Junior venture companies in Canada are finally seeing a significant lift.
In early January, the S&P/TSX Venture Composite Index rose above the 200-day moving average for the first time in three years. The index is also very close to experiencing a golden cross, which is when the shorter-term 50-day moving average crosses above the 200-day moving average. Historically, traders see this cross as extremely bullish.
You can see on the chart that there have been few occurrences of golden crosses over the past five years, with one in 2009 and another in 2011. Following these crosses, the index saw a spectacular increase.
The Canadian venture index holds 372 micro-capitalization securities that trade on the S&P/TSX exchange. It’s a resources-heavy index, with more than 80 percent of the holdings in the energy and materials sector. Making up the top 10 by weight are energy companies including Africa Oil, Mart Resources, Americas PetroGas and Madalena Energy.
Materials stocks such as Atico Mining, Balmoral Resources, Chesapeake Gold, Energold Drilling, Gold Standard Ventures, Rye Patch Gold, and Santacruz Silver Mining are also constituents.
These stocks will be familiar to the shareholders of the World Precious Minerals Fund (UNWPX), as they are representative of the fund’s holdings. Historically, we’ve found that these junior mining companies outperformed their larger counterparts.
As resource investors, we’re particularly encouraged by this “golden cross,” but what makes us even more optimistic is further data supporting the cyclical areas of the market.
Cyclical companies in sectors such as information technology, industrial, materials, and consumer discretionary tend to sell goods and services beyond the basic needs. These are the goods and services businesses and consumers buy when times are good.
So consider the potentially major impact that increased investment spending might have on these companies. After curtailing capital expenditures following the Great Recession, businesses may be in the process of reversing that trend after a prolonged period of under-investing.
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