Buy-High-Sell-Higher.com

Ever had one of those weeks where your portfolio did really badly? Me too. This week.

After I started buying last week, the senior gold producers got hammered;

K.TO - Kinross Gold Corp. was down 16.5% on the week, AEM.TO - Agnico-Eagle Mines Ltd. was down 14.6% after disappointing results, and G.TO - Goldcorp Inc. was the star of the bunch, only down 10.9%. I guess I didn’t exactly pick the bottom when I started buying, did I?

Here’s a quote from Bottomfeeder on the Buy High Sell Higher Forum on Thursday:

Picking the bottom is almost impossible.  So you must buy in “pieces of positions”.

Anyway, I have caught more than a few “advisors” say that this is the way you have to play the commodities, and to me these stocks are to be played as commodities.  The good news to me is that my goal is to invest not trade, so as long as I sell them higher than I bought them I will do just fine.  But when a nice rip is there I try and take them, again selling partials.

Exactly.

You can’t pick the bottom. You can’t pick the top. So don’t try to time it exactly. Decide what you want to own, and begin accumulating. I have never seen a stock go up for 100 days in a row. They go up, they pull back, then they go up again, and so on. Decide what you want, and buy “pieces of positions”.

Last week I mentioned that I increased my holdings in K.TO - Kinross Gold Corp., G.TO - Goldcorp Inc. and AEM.TO - Agnico-Eagle Mines Ltd. They rose after I bought them, but as I mentioned above, they got hammered this week. I don’t get excited when they go up, and I don’t cry when they pull back; that’s just the way it goes.

Here’s how I think you play it: Let’s assume I’ve decided I want 1,000 shares of Company X in my portfolio. I look at the chart, and if it’s currently trading at the high end of the range, with a relative strength over 70, I won’t buy it now. I’ll wait until we have a down day or two, and then I’ll buy perhaps 300 or 400 shares to establish my initial position. If it falls the day after I buy it, I’ll buy 200 or 300 more shares. If it stabilizes, I hold, but put in some bids at below market prices. Eventually I get to my 1,000 shares. I may even get to 1,200 if conditions look good.

Then, when we have a few strong days and I’m well into the money, and the RSI is up over 70, I start selling. 200 shares today. Perhaps 200 the next day, until it stops advancing.

If Company X is a core holding in my portfolio, I will probably not drop below 500 shares unless I’m ready to sell and get out for good.

What do I do now? Gold got hammered on Tuesday and Wednesday, falling from almost $980 to below $920, before bouncing back on Thursday and Friday to close the week at $936.90. We know gold is volatile, so big drops are buying opportunities, and that’s what I’ll do this week. I’ll continue to increase my core holdings.

Our Friend Mr. Dines

I can’t pass up the opportunity to quote James Dines from yesterday’s The Dines Letter. He spends most of the letter explaining that markets go up and down, so even if markets go down for a few years that’s no reason to sell. Here’s the classic quote:

“Our recommendation of PNP.TO - Pinetree Capital Ltd. at 0.795 cents (Cdn) subsequently rose 1,931% to $16.15 (Cdn) nearly two-thousand percent in only 17 months, such that a $10,000 investment would have risen to $203,145.”

Unfortunately he didn’t finish the thought, which should have gone something like:

“Ever since that peak I have had a Buy recommendation on Pinetree. I even moved it from my speculative list to my “good grade, moderate risk” portfolio. As of today it is trading at $1.82 (Cdn), so if you had followed my advice and bought it at $16.15, you would have lost 89%, such that an investment of $200,000 at that time would be worth $22,538 today.”

Even better, there’s a letter to the editor in this edition from some guy who spends the first 20 lines of his letter praising Mr. Dines, but then asks why one would continue to hold a stock that adds no value to the companies it invests in (Pinetree is basically just a venture capital firm), has no technical indicators to recommend buying, and has no truly great assets.

Dines then spends have a page explaining that yes, some companies go down, but if their investments start paying off, it will go up. He ends with the classic “You have lost nothing if you own the stock and the price fluctuates.”

Yeah, I guess that’s true. But if you had sold a few dollars ago, the money could have been redeployed and earning you money. It’s called opportunity cost, and it is real.

Oh well, I haven’t owned Pinetree for a long time, so it’s all academic to me at this point.

It’s not a profit until you sell, and if Dines had recommended selling after a 2,000% rise he would be hailed as a genius. Holding a stock all the way back down isn’t that impressive.

