And now, we wait

by JDH on April 11, 2020

By all accounts, it was a great week on the market.  I know.  The Wall Street Journal said so: U.S. Stocks Log Best Week Since 1974

Unemployment claims are at record highs, the economy is in lock-down, and the market has it;s best week in 46 years?

All is not what it seems, of course.

The DOW closed for the (short) week at 23,716, about where it was in the middle of March, and over 6,000 points lower than it’s peak in February, so while this may be a good news story, it’s not a great news story.

If you like Fibonacci retracement lines (and who doesn’t?), the DOW is close to the 50% retracement line, which may or may not serve as resistance.

I assume it will.  The market crashed, we’ve had a bear market rally, and now it’s time to retest the lows.

That’s how it works.

Crashes don’t happen in a straight line over many months.  They happen as jagged lines, with bear market rallies along the way.

But what about gold?  It broke out, didn’t it?

Sort of.

A close at just under $1,700 is impressive, but the all time high is around $1,920, so until that is breached, predictions of $10,000 an ounce gold are very premature.

Fibonacci wise, $1,732 looks like an important level, and given the steep rise on Thursday, I don’t think we will see it this week, or next.

So, I took the opportunity this week to sell.

Not everything, but I am sitting on some nice profits in my gold shares, so I sold some and raised cash.

But why, if gold is breaking out, would I sell?

Many reasons:

First, seasonality.  Traditionally May, June and July are, at best, flat months for gold.  “Sell in May and go away”.  August and September are good months (January is the best), so with recent profits, a seasonal consolidation would seem likely.  Cool.  I will redeploy if prices fall.  If they don’t, no worries, I’m still holding shares so I can benefit if there is further strength.

Second, gold production is, essentially, stopped.  The Royal Canadian Mint (which serves many countries) is offline.  Gold refineries are shut down.  Mines are closed.  So with no supply, why has the price of gold not blasted through $1,732?  I don’t know, but it’s not good.

Third, technicals.  From the chart above, a drop back into the $1,500 range, and even $1,400, would be the “pause that refreshes”.

So I’ve decided that having 25% of gold allocation in cash makes sense.  If gold is strong this week I will increase that to 50%, and perhaps higher.

Cash is king.

The point is this: the DOW, and S&P, and gold, and everything else, crashed, then bounced, but the bottom is not in until the lows have been retested.

So, take this opportunity to raise cash, and when the lows are tested, if they hold, that’s the time to buy.

I believe we will be largely back to work at the beginning of June, so if we have a retest in the next month or two we can take a shot at new highs before the end of the year, and that’s why having cash now is important.

That’s my theory.  We’ll see if it works.

Happy Easter; see you next week.