April 19, 2008 – Gold, Uranium, and the Week That Wasn’t

Last week I was down down 7.6% on the year; as of today I’m down 7.4% on the year, so overall it was a flat week. Ho hum. (Had the week ended on Thursday I’d be down less than 5% on the year, so I’d be singing a different tune; Friday, as is typical, was not a great day, as traders on margin sell into the weekend so as not to be exposed, and then buy back in on Monday). So, am I happy or sad?

Well, we are talking about the stock market here; it’s only money, so I am neither happy or sad. Obviously I would prefer that my portfolio increased by 10% every week, but that’s not the way life works. Overall, I’m quite satisfied, for a number of reasons:

First, markets go up and down. We are in a consolidation period at the moment, which may last for a few more days, or weeks, or even months. There’s no point in me trying to force it; it is what it is. As the chart of gold shows, we are in a temporary consolidation period, but the overall trend dating back to August 16, 2007 is still up.

Second, some stocks actually did well this week. My biggest winner this week was UUU.TO – Uranium One, Inc., up almost 14% on the week:

The chart looks terrible, but the low of $3.16 reached on April 1 appears to have been an over-reaction, so even though I’m back to the break even level on this one, I see no reason to be selling at these levels, and an uptick to the $8 level is a possibility.

Third, many commentators are starting to see signs of life. Merv, proprietor of Technically Uranium with Merv, is now bullish for the short term, and will probably turn intermediate term bullish shortly. Mr. Dines released his latest The Dines Letter yesterday, and he’s bullish. (Of course he’s been bullish all the way down, but even a stopped clock is correct twice a day, so Dines is due to be correct at some point). Casey is also bullish, again provided you make your purchases at prudent prices. Jim Sinclair has a gold chart on his site that indicates a strong likelihood of more volatility in the short term, but long term he also believes the trend is up for gold.

Fourth, we traditionally have a rally in the April/May period. Davidslane started the discussion on the Forum with his post on the April rally, and many of you chimed in with your opinions, saying basically that you’ve got to make up your own mind.

As I’ve been saying for a while, and as is obvious to everyone, we are in a volatile period, so placing stink bids and selling on pops is a good strategy. Until all of our non-gold stocks start making new highs, we have to play the ups and downs as though we are still in a bear market.

So, my strategy continues to be as follows:

1. Decide what I want to own, and what percentage of my portfolio I want it to be.
2. Place stink bids at below market levels. There will be big swings, so don’t chase a stock. It will probably come back, so be patient.
3. Don’t chase a stock.
4. Don’t chase a stock.
5. For added clarification, in case you didn’t understand points 2, 3 and 4: Don’t chase a stock. We are NOT in a booming bull market, so it’s unlikely that a stock will continue to rise day after day for 10 straight days. There will be pull backs, so that’s where you buy.
6. On the juniors, pick a profit level, and put in your sell orders now.

By following this strategy, you can buy attractively, lock in profits (since it’s not a profit until you sell) and then re-deploy the cash on the down swings.

What’s a reasonable profit? It depends on the stock, but if you bought a junior at a depressed price on a down day with a stink bid, than it’s probably not unreasonable to put in a sell order 30% above that level in the hopes of being filled on a big up day, on the theory that with that level of increase a pull back becomes increasingly likely.

Of course the biggest flaw with this strategy is that if a take over of a junior is announced and the stock doubles in one day, you can only make 30%, and with many of these juniors take overs are likely. To mitigate that risk perhaps you put in a sell order for half of your position, and then manually sell the rest it the rise was not due to take over talk. (Or, take the 30% profit and be happy).

For example, how could you play DML.TO – Denison Mines Corp.?

Obviously we have a series of lower highs and higher lows, so at some point this stock will need to break out, probably to the upside. But with this huge amount of overhead resistance, the chances of a smooth ride to the top with no corrections along the way are virtually zero. A bounce up to $9 (around the 200 day moving average) would not be unreasonable, so perhaps a sell order at $8.99 would be in order. If you don’t already own the stock, perhaps a stink bid at $6.50 would make sense.

To summarize, I expect continued strength in April and into May, at which point I will begin to raise cash for the typically slow summer season, and to lock in gains. I also plan to keep a short trigger; if I start losing, I’m selling; I’m not letting losers run. I’m at 17% cash now (same as last week), as I continue to sell losers and place stink bids on stocks I want to own.

As always, thanks for reading, and keep on posting your comments on the Buy High Sell Higher Forum.