... It was only eight months ago that we lamented in these pages that small resource company bargains were few and far between. That was while we were still reducing size in our positioning, raising speculation ammunition in what we call our Bargain War Chest. Back then sellers were few and buyers were many.
Today, by contrast, bargain hunting for small miners and explorers is a target-rich environment. Relative to then there are bargains galore,
a testament to how much this current market is dominated by fear. Today buyers are few and sellers are many.
(CDNX 4-year, weekly. This has already been the second largest correction of the CDNX ever. As much as 47% as of October 5.)
...
Value Irrelevant
In both cases, extreme fear or euphoria, “value” becomes an abstraction. There is nothing “real” about the price of something at extremes of positive or negative liquidity events. In extreme events prices merely reflect the imbalance of buyers and sellers, nothing more or less. Indeed,
our experience is that for smaller, less liquid and more speculative miners and explorers “valuation” is fairly difficult to measure, but in the end is not really all that important. Much more important for speculators is to discover and to exploit increasing or decreasing liquidity or money flow.
In a panic scenario, for example, a portion of the investors/speculators succumb to irrational fear – even when the issue has already been trounced by 75%, 80% or 90% as if they fear the issue could go “no-bid” (to zero). Nothing else explains why an issue that the actor thought was a “good buy” at $2.00 per share is summarily thrown overboard during a panic negative liquidity event even though the price has fallen to 10% to 25% of $2.00 ($0.20 to $0.50). That’s assuming nothing has affected the company in a material fundamental way and the selling pressure is sector or market wide.
Vultures Provide Liquidity in Extreme Negative Liquidity Events
Enter the bargain hunting specialists. We call ourselves Vultures.
If nothing has changed for the company or its prospects, but it has come under extreme or panic selling pressure, due to non-company specific (outside) influences – so much so as to drive the price down to irrationally low bargain pricing (relative to the history of the issue) we Vultures are energized to take a position or to add to the positions we have already established. We do so in the secure knowledge of two important driving forces –
market extremes are temporary; the market cannot stay in a hyper negative or panic state for very long, and reversals out of extremes tend to be initially violent, then self-reinforcing – in both directions.
Successful Vulture speculators develop the courage and confidence to do the opposite of the market at extremes. As much as possible they (we) strive to buy when there is extreme negative liquidity and reduce exposure when there is euphoria or irrational exuberance. (Easy to say, not always easy to do, especially for new, fledgling Vultures who have not yet experienced a full reversal of sentiment and liquidity. Most especially difficult for people who aspire to be a Vulture, but have not yet developed the patience required to be one.)
Targets Need Not Be Perfect, but We Need Targets
We operate our own business of position taking in the small junior miners and explorers in areas or zones where we expect strong support to form under a set of market assumptions, using the technical trading history of the stock itself as one guide. That works especially well in “normal” markets with “normal” ebbing and flowing liquidity. Our Vulture readers will know intuitively that we are referring to our purple “op boxes” on the individual charts of the Vulture Bargain issues for those expected zones of normal support.
Somewhere below the purple box we also usually employ a green price range target box, meant to attempt to predict where very strong support might form in an ordinary negative liquidity event, either for the issue itself or for the markets. We rely on our experience with the small resource company “sector” in the placement of those green “op boxes.” The green boxes are intended to capture an additional tranche of the issue in the event of an anomalous sell/buy imbalance. The green box is where, under non-extreme panic conditions we would expect insiders, deep discount bargain specialists and large bargain loving Vultures to soak up all comers on the sell side. In “normal” negative liquidity events the green box is where we usually become more aggressive on the buy side.
CDNX Still Discounting $400 Gold
(CDNX, 10-year, monthly.)
Right now is anything but a “normal” market, however. We are without question in the midst of the second strongest negative liquidity event for the small junior miners in our memory. We need only look at the graph above to confirm that notion.
The graph is of the Canadian Venture Exchange Index or CDNX a reasonable proxy for The Little Guys (data as of Friday, November 25).
Notice, please that the CDNX is currently trading at about the same level as it did in September of 2003, back when the price of gold had not yet taken out $400 and the price of silver was below $5. Notice also that measured from the previous peak, we are involved in the second largest “correction” for the CDNX since the precious metals bull markets began. This is not, repeat not, a “normal” market correction, which will come as no surprise to Vultures.
Instead,
this is one of those rare market events where extreme sell/buy imbalances are to be expected – for a time. Therefore we cannot rely on the “normal” zones of where we expect strong support to form on our Little Guy charts. Rare periods like now, when people lock up in fear; when there is an overabundance of negative liquidity, virtually all of the small resource companies in our universe are affected.
Under these conditions we can expect and position for extreme bargains. That is why a couple months back we chose to temporarily abandon our “normal” opportunity boxes and chose extremely low, panic event target pricing. Vultures know we are referring to the target zones on our tracking charts in blue. The “Temporary Panic Targets” for most of the issues we track on technical charts here at Got Gold Report.
The blue panic event targets are an attempt to position where we would expect support to form even in a panic event such as the one now. Our object is not, repeat not, to guess where the lowest trade will occur on an issue, or to “pick a bottom.” In a panic negative liquidity event no price is “safe.” It is extraordinarily difficult to gauge in advance how much irrational selling pressure will occur for a particular issue or how low the price might go in extremis. It will neither surprise us nor disappoint us should the price actually travel beneath our chosen blue targets for some issues. Just one very large last minute tax loss seller can wreak temporary havoc on any of these thinly traded issues and that just comes with the territory from October to December.
Instead, the object of the blue target boxes is to acquire a tranche of the issue of meaningful size that we are as reasonably sure as we can be under the circumstances, that will look very low priced 6 months, a year or two years hence – once the conditions that prompted the extreme negative liquidity event have faded to the background. It really is as simple as that.
Just below is one example (of 35 that we share with Vultures) of the target boxes, including our temporary blue panic event target box. This one happens to be for Argus Metals (AML.V), a junior explorer operating in the Yukon. The Yukon area play issues have been particularly hard hit in this panic negative liquidity event. In part because they were irrationally bid up in late 2010 and early 2011 and there has been general disappointment selling due to backlogs in assays and not enough discovery news to offset the market wide rush to liquidity. In short, the Yukon issues went too high and are now over-correcting too low in our estimation. Excellent Vulture fodder in other words.
(Argus Metals, 2-year, weekly. Note that Argus enjoyed popular enthusiasm at the beginning of the year but has now been decimated by an extreme negative liquidity event. On our actual charts the purple and green op boxes have been colored light gray, meaning they are no longer in play. They are shown here to illustrate where we would have looked for support to form under more normal conditions. Note that the extreme negative liquidity event underway now has rendered Argus down to all time lows although there has been no material change to the company we are aware of.)
Two months ago 500,000 shares of AML.V changed hands for $92,500 (at $0.185). On about October 5, one could have been on the bid and acquired 500,000 shares for less than $25,000 (more than 70% lower). The chart for Argus is not unique, it is representative of a group of Yukon explorers similarly situated. We believe it to be an opportunity, but we are getting ahead of our message for this report.
