This Week’s Commentary – March 31, 2007 – Thoughts on the year’s first quarter, and the next one

The first quarter of 2007 has now ended, and I am satisfied to report that my portfolio is up 11% on the year. If I can maintain this pace I will gain 44% for the year, which is satisfactory, although not as impressive as the 94% I gained last year. Given that we have already had one correction this year, I’m satisfied with where I’m at.

What mistakes have I made so far this year? Well, as discussed in my March 17 commentary, I wanted to diversify out of the pure uranium stocks, and also pick up some junior stocks for purely speculative purposes, on the theory that if the uranium and base metals markets keep increasing, it will be the juniors that become take-over targets. I picked four stocks, all owned by PNP.TO – Pinetree Capital Corp., on the basis that they have already done the research on which juniors are good candidates for capital appreciation. My four picks were:

• GU.V – Global Uranium Corp.
• INI.V – Independent Nickel Corp.
• KAU.V – Kilgore Minerals Ltd.
• TOE.V – Tri Origin Exploration Ltd.

How did I do? Not great. Global Uranium tanked just before I bought it, and kept dropping after I bought it. Independent Nickel and Tri Origin were also downers. The only winner in the bunch was Kilgore, which announced a merger with Bayswater Uranium. I’m up 12% on Kilgore, so I’m holding it. The other three were losers, so I cut my losses and sold them. Fortunately all four of these stocks were small components of my portfolio (about 1% each), so no serious harm done.

The most interesting stock this quarter, without a doubt, has been PNP.TO – Pinetree Capital Corp. I have written a detailed explanation of my thoughts on Pinetree to explain why I have thinned out my position this week (fortunately before the drop on Friday).

I also took some profits in LAM.TO – Laramide Resources Ltd. since it has had a big run recently.

So, what to do now? I’ve sold my losers, and thinned out my big winners, so now I have 20% of my portfolio in cash. My plan was to keep cash of roughly equivalent to my gain on the year, on theory that as the portfolio increases I will take profits. Since I’m up 11% on the year, I’m not as invested as I would like to be. Should I just start buying to hit some arbitrary cash percentage? No. It’s time to do some thinking.

Refining Buy High Sell Higher

I believe it’s time to refine my buy high sell higher approach. In it’s simplest terms, I buy stocks in an up trend, preferably as they are breaking out of a consolidation phase. A new high is a good indication of a break-out, but it’s also likely that that approach misses some of the upside. How to refine this approach? By using the RSI.

The Relative Strength Index (RSI) compares the magnitude of a stock’s recent gains to the magnitude of its recent losses and turns that information into a number that ranges from 0 to 100. (The RSI that I am using should not be confused with other forms of “Relative Strength” rankings, such as the one that appears in Investor’s Business Daily, which is a comparison of this stock to other stocks. Using that indicator a Relative Strength of 80 means the stock out-performed, price wise, 80% of all other common stocks over the last year). Like most true indicators, the RSI only needs one stock to be computed. In order to avoid confusion, many people avoid using the RSI’s full name and just call it “the RSI.” A full description of RSI and other technical indicators can be found at stockcharts.com.

A chart of the RSI shows visually whether or not the stock’s recent gains are larger than it’s recent losses; in other words, whether or not it’s going up or down. Since I like to buy stocks that are going up, this is a good indicator for my investing style.

Stocks typically trade in an RSI of between 30 and 70. Once a stock gets over 70, it’s looking “toppy”. It would appear that a good time to purchase a stock is as it increases over the half-way point, or 50, meaning it’s on the way up. (A review of my three losers above indicates I should have paid attention to the RSI before buying).

So what am I buying?

First, I’m getting back into PXP.V – Pitchstone Exploration Ltd.; I made a mistake selling this one on March 20; you can read the summary of my stupidity here.

Second, I think silver is poised to move higher. Please read my detailed thoughts, and my new silver recommendation: EDR.TO – Endeavour Silver Corp.

Third, I am adding two new stocks: HAT.V – Hathor Exploration Limited and AZM.V – Azimut Exploration, Inc. You can read my full thoughts here. I plan to start buying them on Monday.

What will the next quarter bring? Are we due for the April correction, or is it already over? I don’t know, but a glance at the uranium chart on the right hand side of this page should bring a smile to our faces.

As always, please post your comments at the bottom of this post, or post your thoughts on the Buy High Sell Higher Forum, and good luck this week.