Enough about Mr. Dines. That’s two weeks in a row we’ve discussed him; it’s probably time to stop mentioning him for a while.

As always, I’ll leave it to you to set the agenda by posting your thoughts on the Buy High Sell Higher Forum. I expect better weeks ahead, so I’m buying the producers at these levels.

Well, overall, this was a week pretty much as expected.

Two week’s ago, I said that gold was looking over bought, so I sold a bunch of my holdings (at a nice profit).

Then last week, in My Strategy Backfires, I scolded myself for saying that I sold out of the gold’s too soon, as they continued their run.

Well, maybe I’m not as ignorant as I think. After peaking around $990, gold dropped big on Wednesday and Thursday, and then closed Friday at 954.87. So here, then, is my fearless prediction:

Gold is finishing it’s consolidation, and is heading upward. This week was the first try at breaking the magical $1,000 level (which happened for one day in March of this year, before correcting down to around $850. I think the next try, which could be as early as next week, will be successful, and this time it may hold.

Since the May bottom, gold peaked around $930 before falling to around $870. Then it peaked again at $950, dropped slightly to around $920, then ran to $990 (intra-day) this week before falling back to $955.

In other words, we have had a series of higher highs and lower lows; that’s an uptrend, and that’s what we want to see.

On Friday I put my money where my mouth is, and bought back all of the gold shares I sold earlier, at a lower price than I sold them, so I’m happy. Quite happy. I increased my holdings in K.TO - Kinross Gold Corp., G.TO - Goldcorp Inc. and AEM.TO - Agnico-Eagle Mines Ltd.

I was also buying silver stocks, including FVI.V - Fortuna Silver Mines Inc. and SVM.TO - Silvercorp Metals Inc.; they are both down significantly recently, so I averaged down my cost by grabbing more.

I even picked up some more UUU.TO - Uranium One Inc., since it’s a uranium producer that’s down, and I grabbed some more WND.V - Western Wind Energy Corp., and alternative energy company.

Finally, I added to my holdings of HND.TO - HB NYMEX Natural Gas Bear+ , a play on a drop in the price of natural gas. All energy stocks, including oil, have been very high recently, but now the summer is here and high prices have curbed demand, I’m placing a small bet that the price of natural gas will drop over the next month or so. This is a short term trade, with a tight stop loss, since this stock will move at twice the volatility of the underlying price of natural gas. You can track the price of natural gas here.

My buying spree this week has left me holding only 6% cash, my lowest cash holdings in a very long time. I betting, heavily, that the gold run will resume, and I don’t plan on being on the sidelines when it happens. We will see if I am correct.

The Dines Letter

We also had a fun discussion this week on the Buy High Sell Higher Forum about the Dines Letter, prompted in part by an article by Peter Brimelow on CBS MarketWatch. I happen to like Mr. Brimelow’s writing, but he, like most writers, can spin a story any way he wants.

He makes the comment that Dines was the Investment Letter Editor of the Year in 2006, obviously due to the spectacular success of his uranium recommendations. He then goes on to say:

“The Dines Letter is up 28.2% over the past 12 months vs. 15.1% for the dividend-reinvested Dow Jones Wilshire 5000, according to the Hulbert Financial Digest. And over the past 10 years, Dines is up an even more impressive 19.8% annualized vs. 7.4% for the total-return DJ Wilshire.”

Hmmm. So from July 1, 2007 to June 30, 2008 Dines is up 28.2%? What was his return during 2007? Obviously he didn’t win Editor of the Year that year.

Here’s my favourite quote:

“These stocks are rated “buys” in Dines’ top-performing “Long-Term Growth” portfolio: PAA.TO - Pan American Silver Corp., DML.TO - Denison Mines Corp. , LAM.TO - Laramide Resources , FRG.TO - Fronteer Development Group Inc. , MGA.TO - Mega Uranium Ltd. , PDN.TO - Paladin Resources Limited , UUU.TO - Uranium One Inc., and Arafura Resources”

Interestingly, that’s a list of 8 stocks; there are actually ten on that list, with the other two stocks also rated a buy, but not doing particularly well of late.

I’m surprised he didn’t pick the “Low Priced Stocks” portfolio, all of which are rated a buy, and all of which are down between 37% and 87%. Yikes.

However, I guess the point is that you can look at whatever period you want, and draw your own conclusions.

If you started investing with Dines at the start of 2007, you hate him. His recommendations have cost you a lot of money. If you’ve been with Dines for the last 10 years, you are up about 20% per year, so perhaps you love him.

