RJ Hamster
Two Strong Setups for the Coming Rally
A big slowdown in job growth … statistics and perspective on this pullback … gold miners are trading at discount valuations … two trades to consider
Before we jump in today, please note we’ll be taking a break tomorrow, Christmas Eve, and Thursday, Christmas Day, here in the Digest. We’ll pick back up on Friday, December 26. Now, today’s Digest…
This piece, from March 2025, came during a moment of market wobble – and it offered a calm, statistical reset on how normal such pullbacks truly are.
I chose it because two of the trades highlighted have since delivered strong moves: GDX is up approximately 115% since that original Digest (as of mid-December), and QQQ is up approximately 27% over the same period.
It’s a good reminder that disciplined investors often benefit when fear pushes others to the sidelines.
Have a good evening,
Jeff Remsburg
Job creation hit the brakes last month.
This morning, ADP’s private sector jobs report showed February’s gains clocked in at just 77,000 workers. That’s miles beneath January’s revised number of 186,000 and substantially lower than the consensus estimate of 148,000.
For what’s behind the slowdown, here’s Nela Richardson, ADP’s chief economist:
Policy uncertainty and a slowdown in consumer spending might have led to layoffs or a slowdown in hiring last month.
Our data, combined with other recent indicators, suggests a hiring hesitancy among employers as they assess the economic climate ahead.
As we’ve been highlighting here in the Digest, “uncertainty” is the big market overhang today.
Will President Trump’s tariffs be fleeting or long-term? How will they impact corporate profits? How will they affect consumer spending? How will they influence inflation and the Fed’s interest rate policy?
This swirl of questions has weighed on the market since mid-February.
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As we’re going to press, we’re getting welcomed news that’s helping the market
President Trump has given a one-month tariff exemption to the big three U.S. automakers.
From Press Secretary Karoline Leavitt:
Reciprocal tariffs will still go into effect on April 2, but at the request of the companies associated with USMCA, the president is giving them an exemption for one month so they are not at an economic disadvantage.
Stocks are rallying on the news. The hope is that this is a foreshadowing of additional tariff leniency to come.
Meanwhile, earlier today, Commerce Secretary Howard Lutnick suggested the Trump administration could scale back tariffs on Canadian and Mexican goods. An announcement with more details could come as soon as this afternoon. As we go to press, that update hasn’t arrived.
But even if that announcement comes, a “scale back” isn’t a “removal.” And so, the impact of scaled-back-yet-sustained tariffs remains an uncertainty…which Wall Street hates.
Returning to jobs, the most important report comes on Friday with the Labor Department’s Bureau of Labor Statistics report on nonfarm payrolls. It could be a market mover.
We’ll report back.
One thing to remember if the recent market drawdown has you feeling rattled…
It’s normal.
As I write, the S&P is down about 5% from its high. This doesn’t even register as a “correction,” as defined by “down 10% from the most recent high.”
So, in the grand scheme of things, this is far less a massive 10-car pileup, and more so the slightest of parking lot fender benders.
But what if we get a 10% correction, or even something a bit deeper?
Such pullbacks are commonplace in Wall Street’s long history. Here’s some perspective from Kiplinger:
Since the 1950s, the S&P 500 has experienced around 38 market corrections. That means that historically speaking, the S&P 500 has experienced a correction every 1.84 years.
Considering that the S&P’s last correction came in 2022, we’re basically right on schedule.
And how long should we be prepared to endure this?
Obviously, no one knows. But American Century Investments crunched the numbers and found that if this pullback reaches “correction” territory but doesn’t slip into a full bear market, then, on average, we’re in for a 14% drawdown that will last about four months.
How do you manage your portfolio during such a drawdown?
A study of market history shows that the best thing to do is ignore it.
Of course, if your specific investment timeline and/or financial situation requires you to pull your money out of the market, do what you must. But if you’re investing for a longer period, log out of your brokerage account and go live your life as you wait for the inevitable rebound.
Here’s Schwab with perspective on that eventual bounce:
Occasional pullbacks have historically been followed by rebounds, according to the Schwab Center for Financial Research.
Since 1974, the S&P 500 has risen an average of more than 8% one month after a market correction bottom and more than 24% one year later.
Schwab delved into additional historical data on corrections, concluding:
Despite these pullbacks, however, stocks rose in most years, with positive returns in all but 3 years and an average gain of approximately 7%.
This brings to mind the 2025 market forecast from our hypergrowth expert Luke Lango, editor of Innovation Investor:
We think this will be the pattern for the stock market for the foreseeable future: two steps forward, one step back. Lather, rinse, repeat.
And yet, I still think stocks are going higher in 2025.
Bottom line: Pullbacks like the one we’ve been experiencing today are 100% normal. Take it in stride.
A different way to play the gold bull market
As I write Wednesday, the yellow metal is barely 0.3% below a new all-time high.
