This Week’s Commentary – August 10, 2007 – Capitulation

by JDH on August 10, 2007

I have great news for each of you who continues to be “long” in this market:

I have capitulated. On Thursday I did a lot of selling. I still own a bunch of stocks, but I am now around 30% in cash. Obviously, it’s something I should have done much earlier.

Assuming that the market can’t go up until everyone has capitulated, I have now capitulated. As a contrary indicator, that probably means we truly have reached a bottom, and the markets will rise from here. Start buying, everybody.

Last week I said that I think we have put in a bottom because “Most stocks in my portfolio have not re-tested their lows of earlier this year.”

Well, so much for that theory. Here’s chart of PNP.TO – Pinetree Capital Ltd. , from early afternoon on Friday:

pinetree capital corp

Last week I said that “PNP.TO – Pinetree Capital Ltd. bottomed at $9.08 on February 7 (split adjusted numbers), touched $9.26 on March 5, $9.12 on June 26, and recovered to $9.75 on July 25, and then fell to $9.03 on August 1, before recovering to close the week at $9.15. That looks to me like the base is holding.” Well, I’m guessing that given that Pinetree traded at $6.73 at around 10:30 on Friday morning obviously indicates that the base has been broken.

Hence, on Thursday, I dumped a lot of my Pinetree.

I have also capitulated and reduced or eliminated my holdings on stocks that have a chart that looks like Pinetree’s chart. Why?

First, I like to Buy High, Sell Higher. I stock that is making a new low for the year is obviously not going up. (As our friend Mr. Dines is found of saying, don’t think, look). Wishing it will go up will not make it so. Fortunately selling on Thursday made sense, as the markets continued to fall on Friday.

Second, I’m going on vacation for the next two weeks, and I won’t be near a computer to watch things closely, so I prefer to be in cash when I can’t keep an eye on things.

Third, two words: overhead resistance. If you buy a stock for $10, and it falls to $6, and then recovers to $7, what do you do? You say “great, I can recover some of my money”, so you sell it. Explosive moves happen when a stock clears through it’s overhead resistance. When there are no more sellers trying to “get out even”, a stock can go on a run. When a chart looks like Pinetree’s, that is unlikely to happen.

Fourth, if you bought on margin (which is a very dangerous game), and shares are down, you are forced to sell to cover your margin calls. That selling creates downward pressure, forcing more people to sell, and so on. It’s happened in the sub prime market, and obviously is happening here as well.

So, how will this back-fire on me?

Obviously the market may actually be at a bottom. Apparently everyone is screaming at people like Dines (check out ULover’s post on the Forum), which is perhaps a sign of the bottom (everybody loved him when they were making money last year, and he could do no wrong). Selling at a bottom is the wrong thing to do. (Unless this isn’t the bottom).

Also, if one of our friends in the newsletter business issues a “back up the truck” recommendation, that may cause an increase in share prices. However, as quoted above, newsletter-reading lemmings at the moment are not very pleased with their gurus, so it is possible that a back up the truck recommendation will be greeted with a yawn (ie. “why trust this guy now; he should have told me to sell four months ago”). Also, if we are close to fully invested, and if we are selling shares to cover margin calls, no-one will have any money to back up the truck with.

Here’s my current thinking:

We are in for a choppy ride. We will have big down days, and big up days. The trend will eventually assert itself, but it looks increasingly unlikely to me that the trend will resolve to the upside in the next few days or weeks.

The lows must be tested. I thought they were re-tested at the end of July. Obviously I was wrong. We don’t yet know where the lows are. Therefore, we watch and wait and observe until we see them.

This strategy of course means that I will not catch the exact bottom. If I had unlimited cash I would be buying all the way down, because, of course, fundamentally nothing has changed. Uranium will be in short supply for the next few years. It’s inevitable. However, there will be ups and downs along the way.

I will take my vacation, hang out with my wife and kids, and return in two weeks rested and wiser.

Well, rested anyway.

In my absence, please continue to start new threads and post your thoughts on the Buy High Sell Higher Forum.

We will talk again, probably around the 27th of August, unless I have some brilliant insights sooner.