I neither love him or hate him. He is a commentator with his own opinions. Some will be right, some will be wrong. Like many people before him, he has a big ego, and may be tempted to tout a stock that he owns for his own gain. So be it. We all know how the game works, so if you don’t like it, don’t subscribe to his newsletter.

(Obviously I have a big ego as well, or else I wouldn’t be writing a blog every week. Unfortunately my subscriber base isn’t as large as Mr. Dines, and therefore whatever I say has not impact on whether a stock goes up or down, which is probably a good thing).

Another hot summer day is upon us here in Southern Ontario, so I will leave the computer and go outside and enjoy it.

As always, thanks for reading my somewhat less long summer commentaries, and feel free to post your thoughts, long or otherwise, on the Buy High Sell Higher Forum.

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.

Last week in this very space I told you that I was writing my “most important blog posting” since starting the Buy High Sell Higher website in November, 2006. I then went on to give my thoughts on Gold, Uranium, and the market in general. I stand by what I said last week, so after my long-winded thoughts last week, I’m going to keep today’s comments somewhat shorter and to the point.

My plan last week was as follows: I said there will be more bumps along the road, so I picked up more AEM.TO - Agnico-Eagle Mines Ltd., G.TO - Goldcorp Inc. and K.TO - Kinross Gold Corp. last week, “and if we have another good week I’ll sell what I bought and pocket the cash.” Well, guess what, we had a good week.

On April 29, 2008 I paid $35.22 for G.TO - Goldcorp Inc.; I wanted a 10% profit, so on Monday I put in a sell order at $39.95, and it got filled on Thursday. I then sold a few more shares on Thursday at $40.32

Why? Here’s a six month chart:

As you can see, Goldcorp peaked on April 16, and has been in a down trend ever since. Here’s the chart for the last month:

I’ve marked with a green arrow April 29, the day I was buying, because the RSI had gotten so low I assumed it had to go up from there. The big blue arrow shows the action on Thursday. The stock had a huge one day run, which generally doesn’t sustain itself. In addition, the RSI had gotten higher, and the 50 day moving average appeared to be a resistance level. So, I sold.

We closed Friday at $39.71, after falling 99 cents on the day, so I’m happy with what I got on Thursday.

On Monday I plan to put in some buy orders at $34 and see if I can get filled if the market has some week days again.

I won’t bore you with all of the charts, but I used the same strategy on other stocks as well. For example, on April 29 I bought DML.TO - Dension Mines Corp. for $6.57; I sold it on May 8 for $7.40.

I didn’t get filled on all of my sale orders, but I’ll try again next week on AEM.TO - Agnico-Eagle Mines Ltd., and K.TO - Kinross Gold Corp.

In addition, I did some clean up work, selling some losers like JNN.V - JNR Resources Inc.

Last week I also advanced the notion that we should be buying stocks that are making new highs, not trying to grab stocks at the bottom. To that end on May 2 I paid $133.25 for shares of RIM.TO - Research in Motion Ltd. RIM closed this week at $133.35, so I’m not exactly a billionaire, yet. However, in my on-going quest to find low risk ways to make a dollar, on Thursday I sold the May 135 calls against RIM. This covered write brought in $3.35 per share.

If Research in Motion is trading above $135 on Friday when the options expire, my shares will be called, and I’ll get $135 per share (for a profit of $1.75), plus I get to keep the $3.35 premium I brought in. That’s a total profit of $5.10 on my $133.25 investment, or 3.8%, which over a period of two weeks is a nice rate of return. If RIM isn’t above $135, I still get to keep the premium, and I can either cover again next month, or sell, or whatever. I still like the stock over the medium term, so I think the strategy makes sense.

Obviously I have liquidated some of my other holdings, but I only view that as a short term phenomenon. I plan to put in below market buy orders to pick up shares on weakness over the summer months, which are traditionally very weak months.

“Sell in May and go away” is an old saying, but it’s often true, so I will feel much safer to be in cash over the summer, not fully invested.

The Dines Letter

Mr. Dines issued both an Interim Warning Bulletin and and issue of The Dines Letter this week. The IWB was issued on Thursday, and it said “buy”, which was repeated in the newsletter on Friday. (Which of course begs the question: what’s the point of issuing an IWB one day before the newsletter; he does that quite often. It provides no additional value, but I guess it’s a way to justify to his subscribers “look at all the IWB’s I issued this year”).