But rather than discuss investing in gold today, let’s highlight gold miners. You can think of this as investing in gold, yet with operating leverage.
You see, there’s something strange happening with miners today…
While gold’s price has been hitting new highs in recent months, sentiment toward miners has been lukewarm at best. This is resulting in valuations near historic lows.
Here’s Barron’s from February:
Gold stocks, despite their gains, really do look like bargains.
The VanEck ETF trades at just over 12 times 12-month forward earnings, a 44% discount to the S&P 500’s 22 times, a much wider gap than the 10-year average of 20%.
Narrowing the price/earnings gap to that average discount would bring the ETF up to just over 16 times, landing it, once again, at $51.
Let’s get a visual on this inconsistency between gold and miners.
As you can see below, since spring 2022, while gold has climbed almost 50%, gold miners, as represented by the VanEck Gold Miners ETF, GDX, are basically flat.
(Disclosure: I own GDX.)
This is abnormal. Typically, top-tier gold mining stocks make moves that are 2X- 3X the size of gold’s move. This reflects the swelling profits that miners enjoy as gold’s market price rises above breakeven costs…or the snowballing losses they suffer when prices swing the opposite way.
Recently, miners haven’t been commanding this premium. Here’s Mining.com:
The gold miners’ stock prices have largely decoupled from their metal, which overwhelmingly drives their profits.
This fundamental disconnect has spawned a shocking valuation anomaly, with gold stocks far too low relative to gold. But this aberration won’t last, as markets abhor extreme deviations from precedent.
Mean reversions and proportional overshoots soon follow, so gold stocks will soar to reflect their record earnings.
But why are miners lagging so badly?
First, miners usually sell their gold based on long-term contracts or hedging strategies. This creates a lag in profits even as gold hits all-time highs.
Beyond that, the question is usually better answered on a case-by-case basis. But here are some of the top reasons why miners are lagging:
- They’ve faced higher operating costs due to inflation
- Environmental and regulatory costs have also increased
- Some miners have a history of poor capital allocation (bad acquisitions, excessive debt, shareholder dilution)
- Many mines operate in politically unstable regions, leading to supply chain disruptions, government intervention, or nationalization risks
Remember to do your due diligence and be discerning about which miners you buy, but the opportunity today looks compelling.
For your own research, I’d recommend looking at Agnico Eagle Mines (AEM) and Alamos Gold (AGI). They’re generating enormous free cash flow today. And, of course, there’s GDX, which gives you exposure to a basket of top miners.
Finally, are you feeling courageous?
One of Warren Buffett’s most famous quotes is to “be fearful when others are greedy and to be greedy only when others are fearful.”
Well, we’ve got the “Fear” part covered.
Even though stocks are up as I write Wednesday, CNN’s Fear & Greed Index puts us at “Extreme Fear.”
So, are you ready to be greedy?
If so, here’s an idea…
According to TrendSpider, the trade is to buy QQQ (a fund that tracks the Nasdaq 100) when its price is 10%+ off its 20-week range high.
In the last 10 years, when following this entry signal, the average returns six months later have been 13.5% with an 82% win-rate.
Here’s the chart from TrendSpider.
For another idea, I’d point you to our global macro expert, Eric Fry, the editor behind Leverage
In Leverage, Eric recommends LEAPS trades, which stand for “Long-Term Equity Anticipation Security.” You can think of this as an option with a longer-dated expiration, usually lasting from one to three years.
One of the main reasons to use LEAPS is because of the “leverage” they afford investors. As Eric writes, you “put down a small investment to control a large amount of stock.”
As an example of the potential payoff, in February, Leverage subscribers locked in gains of nearly 300% on their Dutch Bros. Inc. (BROS) call options that they opened in July 2024.
Now, also in February, Eric recommended a miner that he called a “hidden” gold play.
From Eric:
[This miner’s] relatively low valuation underscores its identity as a hidden gold play.
Its shares are trading for just six times gross earnings (EBITDA), which is 40% lower than the valuation of the Philadelphia Gold and Silver Index (XAU) stocks.
Since that recommendation, this stock has fallen slightly in sympathy with the broad market. But this is offering investors an even better entry price on what could be a monster trade if gold mining stocks roar higher as history suggests they’re likely to do. (As of mid-December, the stock is up about 70%.)
If jumping into QQQ or Eric’s “hidden” gold trade makes you nervous…
That’s totally normal.
But here are a few words of wisdom from wise (and very successful) investors who have gone before us.
From billionaire Rob Arnott, founder and chairman of the board of Research Affiliates:
In investing, what is comfortable is rarely profitable.
And J.P. Morgan:
In bear markets, stocks return to their rightful owners.
Finally, Cullen Roche:
The stock market is the only market where things go on sale and all the customers run out of the store.
Bottom line: Don’t take on more risk than is appropriate for you and your financial situation, but recognize that one investor’s panic sale is another investor’s bargain entry price.
Have a good evening,
Jeff Remsburg
