May 17, 2008 – Agnico Eagle and the May 2-4 Weekend

by JDH on May 17, 2008

Today’s commentary will be brief; I’m out of town today and I don’t have access to my usual internet connection; fortunately, my thinking hasn’t changed since last week, so my strategy remains the same.

Last week I said that “my plan from here remains the same as stated here last week. I would like to rebuild my cash reserves for the summer. Last week I was 4% in cash. Today I’m 17% in cash, and I expect that to increase to over 20% this week, since I want cash for the summer shopping season in July and August.”

As suggested , I did some selling. I sold some gold stocks, including G.TO – Goldcorp Inc., ABX.TO – Barrick Gold Corp., and MFL.TO – Minefinders Corp. Ltd.

I also sold some of my uranium holdings, including DML.TO – Denison Mines Corp. and UUU.TO – Uranium One Inc.

Why did I sell? Do I think gold is headed down to $500 an ounce, and nuclear energy won’t catch on? No, quite the opposite, actually. I am long term very bullish on gold, silver and uranium. But, traditionally, the period from May through August are weak months. (Have you forgotten what happened on August 16, 2007, and the whole capitulation discussion we had last summer)? History never repeats itself exactly, but if we are going to have a weak period again this summer, I would prefer to be holding cash.

On Thursday I put in above market sell orders on most of my remaining gold holdings, and the big uptick on Friday resulted in the sales of most of my holdings ofAEM.TO – Agnico-Eagle Mines Ltd., G.TO – Goldcorp Inc. and K.TO – Kinross Gold Corp.,

But wait, you say, has JDH gone crazy? We finally have a rebound in gold stocks, and now he’s selling? Well, tell me what this chart shows you (prepared Friday morning):


As you can see, this chart of AEM.TO – Agnico-Eagle Mines Ltd. (and most of the senior gold charts look the same) shows that the uptick of the last two weeks that has carried the stock into the $70 range has carried the stock precisely to just below the down trend line that started back in March. My guess is that this down trend line will offer some resistance, as will the 50 day moving average. I therefore expect a further consolidation period, lasting anywhere from one week to two months.

Now that I have lots of cash, I plan to place below market stink bids on all of the quality stocks I want to own, and pick them up on days of market weakness. For Agnico Eagle my stink bid will probably be placed at the $60 level, right around the uptrend line going back to last summer. At that level the bull market is still intact, and I will be well positioned for the big rally in gold I expect to happen later this summer, or early in the Fall.

Could I be wrong? Of course. The recovery may have already started, and gold my hit $1,000 next week. If that happens, I guess I will be buying back the stocks I sold this week at much higher prices.

But let me ask you this question, dear readers: Do you expect that the volatility we have experienced over the last year is now over? I don’t, so even if I am wrong, there will be lots of down days to re-establish positions. Also, I find it curious that the spot price of gold went on a run on Thursday and Friday, but ended the week just below $900. I’m guessing that’s also a resistance point, so a further pullback is likely.

Finally, Monday is a holiday in Ontario. It’s the Victoria Day Holiday, in honour of the Queen’s birthday. It is more traditionally known as the “May 2-4” weekend, since the holiday always happens on the weekend before the 24th of May. The “2-4” is of course significant because in Canada (and I assume the U.S.) beer is shipped in cases of 24. It is tradition to buy a 2-4 and head up north for the traditional start of the summer cottage season. Those with cottages then spend from now until Thanksgiving Day weekend (which in Canada is in October) at the cottage. This explains why the markets are slower in the summer; all the rich brokers are at their cottages, enjoying the all too short Canadian summer.

(As a side note, I am no longer young and single, so my days of having a 2-4 with the boys at the cottage are long since over. I did however consume one beer with my in-laws last night, over a pizza with my in-laws, wife and kids. It will be windy in cold this weekend, so that will be the extent of the partying this weekend, I’m afraid).

My point is this (and yes, I know I said this would be a short commentary; I guess I was wrong about that): we are approaching resistance points, and the summer season has started, so I’m betting on lateral, consolidating movement for the next week to two months. The bull market in resource stocks is not dead, but it will be taking a break for a while, so I’m cashed up and ready to grab bargains as they appear.

Buy High Sell Higher

For the last two weeks I have been advocating the concept that we should be buying stocks that are making new highs, not trying to grab stocks at the bottom. To that end on May 2 I paid $133.25 for shares of RIM.TO – Research in Motion Ltd.. Then, in my on-going quest to find low risk ways to make a dollar, on Thursday May 8 I sold the May 135 calls against RIM. This covered write brought in $3.35 per share.

Last week a stated that if “Research in Motion is trading above $135 on Friday when the options expire, my shares will be called, and I’ll get $135 per share (for a profit of $1.75), plus I get to keep the $3.35 premium I brought in. That’s a total profit of $5.10 on my $133.25 investment, or 3.8%, which over a period of two weeks is a nice rate of return. If RIM isn’t above $135, I still get to keep the premium, and I can either cover again next month, or sell, or whatever. I still like the stock over the medium term, so I think the strategy makes sense.”

Well, guess what. RIM announced a new Blackberry, called Blackberry Bold, and by Wednesday morning RIM was trading at over $144 per share. Obviously I should not have covered my shares; if I had just held the stock I would be up over 8%. However, stocks don’t go up forever, so on Wednesday morning I covered my RIM calls (ie. I bought them back), and then sold the shares.

Here’s the math: I was playing with 400 shares, so I made $4,299 after commissions on the shares I sold, but I lost $2,509 after commissions on the options I sold and then bought back, for a net profit of $1,789, or about 3.3%. Factoring in commissions that’s about what I would have made if I had simply allowed my shares to be called (because there would have been commissions on that transaction as well).

3.3% profit for less than 1 weeks work is fine with me, so I’ll take the profits and run.

What’s next?

I assume we will be in a lateral to down market over the next few months. I plan to keep an eye on every stock on my watch list; if we have a really bad day where stocks fall and the RSI on the stock gets down into the 30 range, I’ll probably be buying. Then, I’ll place sell orders to cash in on the resulting bounce back. On Friday RIM closed at $140.31, so it appears that the consolidation is in progress. Stay tuned.

That’s it for today. Happy May 2-4 weekend, and please post your thoughts on the Buy High Sell Higher Forum. I’ll be interested to see how many of you think I was selling when I should have been buying.

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