The front page headline was “A Dip, Then Spring Rally to Continue?” I love the question mark at the end. It appears that he is saying the market will go down, then up, but he’s not sure, it could be up then down, hence the question mark.

(Note: See that I used the same trick in the title for this week’s posting? With the question mark at the end? Cool, eh?)???

He seems quite pleased with the fact that the lows made by the Dow in January were retested in March but not broken, therefore we are probably in a bull market. Unless the lows are broken again. There were lots of new highs and new lows on the NYSE on Friday, so it may be premature to call this a bull market quite yet, but who knows.

The brilliance of saying that a bull market has started is that it’s a meaningless prediction. You can’t invest in a bull market. You can only invest in stocks, and the only Dines recommended stock that is part of the Dow is down 12% since he said to buy it in December. But that’s fine; even though we won’t make any money from this advice, at least six months from now he’ll be able to say that “he called a lucky shot”, “right at the very bottom”, etc., etc.

Uranium

Of more interest to me are the comments of Merv who has turned bullish on the uranium stocks. Does this mean we should start buying? I’m not so sure. Here’s a chart of PDN.TO - Paladin Resources Limited, a stock that gained over 9% on Friday, and over 23% on the week:

I still see a down trend; the 50 day moving average is a resistance point, and the RSI is now getting high. This one could run for a few more days, but if I owned it, which I don’t, I’d be selling on this rally, not buying, and then I’d place buy orders back around the $4 mark to pick it up on market weakness.

The charts of other uranium stocks, like CCO.TO - Cameco Corp. and UUU.TO - Uranium One Inc. look similar, so I’m not convinced now is the time to buy. I’m not saying this is a “Sucker’s Rally”, but I’m not ready to bet the farm just yet.

As of last week I was down down 17.3% on the year. We had a good week, so now I’m only down 13.9% on the year. If I can pick up 3 points a week I can be break even by the end of June. Yippy.

The strongest performer on the week was DML.TO - Denison Mines Corp., up over 15% on the week. One of the worst performers was UUU.TO - Uranium One Inc.down 1%. Call me cynical, but how can we be in a new uranium bull market if only some of the stocks are participating in the rally?

So, my plan from here remains the same as stated here last week. I would like to rebuild my cash reserves for the summer. Last week I was 4% in cash. Today I’m 17% in cash, and I expect that to increase to over 20% this week, since I want cash for the summer shopping season in July and August.

Also, I won’t be chasing anything. Some below market stink bids when I resume buying will be the way to go.

Many of you have had great comments this week over on the Buy High Sell Higher Forum. We seem to be both frustrated and happy. Keep commenting; I assume this week will also be eventful.

Today I present to you, my dear readers, the most important blog posting on this web site I have written since starting the Buy High Sell Higher website in November, 2006. (Newsletter writers like to feel important by telling their readers how “important” they are ). I think I’m finally starting to understand this whole stock market thing. This post includes the results of my deliberations on a number of issues, so please, grab a fresh coffee and read on. (I will ramble on for the next few paragraphs, but be patient, there will be actual intelligent commentary later in this posting).

As you are all painfully aware, the last year and a half have not been kind to resource stock investors. As of last week I was down 15.3% on the year, and after the pain of this week I am now down 17.3% on the year. In fact, the only significant stock in my portfolio that was up this week was AEM.TO - Agnico-Eagle Mines Ltd., which managed a meager 0.8% gain. Unfortunately the worst performer on the week was JNN.V - JNR Resources Inc. that fell almost 15% (more on that later).

The spot price of uranium has been falling for well over a year. Merv continues to be very bearish. Gold and silver made new highs, but have since pulled back, and the increase in the price of gold did not translate into similarly high prices for gold stocks. So where do we go from here?

Gold

Here’s a three year chart of gold::

The long term uptrend dating back to the summer of 2005 is still intact. Obviously the correction that started in March is also still going strong. Is gold going to break the uptrend by falling below $750? Perhaps, but I doubt it, for the following reasons:

First, the RSI has only fallen below 30 twice in the last three years. The first time was in June of 2006, and as you can see by the first green vertical line on the chart, gold has not fallen below that price level (around $550) since then, although it did retest that level in the fall of 2006. The second time was on Thursday, when it fell to 29.75. Historically it would be a very bizarre event for it to keep falling from these levels, and in fact the uptick that happened on Friday is exactly what we would expect at these levels. The RSI is now back to 32.94, but there is no indication we have found the bottom.

