Junior miners are linked to stocks. And stocks are/were pulled higher by the soaring interest in AI. Doesn’t it all look familiar?
Bitcoin is a game-changer, it’s practically a new type of money that will substitute fiat currencies, NFTs, and now AI. We live in a brand-new world, where there’s plenty of money and old rules like periodic recessions and big declines in stocks no longer apply.
Or are we?
Cryptos might indeed be a new form of currency, but why should it imply that governments will give away their monetary power? Those that didn’t skip history classes know that wars were waged for monetary dominance, and people expected that the Powers That Be will give it away… Just like that?
Fat chance.
NFTs have already proven to be a specific niche that needlessly got as much attention as it did recently. In fact, the interest has already waned.
Now it’s the turn for AI.
The above chart from Google Trends shows that the interest in AI just peaked at very high levels, greatly surpassing the one for the NFTs. No wonder, it’s easier to buy an AI or AI-related stock than to invest in NFTs.
Anyway, while all those technologies (including blockchain) are revolutionary, they are not necessarily going to change how the world works overnight except for some local changes, and those can actually disrupt economic activity in the near term.
Remember the… Dot-com Bubble?
The internet wasn’t just a fad, but the excitement that it initially caused stocks – especially tech stocks – to soar waaaay too high and waaaay too soon.
And they plunged in a spectacular manner.
Could this really be happening again?
Of course. Just look at the NASDAQ chart and take just a second or two to compare the 90s rally with what we saw recently.
They’re very similar, and it’s clear at first sight.
This time the volatility wasn’t as big, so it’s no wonder that the final top, initial decline, and then the correction took more time. I marked both periods with black rectangles.
The rectangle covers volume, and that’s not accidental. The action in it confirms that the situations are indeed analogous. The final tops formed on volume that increased rapidly, then it declined along with prices, and it stayed stable during the final pre-slide correction. That had been the case in 1999 / 2000, and it has been the case in recent months, weeks, and days.
Back in 2000, tech stocks declined, and mining stocks (XAU Index is a proxy for gold and silver mining stocks, and it’s marked with orange on the above chart) moved higher, but that was when those two markets had been negatively correlated in the long run (based on the 250-session correlation coefficient that you can see at the bottom of the above chart).
The correlation has been positive for a long time now, which means that when tech stocks slide now, they are likely to take mining stocks with them.
And are tech stocks likely to tumble soon?
Yes! That’s what the analogy to the Dot-com bubble and all the above-mentioned signs point to.
Moreover, please note that the 50-week moving average (marked with blue) has almost always been on the rise. In recent decades, there were only three times when this moving average turned down in a noticeable way.
- One was at the 2000 top.
- Second warned about the 2008 slide.
- The third time was earlier this year.
Is this time different?
No, it isn’t. Tech stocks are about to slide, and mining stocks are likely to slide along with them.
But wait, there’s more!
The orange rectangles on the above chart mark times between the moment when the long-term mining-stocks-other-stocks correlation turned positive right to its top.
The particularly interesting thing is that when the correlation topped, it was only a matter of time before huge declines in the XAU Index followed.
That worked in four out of all four cases that we saw in the previous decades. And, in fact, ever, because the XAU Index didn’t exist before mid-80s.
And we saw this indication also in the previous months. Since that time, we saw a sizable decline and a corrective upswing that’s similar to the one that we saw in 2012. Since the 2012 rally wasn’t able to reverse the massive bearish indication, the recent one most likely wasn’t able to achieve that, either.
What followed the 2012 corrective upswing? A powerful slide. One that was in tune with the previous huge declines that we saw after the long-term correlation peaks.
The history is likely to rhyme, as above-featured German philosopher Georg Hegel pointed it out – people don’t learn from history.
At least most of them. And this “most” is the same “most” that is not making money in the long run.
Don’t be among those “most”.
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Sincerely,
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief