Early, or Wrong?

by JDH on March 28, 2009

This week I have good news and bad news. The good news, as we head to the end of the first quarter, is that my portfolio is actually up for the year, which considering the devastating losses of the last year or two is actually really good news. The bad news is that I am only up 2.5% on the year, which given the bounce in gold should have made my gains higher.

My profits have been limited by two factors:

First, I am carrying a lot of cash. Currently my portfolio is 28% in cash, and I have carried over 50% cash at various points over the last few months. In risky markets cash is king, so my gains may be muted by holding cash, but obviously my losses are also reduced by holding cash.

Second, I continue to bet against the general market, which during the month of March was the wrong bet.

A quick peek at a one month chart for the Dow shows what appears to be a raging bull market. From the bottom on March 9 of around 6,547 to the peak on March 26 of 7,924 the Dow advanced 1,377 points, or 21%. Most commentators define a 20% increase as a bull market, so obviously me holding puts and shorts was the wrong move.

I anticipated a bounce, but not a 21% bounce, so in hindsight I should have either stayed on the sidelines, or played for a bounce.

Are we really in a new bull market?

I dunno, whadda you think?

Stepping back from a one month chart and looking at a three year chart makes the March rally look a lot like a dead cat bounce, a bear market rally, not the start of a new bull market. We need the Dow to break 10,000 before we can start thinking about a new bull, and a close over 12,000 is needed to confirm that, and I just don’t see it.

I realize that the stock market is a leading indicator, but I see no fundamentals that yet indicate the economy is improving. Yes, house sales may be increasing, but they are mostly foreclosure sales, which is not a good sign. Personal bankruptcy rates continue to soar. Unemployment rates are increasing. Until those real indicators begin to stabilize and turn around, I don’t see a new bull market.

Call me stubborn, but I will stick with my shorts.

And my gold.

Obviously gold has had a double or triple top, and the uptrend will not be confirmed until we are decisively above the $1,000 level, but does anyone doubt it will happen? The gold chart looks a lot better than the Dow chart, and with the massive confiscation of wealth being transferred from the average American to the banker class (sorry, I mean “stimulus”), inflation will be booming later this year, and so will gold.

My best performers to date have been my silver plays.

PAA.TO – Pan American Silver Corp. is looking good, although a 5 month chart shows we are hitting some resistance:

The RSI is looking toppy, so if we don’t have some follow through gains on Monday I will probably take some profits, but not sell all of my holdings, and place more stink bids and try again.

My stink bids on SLW.TO – Silver Wheaton Corp. never did get filled, and it’s been very strong lately, so some profit taking there may also be in order.

A final thought: Mutual fund investors receive a statement from their fund every three months. The big crash of October and November, 2008 was mitigated by a slight bounce in December, so their December 2008 quarter end statements were not as bad as they would have been if they were issued at the bottom. January and February were bad months, but a rally in March means that their March, 2009 statements also will not be as bad as possible. It’s almost as if these rallies are being engineered in advance of quarter ends to keep the average, semi-sophisticated investor in the market.

But that’s just a thought.

My plan continues as stated previously. I will skim profits as they appear, meaning this week I will probably lighten up on some of my gold and silver holdings. I will continue to add to my RSW – Rydex Inverse 2X S&P ETF position on up days, since I believe a further testing of the lows is inevitable. The RSI on the Dow is higher than it’s been in a year, which I don’t believe is sustainable. The talking heads on TV will tell us we have turned the corner; I just shut off the TV (it helps me do my workout in peace).  A three week rally will not fool me into believing good times are here.

I will continue to buy gold and silver on weakness, in preparation for what I expect to be a very profitable summer and fall.

Those are my somewhat abbreviated thoughts this week; feel free to post thoughts you opinion on the Buy High Sell Higher Forum; see you next week.