Second, commodities markets are volatile. They go up and down. If they always went up, you wouldn’t be wasting your time reading the nonsense written by some anonymous blog writer; we’d all be retired already. Here’s a quote from an alert issued on Friday by Casey’s Big Gold newsletter: “The 1970s show how rough the gold bull market sometimes got: from March 3 to April 27, 1978 (a time period eerily close to today’s), the price fell 13.4%. Then, in less than two years, it rose 428% to its peak in 1980. And more recently, in just six days last January, gold corrected 5.6%, bottoming at $608.40. ” In other words, volatility is not unusual; we’ve seen it all before. In fact, here’s a chart of the XAU for the last three years:

As you can see, the annual correction produced a drop of 28.8% in 2006, 20.7% in 2007, and a drop to the bottom on Thursday in 2008 of 19.6%. Seems pretty normal to me. In fact, it seems freakishly normal to me.

Third, the geniuses running the Federal Reserve in the U.S. keep printing money, and they are printing it at an accelerating rate. The geniuses running the U.S. government sent out “bribe” cheques (I guess in America that would be “checks”) to Americans this week, and they continue to spend billions daily fighting a war, and after November the new government, whomever they may be, will want to spend billions more on a new health care program. All of the above is inflationary (particularly the printing money part), and the continued debasement of the U.S. currency will continue to make non-Americans sell U.S. dollars and buy something that can’t be printed (namely gold).

Of course the correction may continue for a few more days, or weeks, or months, but eventually underlying fundamentals will trump the speculative excesses that are happening now, and higher prices will result.

So what should we be doing now? More on that below. (I told you earlier, you need to be patient; I like to ramble before I get to the good stuff).

As prices have fallen, have I sold? Not much. Why? Because I continue to stubbornly believe that the prices of gold, silver, and uranium will be much higher in the future, and therefore now is not the time to sell.

However, let’s be realistic here. After a 94% gain in 2006, my portfolio declined by 34% in 2007 (my second worst year ever, as noted on the Portfolio Performance page). Even worse, I am now down 17.3% so far in 2008, which means my wonderful gains from 2006 will soon be gone, if we don’t see a change in fortunes, or a change in strategy, very soon.

Now, to the “most important blog posting” part of this post:

After much soul searching, I have arrived at five conclusions:

Conclusion #1: The Trends The Thing, Sort Of

I have long believed that the genius of guys like Dines, Casey and Donald Coxe is that they are able to spot the macro trends. They all predicted gold’s resurgence, and I agree with Dines and Casey that uranium is the fuel of tomorrow. That’s why I believe these commodities will trade higher in the future.

Unfortunately you can only make money from a macro trend if you get the timing correct. We all know that one day the sun will run out of energy and die, but unless I know when it will happen I can’t profit from that trend.

As uranium has demonstrated over the last two years, the long term uptrend can be accelerated by the arrival of hedge funds and other speculators, and the departure of those hedge funds can accelerate the downward spiral. If we chart the price or uranium over the last ten years and the next ten years there is little doubt that the trend will be upward, but obviously there can be one, two or three year pauses in that uptrend. If you are fully invested during the pauses, you get killed.

Therefore we should keep the long term uptrend in mind, but we must also be mindful of interruptions along the way. (I’ll have more thoughts in Conclusion #5 below about how to spot these macro trends).

Conclusion #2: Not Losing Money is More Important Than Making Money

This one may not appear obvious, but making 100% and then giving it all back is not a profit. Profits must be taken off the table, and risk minimized. Of course I have already described this in my Investment Rules, where I specifically state that if any stock drops 20% from it’s high, it should be sold.

However, the mere fact that I have lost as much as I have since 2006 demonstrates that I am not following my own rules, so a greater level of discipline is needed on my part. To that end, I plan to keep the uptick of the last two days on a very short leash, and start skimming profits early in the week, probably on Monday or Tuesday.

Conclusion #3: In a correction, quality is better than crap

Back in the good old days of 2006, you could buy whatever uranium stock you wanted, and it went up. It was easy. Quality didn’t matter, everything went up. (There was a good discussion on the Buy High Sell Higher Forum yesterday on this very topic; check out davidslane’s post responding to honeytart’s question about the future).

2008 is different. Very different. The sub prime crisis has drained liquidity from the market. Speculators who had their “play money” in the uranium market have long since vanished, since they need that money to stave off bankruptcy in their other funds and investments. It will be increasingly difficult for tiny little exploration companies to raise money.

