I’ve seen several recent mailbag questions about turbulent trading conditions in VanEck Vectors Junior Gold Miners ETF (GDXJ) … and the fact that mining stocks in general aren’t performing as well as gold and silver. So let me address your concerns straight away …
First, the facts. GDXJ is one of the largest and most popular ETFs on the market that tracks mining shares. Well, out of the blue last week, the fund sponsor, VanEck, admitted a growing divergence between GDXJ’s stock holdings and the underlying index it’s supposed to be tracking.
Why? In a nutshell it’s because GDXJ has gotten too big for its own britches.
After massive money flows since December when mining stocks bottomed and began to rally, GDXJ now has a whopping $5.4 billion in assets.
But the reality is, the sector GDXJ must invest in is a relatively small, niche part of the stock market. Remember, many of the stocks in this space are thinly traded.
So VanEck simply was not able to put all this money to work in junior miners, and was forced to expand its purchases to include larger-cap mining stocks. In fact, it has upped its target market-cap range to as much as $2.9 billion … which is solidly in mid-to-large-cap territory!
In other words, the “J” in GDXJ no longer applies.
Naturally, as a result of this massive market-cap shift into larger stocks, VanEck may be forced to sell $2.6 billion worth of stock holdings in GDXJ, representing gigantic turnover of 60% or more of the entire ETF portfolio.
So this internal makeover of GDXJ is a big reason why the ETF hasn’t been tracking its index lately … much less the price of gold or silver. It’s also the reason why we’re seeing unusual volatility in mining stocks in general, but not to worry.
While we expect more short-term volatility in the sector, perhaps even a correction, we’re monitoring GDXJ closely and will let you know asap if we need to exit this position.
The good news is this artificially-induced turbulence is bound to create some outstanding buying opportunities in select mining stocks, and we have several on our watch list right now. We’ll be sure to let you know when to make your next move!
Meanwhile, stocks are finally starting a long overdue correction with the Dow down about 3% from its March peak, and we see more to come for two very good reasons.
Reason #1 – Lousy economic data: Recent data shows the U.S. economy fading fast. In fact, even the Atlanta Federal Reserve cut their own estimate for first quarter GDP in HALF … down to just 0.5% for the last three months ended March.
That’s a sharp slowdown from a GDP growth rate of 3% in the fourth quarter of 2016, and …
Reason #2 – Great profit expectations: Wall Street is looking for first-quarter profit growth of 9.4% for S&P 500 companies – the strongest year-over-year growth since late 2011! But don’t hold your breath, even a mild disappointment could doom this overvalued stock market.
And get this, the Dow is up roughly 900 points so far this year, but did you know that Apple (AAPL) alone is responsible for over 200 of those Dow points, or a whopping 23% of the Dow’s advance!
Add in Boeing (BA), which accounts for about 170 points, and Home Depot (HD), which racks up almost 100 more Dow points, and you’re looking at just THREE stocks that have accounted for over HALF the Dow’s gain this year! That’s insane, and it’s also unsustainable.
A narrow rally like this is a huge red-flag for the market. That’s because if AAPL, BA, and HD stumble this earnings season … not to mention other darling stocks like Amazon or Google … it means lights-out for the stock market.
Bottom line: We expect near-term volatility in the metals and mining stocks, but it may not amount to much on the downside, and should hand us new buying opportunities. Meanwhile, the stock market is poised to break even lower. For now, continue to hold ALL current positions, and stay tuned for more updates AND new trade alerts as market conditions warrant.
Good investing,
Mike and David
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