This Week’s Commentary – December 1, 2007 – A or B?

Well, it’s official. This has been a lousy year, investing wise, for me.

With one month to go, I am down 32%, which, if it holds for the year, will mark my almost my worst performance ever (which was a drop of 38% in 2001).

I expected a retest of the August 16 lows, and obviously it’s happened, and to a greater extent than I expected.

I am upset. November is supposed to be a great month. It wasn’t. Stocks are supposed to bounce off their previous lows during the consolidation phase and blast higher. So far, they haven’t.

I am telling the market what to do, and the market isn’t listening!

It’s almost as though the market has a mind of it’s own, independent of what I tell it to do!

But then, that’s the point, isn’t it? It doesn’t matter what I think. It doesn’t matter what you think. The market takes all of our inputs, and produces a price for each stock. That’s the way it is, and me telling it to do something different won’t change things.

I am feeling now like I was feeling back in August. On August 10 I wrote that “I have capitulated”, bringing my portfolio up to 70% cash. In hindsight, of course, that may look brilliant, because the market completed it’s summer crash on August 16, when I was largely in cash. But, of course, I didn’t immediately rush out to buy on August 17, waiting to see what would happen, and therefore I missed the “dead cat bounce” in August and September.

I fully invested in the early Fall, so now I sit with very little cash, watching the retest.

My gut feel is to say “okay, I can still salvage the year and not beat my worst 2001 performance by selling now and sitting in cash. At least I won’t lose any more.”

(NOTE TO READERS: After you finish reading this sentence, close your eyes, sit still for 30 seconds, and ask yourself: “What am I feeling now? Optimism? Pessimism? Confusion? What?)

 

 

you may open your eyes now

 

 

really, wake up, open your eyes……….

 

 

So what did we prove? Probably nothing, other than that in general it usually makes sense to do the opposite of what you are thinking. When you feel most pessimistic, like on August 16, that is usually the time to buy, and vice versa.

I feel cheated. I feel that I have wasted all of 2007. I should have sold everything on New Year’s Day, or in the spring, and put the cash in the bank (in a Canadian dollar bank account, of course), and gone on vacation for six months. But I didn’t. So, here are two commentaries for your consideration:

Commentary A – The Pessimist

All is lost. The American economy is in the tank, and it will only get worse. The credit crunch and sub-prime fallout has only just begun. Many millions more will lose their homes, and the result will be economic catastrophe. The U.S. will continue to spend untold billions in Iraq, which will continue to crash the dollar and bleed the economy. When the economy goes down, most stocks go with it. It doesn’t matter that uranium is the wave of the future; if we can’t afford a place to live, electricity for our big screen T.V. is the least of our worries.

Sell, and run.

Commentary B – The Optimist

All appears lost, so now is the time to be fully invested, just like around August 16.

Also, markets go up and down. It’s normal. It’s healthy. Just because I think the market should be going up doesn’t make it so. We had a huge year last year, so it is not unrealistic for the speculative froth to require a year to cool down. The bigger the base, the bigger the upside, so 2007 is a great set up for 2008.

Remember our history: uranium was in the doldrums for 20 years; gold has been below it’s all time highs for about the same amount of time. In the grand scheme of things, should I be worrying about seven or eight months of consolidation?

Commentary A or Commentary B – Which Is Right?

Good question: Here’s a Commentary A chart

This chart of DML.TO – Denison Mines Corp. going back two years shows that the uptrend line was broken on August 16, and broken again in November. If long term support is not holding, that’s bad news.

Here’s a Commentary B chart:

Here’s the same chart, with a slightly adjusted uptrend line. Although we are back to the uptrend line, the RSI and MACD and Money Flow Index levels are so low that they can’t help but go up from here. We are also in a triangle formation; either the red downtrend line will be broken, or the blue uptrend line will be; it can’t be both, so the optimist betters on a break to the down trend.

(On a side note, thanks to depleted on the Buy High Sell Higher Forum for pointing out the insider buying in Denison. This is obviously an optimistic sign; there are many reasons to sell (such as tax loss selling, or to raise cash for other purposes), but there is generally only one reason to buy (expectation of higher prices ahead)).

Here’s another chart, this time of gold over the last two years:

Doesn’t this look like a normal consolidation phase in a long term bull market? Doesn’t the RSI look like it is at a very attractive buy point?

My Point?

My point, dear readers, is that there are two sides to every coin, the yin and the yang, and we must decide which way the coin flip will land.

I believe that the economy is going in the tank, so I will not be buying stocks in home builders or consumer goods. But I also believe that a flight to quality will drive gold higher, and I believe we need electricity, so uranium must also go higher, so that’s what I’m buying.

I may look wrong now, but the score of the football game is not decided at the end of the first quarter. The entire game must be played, so I intend to continue playing.

As always, thanks for reading, and please continue to share your thoughts on the Buy High Sell Higher Forum.