Investors don’t have much cash, and they want to minimize their risk, so where will they put their money? In a Junior Unknown No-name Kid-sized company (ie. JUNK) or in a quality, blue-chip company? Common sense tells us that companies with cash on the balance sheet, proven resources, and experienced management will be the logical investments for risk averse investors.

That’s not to say that speculative juniors have no place in a portfolio, but they call them “speculative juniors” for a reason. They are very risky. If an exploration company hits a big deposit they can become a ten-bagger. If they don’t, they can become worthless. Hence, my next conclusion:

Conclusion #4: Limit Speculation to 20% (or whatever) of the portfolio

Your individual level of speculation will depend on your age, amount of wealth, and level of risk tolerance. A twenty-year old with no family responsibilities will probably speculate with the entire portfolio. Someone who will be retiring next year may only speculate with 5% of the portfolio, and only with money they are willing to lose.

I am neither young nor old, but I still need to put a cap on my risk level. I think 20% in purely speculative plays is more than enough. By speculative I don’t mean crap. I will only invest in companies that are fundamentally sound, and have solid management. However, if a solid management team raises cash and begins exploring in a promising area, that may be a company worthy of the speculative component of my portfolio.

The rest of the portfolio should be in “blue chip” plays like AEM.TO - Agnico-Eagle Mines Ltd., G.TO - Goldcorp Inc. and K.TO - Kinross Gold Corp., for example.

And now for the most important rule of all:

Conclusion #5: Buy High Sell Higher

I called this blog and web site Buy High Sell Higher for a reason. I believe that the time to buy a stock is when it’s making a new high after a period of consolidation. Why? Because that’s the least risky and most profitable time to by a stock. It’s the time when risk is minimized, but significant profit potential still exists.

Of course being stupid, I have not taken my own advice. Just read some past blog entries for proof. Here’s a classic: Back on April 9, 2008 I recommended the purchase of JNN.V - JNR Resources Inc. because it appeared that it had bottomed and was heading up. It appeared that $1 was a multi-year low, and therefore the risk of further downward motion was minimal, with lots of upside.

Guess again, JDH. On April 30, 2008 JNR traded at 75 cents, a 25% drop from where I said the bottom was. (It recovered to close at 81 cents on Friday, but was still my biggest loser on the week).

We all know the old saying: You can’t catch a falling safe (or piano, or knife, or whatever expression you like). You might get lucky and actually catch the safe, but it’s more likely that the falling safe will crush you, as has happened with me and JNR. (You can also look at the chart of FRG.TO - Fronteer Development Group Inc. for a similarly painful example of this; fortunately I got out a while ago, and since the chart is painful, I won’t subject you to it by posting it here).

The point is this: don’t try to guess the exact bottom, because you can’t do it. You may get lucky, but you are more likely to get crushed. Yes, the profit potential is greatest at the bottom, but since the bottom is only obvious with the benefit of hindsight, the perceived bottom is also the riskiest place to buy.

The real point: the spot on the curve with the lowest risk and a high potential for profit is at the point where the stock is breaking out after a period of consolidation. In other words: buy high, sell higher.

Let me give you an example. Here’s the chart of RIM.TO - Research in Motion Ltd., taken after the close on Thursday (American traders can also trade RIMM on the Nasdaq; the chart looks similar):

There are three obvious buy points over the last three years: after the consolidations of April to October 2006, January to June 2007, and now, after the consolidation of October 2007 through April, 2008. I decided to jump in on Friday morning, and I bought some RIM at $133.60.

So far, so good, as RIM closed Friday at $134.35, which is obviously another new high. Of course one day does not a trend make, but that’s exactly what you would expect would happen. After a period of consolidation, a stock moves to new highs, so everyone holding the stock is holding it at a profit. As of today, no-one who is long on RIM has lost money! Therefore no-one wants to sell to “get out even” or meet a margin call on the stock; there is no overhead resistance, so the stock is more likely to move up than down.

How Did I Pick RIM?

So how did I, Mr. Resource Stock Investor, decide to put money in RIM? Do I have some secret formula. Do I have a “research department”? No, but I have a secret.

Here’s the secret:

I go to the newspaper and look at the list of stocks making a new high. If the stock is making a new high after a period of consolidation, I take a look at the fundamentals and any news surrounding the company, and if it looks good, buy it.

(Of course I don’t actually look in a newspaper. That’s just a figure of speech. There’s lots of sites that give the you that information, including Globe Investor.com, which gives you the information for the major North American markets; the exact link to the new high/low table for the TSX is here).

Let me emphasize the point again: the easiest way to “buy high”, is to buy a stock making a new high!

