning these kind of low ratings was back in late November and early December. Then, the GDXJ earned “consider avoiding” ratings for six days in a row before breaking down to trade lower by more than 15% over the next five days. The same selling in GDX took that fund back into bear market territory, where it continues to trade.
Heading into trading on Friday, GDX has a negative, short-term edge of more than 1%, while GDXJ has finished in overbought territory below the 200-day for four days in a row.
Traders looking for potential single stock opportunities on the other side of a short-term sell-off may want to keep miners like Randgold Resources (NASDAQ: GOLD) and Newmont Mining Corporation (NYSE: NEM) on their trading watchlists. Both stocks are trading in bull market territory and could become attractive if pullbacks from new, short-term highs take the stocks into or near oversold levels.
Another option is to put your money where the bullion is rather than where the miners are. Recently back above its 200-day moving average, the SPDR Gold Trust ETF (NYSE: GLD) has set new, short-term highs for the past three days in a row and is due for short-term underperformance. Again, if this underperformance encourages any aggressive selling, there may be another opportunity to pick up shares of GLD at significantly lower levels within the next few days.
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David Penn is Editor in Chief of TradingMarkets.com.