This Week’s Commentary – What Would Newton Do?

Lex I: Corpus omne perseverare in statu suo quiescendi vel movendi uniformiter in directum, nisi quatenus a viribus impressis cogitur statum illum mutare.

An object at rest will remain at rest unless acted upon by an external and unbalanced force. An object in motion will remain in motion unless acted upon by an external and unbalanced force.

-Sir Isaac Newton, Principia Methematica, 1687

Stocks keeping going down, or up, until they don’t.

-JDH, This Week’s Commentary, Buy-High-Sell-Higher.com, June 9, 2007

It would appear that I have no idea what I’m talking about (which begs the question: why are you reading this? I assume it’s because none of us know what we are talking about; we are all searching for answers, trying to make a buck).

Two weeks ago, and again Last Week, I expressed the opinion that we may have reached a “fat bottom”, or a double bottom formation. I gave the example of FRG.TO – Fronteer Development Group Inc. that made an intra-day low of $12.15 on February 27, and had remained above that level, closing at $13.10 on May 24, and $12.84 on June 1, but not violating the February 27 low so I assumed that we were still in good shape.

Well, guess what. On June 8 Fronteer touched $11.72, before closing at $12.25 on the day. That means that the intra-day low has been broken, both on June 7 (closing price: $12.06) and on Friday.

You can interpret this action in one of two ways:

First, there is not much difference between $12.15 and $11.72, and since it was separated by more than three months, it may be meaningless. It could be that the “two cheeks of the fat bottom” occurred on February 27 and June 8. That would be good news, and it could be onward and upward from here.

An alternate viewpoint is that the previous low was broken; it doesn’t matter by how much it was broken by; it was broken, so a further series of declines until we find the final bottom may be in sight over the next week or more. To paraphrase Newton, the stock is going down, and it will keep going down until it stops going down.

To lend some credence to this pessimistic viewpoint, let’s look at a three year chart:

The red line is the 200 day moving average, which Fronteer has reached twice in the last three years. If history is a guide, Fronteer will bottom out around $11 sometime this week in a final brutal wave of selling.

On June 13, 2006 Fronteer made a low of $4.10, crossing below the 200 DMA of $4.615. Ten days later, on June 23, 2006 Fronteer finally got above the 200 DMA, making a low of $4.74 while the 200 DMA was at $4.62.

How’s this for bizarre:

On June 16, 2005 Fronteer made a low of $1.95, crossing below the 200 DMA of $1.98. Eleven days later, on June 27, 2005 Fronteer finally got above the 200 DMA, making a low of $1.99 while the 200 DMA was at $1.9896.

Here’s a table (I’ll let you decide if it means anything):

Okay, let me make it more clear:

So, what does this mean? Well, those of you who have been following the comments of davidslane in the Buy High Sell Higher Forum will know that back on May 18 he started commenting on the fact that uranium stocks tend to make a low around the second week of June. On May 29 he identified June 12 as the bottom day, since it’s the second Tuesday in June. He may be on to something here.

(Lest we think davidslane is perfect, on June 1 he changed his mind and said “okay, you can buy”, assuming that we had reached the bottom. Oh well, no-one’s perfect, obviously myself included).

What’s the significance of the second Tuesday in June? I have no idea. Perhaps it has to do with options expiration. Perhaps it has to do with mass psychology, as everyone reviews their portfolios in advance of summer vacations. Perhaps it’s the start of the summer driving season. Maybe it has to do with the NBA or NHL finals. Maybe it has something to do with Paris Hilton. I don’t really know.

Regardless, it would appear that there is a trend here, and we should be aware of it. Here’s what I plan to do:

First, I don’t plan to do any significant selling. If I was a day trader, I would sell everything at the open on Monday, and then place buy orders well below the market price on Tuesday, hoping to catch the bottom. Unfortunately the world will not unfold exactly as we expect, so that’s probably a very risky game to play. I would hate for the upswing to start before I could repurchase my positions.

Second, I do plan to keep a close eye on things Monday. If there is a pullback I may lighten up a little.

Third, I still have some cash, so if we do have a big down day on Tuesday or Wednesday, some further buying may be in order. I’ll see where the bargains are, and govern myself accordingly. The world has not ended, uranium continues to make new highs (see the chart on the right hand side of the page), so despite the downslide so far this year, we have seen it all before, so medium term I am still bullish.

Finally, the time to not sell is when you are scared and feel that you must sell. Do the opposite. Buy when you are scared, sell when you are happy. Hopefully this week everyone is scared, so we can start buying.

Thanks for reading, and thanks to all of you who share your thoughts on the Buy High Sell Higher Forum; good luck this week, and let’s hope the trend in motion reverses itself, Newton notwithstanding.