May 24, 2008 – Iron Hand on the Tiller?

Two weeks ago, and again last week, I advocated a simple plan: start building cash reserves in May, so that I could deploy that cash during the dog days of July and August. Two weeks ago I was 4% in cash; now I’m 49% in cash, so I am well cashed up for the summer shopping season. As we all recall, July and August in 2007 were brutal months. Why? I don’t know, but the summer swoon may be due in part to the fact that brokers and investors go on holidays, so there is less action, and less news, to move the markets higher.

But wait, you say, hasn’t the summer shopping season already happened? Isn’t all right with the world, and it’s onward and upward from here?

Maybe. But what about Merv?

Early Friday morning (really late Thursday night, actually), whatsupdoc posted about Merv on the Buy High Sell Higher Forum:

Here is another very interesting development in Merv’s U-index chart. http://techuranium.blogspot.com/ On May 21,  Merv’s  daily chart of his index of 50 stocks had a 15dma to 65dma positive crossover.  These crossovers don’t happen very often on his index charts.

Merv if you see this post, thank you so much for your hard work!.  … glta

Then on Friday night Punter, quoting the above, said:

I had pointed this out over the past week but thank you Whatsupdoc for bringing it back to the forum. This is a VERY important point. This is what has excited me to no end and I’m not particularly depressed by the two day swoon in the general  market. GLTA

So, how significant is this 15dma/65dma crossover?

Merv, on his blog, shows the Merv’s Daily Uranium Index chart starting an uptrend. Here’s the link to Thursday’s chart. Merv shows the index bottoming at the start of May, and then increasing from there. More importantly, as pointed out by whatsupdoc and punter, Merv shows the 15 day moving average crossing over the 65 day moving average. This is a bullish sign, because it means that prices over the last 15 days are moving higher than prices over the last 65 days. The last time this happened was back at the start of the last week of September, 2007, and Merv’s index rose to a peak in the first week of November. (Unfortunately November was a peak, and the index then fell from around 525 in November, 2007, to an intra-day low of 252 on April 30, 2008, for an over 50% loss in a five month period).

Is this the start of an uptrend? Maybe. Merv’s index bottomed on August 16, 2007 around the 300 level, so the 252 level at the start of the month is actually lower than where it was during the crash last summer.

Let me repeat: On May 1 of this year Merv’s Daily Uranium Index was still around 25% lower than it was at the bottom of the crash on August 16, 2007. That doesn’t really sound like much of a recovery to me.

(Note to Merv: I don’t know if you have ever heard of this blog our not; many of our Forum readers follow your work; thanks for providing it to us. Could I ask you a favour, please: would you please publish a long term chart of your index? I’ve printed off your charts from the past and glued them together to make a chart on my desk, but your archives only go back a year, so it’s hard to get a long term perspective on the uranium market. Since your’s is the best uranium index, a long term chart would be helpful. Thanks.).

So here’s the thing:

On the one hand, uranium stocks are still at historical lows, so it would be reasonable to expect that they would retest the previous bottom before moving higher. In January, and again in February, 2008 Merv’s index tested the 300 level, which was close but not through the August, 2007 level. It therefore appeared that a bottom was in. Unfortunately the bottom did not hold in March or April, so we don’t know if we have reached a bottom. That leads me to approach this sector with caution.

On the other hand, all uranium stocks will not go down to zero. Nuclear energy is here to stay, so at some point these stocks will start going back up. I guess if you are a gambler you could assume that time is now and start buying. Personally, given the bloodbath from last summer, I would prefer to be cautious. I will put in some stink bids and start buying, but it will be done cautiously. I don’t think every stock is going to double in the next week, but they may well be at or near a bottom, so some selective buying, on weakness, with stink bids, should prove profitable in the medium term.

