And as the juniors leveraged the SPX to the downside, boy have they leveraged it to the upside. Like vultures drawn to carrion on a roadside, brave investors scooped up left-for-dead juniors to fill their larders. And those investors early to the game have experienced a best-of-times scenario. Over the exact-same cyclical-SPX-bull span, the CDNX is up a whopping 198% (+254% from its panic low in December 2008).
Independent of the SPX, this sharp CDNX rise has merits of its own. In addition to juniors being extremely oversold, commodities resumed their climbs higher amidst their ongoing secular bulls. And ultimately the fundamentals have been screaming for these juniors to hit the pavement and make some discoveries. Juniors represent vital components of the supply chains for oil, copper, gold, and all other hard commodities.
But in looking at this chart you can’t miss seeing the striking similarities between the SPX and CDNX. Though the velocity of the flows and ebbs might not be the same between these two indices, the timing sure is. And this is apparent not only visually, but mathematically. From the March 2009 lows to current, the SPX and CDNX have sported a very high correlation r-square of 86.6%. This means that 87% of the daily CDNX price action over this span is directly explainable by the SPX’s own.
Like it’s been doing for so many other sectors, the SPX has guided the day-to-day, medium-term, and cyclical-bull-to-date movements of the CDNX. And this is readily apparent not only in the CDNX’s tight uptrends mirroring the SPX’s, but in the selloffs as well.
Notated in red are the results of the seven major SPX selloffs in this cyclical bull to date. In blue is the performance of the CDNX over the exact-same timeframes as the SPX selloffs. And in between these figures is the CDNX/SPX selloff leverage. As you can see, with one brief exception the CDNX neatly follows the SPX down when selloffs ensue.
One particularly-interesting observation is the fortitude of these high-risk junior companies during the SPX selloffs. Considering their risk it would seem logical for these little stocks to leverage to the downside. And we saw just this in 2008. With the CDNX down by 76% over the exact-same span where the SPX fell 48%, the CDNX exhibited downside leverage of 1.58x. But this same leverage hasn’t been present in these post-panic selloffs.
Of the seven SPX selloffs six are categorized as pullbacks (less than 10% selloff), with one categorized as a correction (greater than 10% selloff). And you’ll notice that in the smaller earlier pullbacks (2 and 3) the CDNX not only held its own, it actually fared better than the SPX. These two minor pullbacks lasted only 8 and 9 trading days respectively, and they instilled little fear into junior-resource-stock investors.
In the first two larger pullbacks prior to the correction (1 and 4), the CDNX did leverage a bit to the downside. This wasn’t near the 1.58x leverage seen in 2008, but at 1.33x and 1.16x respectively the juniors did see more of a selloff. It should also be noted that in both of these pullbacks the CDNX actually bottomed two days before the SPX did. If we use the true CDNX bottoms instead of the prices from the corresponding SPX bottoms, this downside leverage gets bumped up to 1.48x and 1.23x respectively.
Moving on to this bull’s only correction, the SPX saw a healthy 16.0% decline over 49 trading days in the second quarter of 2010. What did the CDNX do? It had a healthy correction of its own, shedding 17.1% over this exact-same span (down 19.5% to its true bottom the day after the SPX’s). With downside leverage of only 1.07x (1.22x to true CDNX bottom), I’d say the juniors held up rather well over this prolonged selling period. Again, nowhere near 2008’s 1.58x.
This brings us to the SPX’s sixth selloff, a strong 7.1% pullback over 13 trading days last August. But provocatively the juniors didn’t respond at all. The CDNX was actually flat over this exact-same span! Up to the point when this sixth SPX pullback commenced, the CDNX had moved near lockstep with this flagship index, sporting an incredibly-strong correlation r-square of 92.7%. But this tight 1.5-year positive correlation would be throttled over the next few weeks.
So what happened during this August anomaly? My best guess is the commodities strength at the time had greater influence over junior-investor sentiment than did the SPX’s brief malaise. Interestingly only three days prior to this SPX pullback the Continuous Commodity Index (CCI) had achieved a new post-panic high, whereas the SPX was still well under its own post-panic high seen in April. With the CCI reveling in its new highs and only shedding 1.6% over these 13 SPX selling days, junior-resource-stock investors didn’t fear the SPX pullback and held strong.
But this brief anomalous event quickly reverted back to normalcy, and ever since the CDNX has fallen back in lockstep with the SPX. From the bottom of this sixth SPX selloff to current, these two indices have a super-tight correlation r-square of 96.2%. And this includes the seventh and latest SPX pullback.
This brief November pullback saw the SPX fall 3.9%, with the CDNX pulling back 4.3% over this same timeframe (1.10x leverage). However if you use the CDNX’s true pullback starting point a day later than the SPX’s, it saw a 5.8% decline over 6 trading days. This 1.50x downside leverage is more in line with how one would expect juniors to react to SPX selling.
Overall the six mirroring SPX and CDNX selloffs have had a simple average leverage of 1.00x (one-to-one). And if you include the anomalous August event in which the CDNX brushed off the SPX pullback, not only was there no downside leverage on average, the juniors actually fared better than the SPX during the selloff periods in this bull to date. These are definitely not the results I expected before I ran the numbers.
There appears to be two major reasons for this overall junior parity with the SPX during selloffs. First is the SPX hasn’t really given the CDNX a reason to sell off. Other than a single correction by definition, which was not sharp measured by average loss per day, the SPX has been resolute during this bull. Its short pullbacks over short durations have yet to stoke fear in junior investors.