Selling has been widespread in the stock market across a variety of sectors and industries lately as eurozone worries persist, not to mention stagflation in the U.S. and an uncertain corporate earnings outlook for the rest of the year.
Safe havens aren't hard to find when the market's under distribution and, right now, bonds and gold are filling that role.
Weak economic data spurred bond buying Thursday as the yield on the 10-year note fell below 2% at one point but eventually finished at 2.07%. The yield on the 30-year bond ended at 3.44%. It touched 3.35%, the lowest level since January 2009.
Meanwhile, gold finished at $1,822 an ounce, up $28.20, or 1.6%. But I don't want to chase the SPDR Gold Trust (GLD) because it extended quickly after its recent breakout over $151.86. Shares closed Thursday at $177.72, up 1.9%.
I'm not keen about owning any stocks in this market environment, but if you're really looking for gold exposure, consider these two miners: El Dorado Gold (EGO) and Compania de Minas Buenaventura (BVN).
El Dorado, based in Vancouver, British Columbia, has a market capitalization of $10.5 billion. It operates gold properties in Brazil, China, Greece and Turkey. It's an institutional-quality stock with top fundamentals and bright growth prospects. It recently broke out over $18.98. Shares closed Thursday at $19.14, down 1.4% and just above its 10-day moving average of $18.93 and 20-day moving average of $18.43. Its recent pullback has been in light volume, which helps its technical picture. Institutional selling is not what you want to see after a breakout. I don't see it in EGO.
The miner reported a strong second quarter last month. Earnings rose 40% from a year ago to $0.14 per share and sales grew 22% to $251.4 million. For the full-year, EGO expects to earn $0.63 per share, a 75% increase from 2010. Annual profit growth of 49% is forecast for 2012. It's trailing price-to-earnings ratio of 47 and forward PE of 20 don't seem out of whack based on its growth prospects.
Peru-based Buenaventura operates gold and silver mines in Peru. It's another high-quality stock and looks solid as well. It has a market capitalization of $11 billion. In its most recent quarter, profit jumped 82% from a year ago to $0.80 a share and sales increased 52% to $343.3 million. Buenaventura isn't a high-multiple stock like El Dorado. It currently sells at 13x trailing earnings and 11x forward earnings.
Shares of Buenaventura outperformed Thursday, rising $0.08 to $42.29. It's sitting just underneath a buying area of $43.43. Note that its 200-day moving average is at $43.30, so strong volume would be good to see if BVN tries for a move over $43.43.
Will gold stocks and bonds continue to attract interest going forward? It's certainly possible considering the current technical picture of the market. What I know for sure is that the charts of leading growth stocks since the start of the bull market in March 2009 have rolled over. This is what tends to happen in the early stages of a bear market. Names like Priceline (PCLN), Amazon (AMZN), Netflix (NFLX) and CommVault Systems (CVLT) broke through their 200-day moving averages Thursday. According to data from Scott O'Neil of research firm MarketSmith, the percentage of topped leaders is now 71%. That's good news for bears and bad news for bulls.
The average length of a bear market is between three and nine months. As of Thursday's close, the Nasdaq had corrected 18.5% from its recent high of 2862 on July 22 to its low of 2331 Aug. 9. That's a big pullback in a short time. The good thing is that it could set the stage for a nice year-end rally. And it could come sooner than expected.
Finally, when the safe-haven trades stop working and new money does start coming into the stock market again, be open to new leadership. Many former leaders hit hard during the recent sell-off will not resume leadership roles. Stocks with the best leadership potential will be the ones that start rallying and retesting prior highs first. When a new market uptrend is confirmed, they're the first out of the gate.