This Week’s Commentary – November 3, 2007 – The Sweet Spot

“Sweet” – JDH, describing market action this week.

What a week it was. Finally, we have started to see some green on our computer screens, replacing the red we have been staring at for much of the year. A few weeks ago my portfolio was down 30% on the year. Now I’m down 20% for the year, but if we have a few more weeks like this one 2007 will still close in positive territory.

Our new best friend, gold, is over $800 dollars an ounce. Not bad, considering it was around $660 in August.

The reasons for gold’s rise are no secret:

First, the U.S. economy is in bad shape. Housing foreclosures are at an all time high, and losing your house certainly dampens your enthusiasm for shopping at your local building supplies big box store.

Second, the U.S. economy is in really bad shape. The Canadian dollar surged above $1.07 U.S. on Friday, it’s highest level ever. It wasn’t that long ago that we were staring at a 60 cent dollar. Clearly, no-one wants U.S. dollars. The U.S. government is printing massive amounts of money to finance the war in Iraq, and apparently no-one wants those worthless pieces of paper. Far better to put your wealth in something that can’t be printed: gold.

Foreign gold buying, reduced central bank gold sales, and general consumer perceptions have also fueled this rise in the sparkly yellow metal.

The only cloud on the horizon is the relatively high RSI number of 78.21 (see chart). The RSI was over the psychologically important 70 level from around September 10 to early October, when gold had a minor pull back to bring the RSI down. Presumably gold could keep running for another week or two before it gets so over bought that a minor correction occurs. I have no plans to worry about that. A drop from say $825 back down to $800 won’t cause me to jump off a bridge. I’ll stay the course, and start thinking about selling as we approach the $1,000 level.

Obviously this strong performance has helped gold stocks, like my biggest old holding, K.TO – Kinross Gold Corp. It is currently 9% of my portfolio (higher than it’s recommended weight of 8% due to it’s recent rise), and I’m sitting on a 22% profit.

Again, my only worry is that we are starting to look a little toppy. The RSI, MACD, and Money Flow Index numbers look over bought, so a correction would not surprise me at these levels. This stock is a long term hold for me so I have no plans to sell, but I may do a covered write to lock in some profits in the event that it falls from here. For example, I can sell an at the money call, the November $19 call, for 70 cents. It expires on November 16, two weeks from now, so if Kinross closes below $19, I pocket the 70 cents, which obviously lowers my cost of ownership by 70 cents, less commissions.

Alternatively, I could sell the November $20 call for about 30 cents. I don’t bring in as much, but I only get called if the stock rises another dollar from here, so I actually make $1.30.

I have not yet decided what I’ll do, but I suspect if Kinross does approach the $20 range I will probably cover and lock in some profits.

Burying the Lead

Now please allow me to explain a concept that journalists call “Burying the Lead”, meaning you start by talking about the least important aspects of a story first. (“The play was great, the actors were wonderful, and oh, by the way, something bad happened to President Lincoln”).

As I surveying my portfolio, the biggest winners are not gold stocks; they are uranium shares. The biggest winner so far is JNN.V – JNR Resources Inc.:

I am happy to report that we have played this one perfectly. After August 16 I said something along the lines of “I don’t want to start buying yet; we need to retest the lows to make sure they hold before putting both feet in the water.” As the chart shows, that was the correct approach. We bounced off the August 16 lows, and then corrected in September and October, but in both cases the August 16 lows held, paving the way for the recent advance.

JNR is now, finally, trading above it’s 200 Day Moving Average, and is also above the $3.25 double top formation from July and August. The RSI and MFI are getting toppy, but this is a great company, and looks to me like it has a lot farther to run (it was $4.50 on April 10), so I’m holding.

Obviously lots of other stocks have done well this week, so what does this mean?

It means we are now in the sweet spot. As in past years, November and December tend to be great months for the uranium stocks, and guess what: Halloween is over, it’s now November. We deployed cash during October, and now is the time to deploy whatever cash you have left, because it doesn’t get any sweeter than this.

Yes, there will be down days – just ask shareholders of UUU.TO – Uranium One Inc., of which I am one.

Uranium One slashed it’s production forecasts, and the stock tanked. However, as the chart shows, it tanked down to it’s long term uptrend line. The RSI is now at a much better purchase level, so I plan to increase my holdings this week, now that the dust has settled (from 2% of the portfolio to 3%).

There are lots more stories out there, but the message now is clear: now is the time to be fully invested. (Or, as davidslane put it on the Buy High Sell Higher Forum, we are at the stage where you can throw darts at the uranium stocks and make money over the next few months).

As always, thanks for reading, enjoy the sweet spot, and feel free to share your thoughts on the Buy High Sell Higher Forum.