Of course I’m not going to buy everything making a new high. There were a bunch of Canadian bank stocks on the list, and given the massive amount of consumer debt out there, and the wave of foreclosures that has yet to hit Canada, I’m not prepared to invest in the banks just yet.

I like Research in Motion for a number of reasons. I wear a Blackberry on my belt, and have for many years. They are developing a new Blackberry to compete with the Apple iPhone. They are expanding big-time in places like China, and they are going after the consumer (non-business user) market in a big way. The company is solid, and the chart looks good.

Even better, Research in Motion gives me some diversification away from the more speculative and volatile resource stocks. Granted, I only bought a small number of shares, and I don’t consider it to be a long term hold, because it’s volatile as well. But as we enter the traditionally slower summer season, I think it’s a good addition to my portfolio.

So, what’s my plan from here?

First, I think there will be more bumps along the road. I picked up more AEM.TO - Agnico-Eagle Mines Ltd., G.TO - Goldcorp Inc. and K.TO - Kinross Gold Corp. this week, and if we have another good week I’ll sell what I bought and pocket the cash.

Note: This is earnings announcement week, with all the big gold producers announcing earnings, including G.TO - Goldcorp Inc. on Monday, K.TO - Kinross Gold Corp. and ABX.TO - Barrick Gold Corp. on Tuesday, and AEM.TO - Agnico-Eagle Mines Ltd. on Thursday. Obviously with the big uptick in the price of gold over the last year the earnings should be great, so the old adage to “buy on rumor, sell on news” will probably take hold this week, so I expect to do a lot of selling. After the initial spike the stocks will pull back, and I’ll re-join the party later this month, or perhaps later in the summer.

I’ll probably cash out of RIM after a 10% or so increase as well, which may be this week, or may be later.

I would like to rebuild my cash reserves for the summer (I’m only holding 4% cash after my purchases of this week), and I want cash for the summer shopping season in July and August.

Second, I plan to stay away from the highly speculative junior uranium and gold stocks. There will be lots of time to buy them if and when the mania stage strikes. It is more likely that the small ones will disappear, so there is no point in owning them. Companies with proven reserves that are beaten down are likely to be acquired by the big guys, so I don’t plan to ignore the sector; I simply plan to be much more prudent.

Third, I plan on having more cash invested in less speculative stocks. Research in Motion is one example; I’ll have a few more examples next week.

Finally, I won’t be chasing anything. Some below market stink bids when I resume buying will be the way to go.

So, are my conclusions valid? Where are you putting your money? Join the discussion over on the Buy High Sell Higher Forum and let me know what you think. As always, thanks for reading, and have a good week.

Last week I was down down 7.6% on the year; as of today I’m down 7.4% on the year, so overall it was a flat week. Ho hum. (Had the week ended on Thursday I’d be down less than 5% on the year, so I’d be singing a different tune; Friday, as is typical, was not a great day, as traders on margin sell into the weekend so as not to be exposed, and then buy back in on Monday). So, am I happy or sad?

Well, we are talking about the stock market here; it’s only money, so I am neither happy or sad. Obviously I would prefer that my portfolio increased by 10% every week, but that’s not the way life works. Overall, I’m quite satisfied, for a number of reasons:

First, markets go up and down. We are in a consolidation period at the moment, which may last for a few more days, or weeks, or even months. There’s no point in me trying to force it; it is what it is. As the chart of gold shows, we are in a temporary consolidation period, but the overall trend dating back to August 16, 2007 is still up.

Second, some stocks actually did well this week. My biggest winner this week was UUU.TO - Uranium One, Inc., up almost 14% on the week:

The chart looks terrible, but the low of $3.16 reached on April 1 appears to have been an over-reaction, so even though I’m back to the break even level on this one, I see no reason to be selling at these levels, and an uptick to the $8 level is a possibility.

Third, many commentators are starting to see signs of life. Merv, proprietor of Technically Uranium with Merv, is now bullish for the short term, and will probably turn intermediate term bullish shortly. Mr. Dines released his latest The Dines Letter yesterday, and he’s bullish. (Of course he’s been bullish all the way down, but even a stopped clock is correct twice a day, so Dines is due to be correct at some point). Casey is also bullish, again provided you make your purchases at prudent prices. Jim Sinclair has a gold chart on his site that indicates a strong likelihood of more volatility in the short term, but long term he also believes the trend is up for gold.