The Dines Letter

Now, to a more fun topic: Mr. Dines. Around 1:23 pm eastern time on Friday, Dines issued an Interim Warning Bulletin. Apparently all is right with the world, and everything is fine. The new bull market is here. He goes on to list all of the stocks that have gone up. My favourite is this one:

List 1 stock #2 is up 46% from its Jan 22 low

Classic. Good ‘ole List 1 stock #2 traded at $14.98 on April 13, 2007. By January 21, 2008 it had fallen to $2.69, a drop of 82%. It recovered, and then on April 30, 2008 was down to $2.42, for a total top to bottom drop of almost 84%. It closed on Friday at $3.18, so from it’s January low it is up 15%. It’s up 31% from it’s April 30, 2008.

Now I don’t mean to quibble with the old guy’s math, but List 1 stock #2 is actually up 15% from it’s January 22 low, not 46%. Even counting from it’s April 30, 2008 low it’s still only up 31%. And yes, I’m using closing prices, so I suppose if you went from intra-day low to intra-day high the numbers may be closer to what Mr. Dines is quoting. That’s not the point.

The point is that List #1 is “Good Grade” stocks with “Moderate Risk”, and a stock that has fallen 90% from it’s high is not a “moderate risk”. It’s great to quote the stats you want; someone in the “High State” of “Telling the Whole Truth” probably wouldn’t hide from a 90% drop.

In his May 9 newsletter there are 44 stocks on his Supervised Investment Lists; 24 of them were down; 21 of them were up; that’s not great. In List #5, every single stock was down, by on average 60% or so. In List 4, 8 out of 10 stocks were down. Yikes.

Mr. Dines then goes on to say that some of his newer subscribers may have lost money (ya think??), but the older subscribers know that you have to “keep an iron hand on the tiller” and ride out these minor, two year long, 90% corrections.

As an aside, what’s this “iron hand on the tiller” stuff? Both Dines and Casey love that expression. I will be spending this weekend planting my vegetable garden (actually my peas, carrots and spinach are already up; this weekend it’s the beans, tomatoes, cucumbers and basil, the latter three of which were started from seed and are ready to plant). My soil is very rocky. I hit rocks all the time with my shovel or pitchfork. Do I keep an “iron hand on the tiller” when I hit a rock? Nope. I dig around the rock, remove it, and then carry on.

I suspect an iron hand on the tiller would result in a lot of broken tillers.

So is this the bottom or not?

Merv seems to think it may be. Dines is convinced it is. Many of you on the Forum think it is. Perhaps it is. The gold chart is starting to look more positive.

Gold peaked at over $1,025 in mid March, and then fell all the way to $850 at the start of May. (Interestingly, the same date that Merv’s Uranium Index was bottoming). The down trend line drawn off the March and April highs appears to have been broken, and gold is once again trading above it’s 50 day moving average, which is a good sign. However, I have circled in the chart the three times in the last three months that gold has broken above it’s 50 day moving average. In March it lasted for three days; it April it was two days, and now in May it’s been three days.

Also interesting is that in March the RSI remained below 50; in April the RSI inched over 50, but just briefly. Now, in May, the RSI is up to 59, the highest level it’s been since the peak in March. That may indicate that strength is returning.

Monday is Memorial Day in the U.S., so Tuesday and the rest of this week will probably tell the tale. If we have a decisive upside break out and gold closes above $960, it’s onward and upward. $960 was the peak in the last week of March (the first circle). We didn’t quite get to $960 in April (the second circle). This week the peak was just under $940 (the third circle). That’s a series of lower highs, and that’s not bullish.

Last Monday I produced a series of charts on gold, silver, and uranium stocks, as well as some assorted other stocks, so I’m not going to update them today.

I will however close by repeating what I still think: we may have reached the bottom. In fact, we probably have reached a near term bottom. However, the evidence is not yet strong enough to compel me to start chasing stocks. I think we will have more volatility ahead, and I’m not going to get sucked in to a sucker’s rally.

I continue to believe there will be better entry points in the weeks ahead, so I will place my stink bids below where we are now, and hope to get filled on days of extreme market weakness. That should position me well for the fall run.

That’s it for today. Happy Memorial Day weekend to all my American readers, and please continue to post your thoughts on the Buy High Sell Higher Forum.