This Week’s Commentary – May 19, 2007 – Has the Worm Turned?

……….If our old friend Mr. Dines was writing this week’s commentary, is this what he’d be saying?…………..

 

The phrase “Tread a woorme on the tayle and it must turne agayne” was first recorded in John Heywood’s 1546 collection of English proverbs, meaning that even the most humble of creatures will try to counteract rough or unfair treatment.

Shakespeare picked up the thought in Henry VI, Part 3, where Lord Clifford urges the king against ‘lenity and harmful pity, saying:
To whom do lions cast their gentle looks?
Not to the beast that would usurp their den.
The smallest worm will turn being trodden on,
And doves will peck in safeguard of their brood.

As time has passed, the phrase has evolved from a description of a lesser creature’s revolt to a much broader meaning that the situation has changed, as, for example, in this quote from the New York Times in 1994: “The day was one long, sometimes poignant reminder of how the worm has turned for Mr. Cuomo–whose approval ratings now lag Mr. Clinton’s in the state by 10 percentage points”

Back in 2000 we advised our loyal subscribers that the worm had turned, leading you out of internet stocks and into natural resource stocks, particularly uraniums, for which we are grateful. But over the past few weeks uranium stocks have pulled back from their multi-year highs; has the worm turned again?

…………………………………………………….

Okay, enough ramblings about Mr. Dines and Olde English sayings…….

However, the question is valid; has the worm turned?

My 20% gains on the year have evaporated, and as of today I am only up 3.4% on the year, which is not much to show for almost 5 month’s work. At these rates of return I might as well put my money in T-Bills and eliminate all risk. Had the week ended on Thursday I would have been flat for the year; only Friday’s big uptick has kept me in the black.

Which again begs the question (since I know you all love it when I beat an analogy to death): Was the action up to Thursday the worm turning from the gains of the past two years, or did the worm turn on Friday, signaling an end to the consolidation?

Here’s a chart of FRG.TO – Fronteer Development Group Inc. for the last two years:

As you can see, the stock peaked at $8.04 on April 19, 2006 and then took 55 days to fall to an intra-day low of $4.10 on June 13, 2006. Of course, from there, it was onward and upward.

An all time high was reached at $16.90 on April 9, 2007, before falling to an intra-day low of $12.37 on May 17 (Thursday).

If past history repeats itself, which it never does, Fronteer’s bottom should be 55 days from the top, and down 50%, which would put it at $8.45 on June 3. On Thursday Fronteer had fallen 27% over 38 days, which means that all of my complaining about how I haven’t made any money is nothing compared to the drop we experienced at exactly this same time last year.

I don’t have records of my portfolio value every day last year, but I can tell you that from April 30, 2006 to May 31, 2006, one month, my portfolio dropped by 27%. I lost 27% in one month, and yet one of the purposes of this site is for me to feed my ego by bragging about how brilliant I am. Why? Because last year, for the entire year, my portfolio was up 94%. My point: the stock market is a dangerous game, and resource stocks are more volatile than most, so it is possible to suffer a 27% loss in one month and still gain 94% on the entire year.

Will this happen again this year? I have no idea, but past history proves it is possible. Look at the Fronteer chart again. The bottoms in 2006 and perhaps 2007 coincide with RSI levels around 30, so it is possible we are near a bottom.

Want another example?

On April 11, 2006 PNP.TO – Pinetree Capital Ltd. peaked at $5.43, and then dropped over the next 37 days to an intra-day low on May 18, 2006 to $3.25, a 40% decline. On April 10, 2007 Pinetree made it’s intra-day high for 2007 at $16.15, and then bottomed, 37 days later, at $11.71 on May 17, 2007, a drop of 27%.

Weird, eh? (Editor’s note: for those of you who are not Canadian, “eh” is a Canadian expression that we put at the end of every sentence to determine if you are in agreement with what we are saying, and to see if you are still listening. It was popularized by Bob and Doug McKenzie, who are enjoying something of a renaissance, but that’s another story for another day).

Weird, in that both last year and this year it’s been 37 days from peak to valley, although the drop last year was more severe.

Here, then, are my conclusions:

First, this is a volatile market. A drop of 27% or more is normal. It’s happened before, and it will happen again.

Second, it is possible that we are at the bottom, or close to it. Last year there was a much more pronounced bottom, almost a crash, that happened relatively quickly. The drop has not been as severe this year, but one could argue that the uptick was also not as pronounced. Why? Perhaps it’s because more investors are in this market, including some institutional investors, which may smooth out the peaks and the troughs.

Third, it amazes me that the bottom for Pinetree was achieved on May 18, 2006, and it is possible that a bottom was also achieved on May 17, 2007. I guess I should take back my comments about history never repeating itself!

The argument can convincingly be made that the bottom won’t occur until early June, given that it can take up to 55 days to go from top to bottom, as we saw with Fronteer last year, which means we may not yet be at a bottom. However, as we saw with Pinetree, 37 days is also possible, which means we are already there.

My guess? We are there. This is the bottom.

I am currently sitting on 19% cash, the largest cash component I have held in two years, primarily because I didn’t want to be fully invested at the bottom. I have cash, so I plan to deploy half of that cash this week, and if we continue on the upside I will deploy the rest in early June.

Monday is a holiday in Ontario, so for stocks trading on the Toronto Stock Exchange we won’t know until Tuesday whether the upward trend will continue, but I’m guessing that it will.

What will I be buying? More of the larger stocks, like PNP.TO – Pinetree Capital Ltd., SXR.TO – SXR Uranium One, Inc., and PDN.TO – Paladin Resources Ltd. because I think the larger stocks will benefit more from new investor interest. However, I will also be keeping an eye on the smaller ones, which have the most potential as the industry consolidates.

Thanks for reading, and thanks to all of you who share your thoughts on the Buy High Sell Higher Forum; good luck this week.