Fourth, we traditionally have a rally in the April/May period. Davidslane started the discussion on the Forum with his post on the April rally, and many of you chimed in with your opinions, saying basically that you’ve got to make up your own mind.

As I’ve been saying for a while, and as is obvious to everyone, we are in a volatile period, so placing stink bids and selling on pops is a good strategy. Until all of our non-gold stocks start making new highs, we have to play the ups and downs as though we are still in a bear market.

So, my strategy continues to be as follows:

1. Decide what I want to own, and what percentage of my portfolio I want it to be.
2. Place stink bids at below market levels. There will be big swings, so don’t chase a stock. It will probably come back, so be patient.
3. Don’t chase a stock.
4. Don’t chase a stock.
5. For added clarification, in case you didn’t understand points 2, 3 and 4: Don’t chase a stock. We are NOT in a booming bull market, so it’s unlikely that a stock will continue to rise day after day for 10 straight days. There will be pull backs, so that’s where you buy.
6. On the juniors, pick a profit level, and put in your sell orders now.

By following this strategy, you can buy attractively, lock in profits (since it’s not a profit until you sell) and then re-deploy the cash on the down swings.

What’s a reasonable profit? It depends on the stock, but if you bought a junior at a depressed price on a down day with a stink bid, than it’s probably not unreasonable to put in a sell order 30% above that level in the hopes of being filled on a big up day, on the theory that with that level of increase a pull back becomes increasingly likely.

Of course the biggest flaw with this strategy is that if a take over of a junior is announced and the stock doubles in one day, you can only make 30%, and with many of these juniors take overs are likely. To mitigate that risk perhaps you put in a sell order for half of your position, and then manually sell the rest it the rise was not due to take over talk. (Or, take the 30% profit and be happy).

For example, how could you play DML.TO - Denison Mines Corp.?

Obviously we have a series of lower highs and higher lows, so at some point this stock will need to break out, probably to the upside. But with this huge amount of overhead resistance, the chances of a smooth ride to the top with no corrections along the way are virtually zero. A bounce up to $9 (around the 200 day moving average) would not be unreasonable, so perhaps a sell order at $8.99 would be in order. If you don’t already own the stock, perhaps a stink bid at $6.50 would make sense.

To summarize, I expect continued strength in April and into May, at which point I will begin to raise cash for the typically slow summer season, and to lock in gains. I also plan to keep a short trigger; if I start losing, I’m selling; I’m not letting losers run. I’m at 17% cash now (same as last week), as I continue to sell losers and place stink bids on stocks I want to own.

As always, thanks for reading, and keep on posting your comments on the Buy High Sell Higher Forum.

Last week I said that, judging by the panic on the Buy High Sell Higher Forum, and the fact that we had the more new Forum members sign up in March than we had in any month in the last year, it appeared that we have reached the bottom. Last week I was down 8.3% on the year, and today I’m down 7.6% on the year, so at least the trend appears to be going in the correct direction.

The chart of gold appears to show a bottom during the “crash” in March, and although it’s not quite back up to it’s 50 day moving average, the RSI and MACD have turned upward, and I continue to believe that it’s onward and upward from here, albeit with a few bumps along the way.

What are the other reasons for optimism?

Well, out old friend Mr. Dines of The Dines Letter fame issued an IWB yesterday confirming his buy signal of January 23, 2008. (Or, as he likes to put it, just to be different, 23 Jan 08). My portfolio has increased by half of one percent since January 23, so that tells me the “buy” signal was somewhat premature. However, I agree with his general premise that the time to buy is when everyone is pessimistic, and I agree that’s where we are now.

A more reliable source of perspective is our not quite as old friend Merv, proprietor of Technically Uranium with Merv, who is finally seeing some bullish signs in the uranium sector.

On April 9, 2008 Bloomberg reported that “the China National Nuclear Corp. said it is looking for Canadian acquisitions or partnerships” in the uranium sector. This is not an unexpected development, and it makes sense. If I was running China, and I needed to secure energy supplies for over a billion people, there is only one option: nuclear power. And the best way to secure that supply would be to actually buy the companies that produce the uranium. With uranium shares beaten down, now is the time to start acquiring.

This may be the start of the acquisition frenzy that we are all expecting, which is why I’m bullish over the medium and longer term with uranium shares. For that reason I plan to continue to liquidate my big losers, and put my money into junior and intermediate producers that have the possibility to be acquired in the future.

There were some good up moves this week, including my best uranium stock of the week, JNN.V - JNR Resources Inc. which was up 13% this week: