Silvercorp still a strong buy; everything else, not so much

by JDH on October 8, 2011

This is Thanksgiving Weekend in Canada, so Monday is a holiday (the Toronto Stock Exchange will be closed). The weather here in Ontario is fantastic. We are expecting temperatures up to 25 degrees Celsius on Saturday, and 26 on Sunday, which is perfect summer weather. I shut the swimming pool heater off two weeks ago, but fortunately we won’t actually close the pool until next week, so I’ve turned the heater back on, and I look forward to spending Thanksgiving outside (other than the turkey eating part, which will occur indoors). I’ll be going for some runs, a long bike ride, and cleaning up the vegetable garden prior to my swim.

So, with that background, I will keep my comments brief today.

First, if you have not already done so, please refer to the special commentary I posted a week ago, Silvercorp Metals Inc. – Profit From the Short Squeeze, where I suggested that the short sellers on Silvercorp are about to get crushed. I still believe that to be the case, and on Friday, while everything else was down SVM.TO – Silvercorp Metals Inc. was on the rise. I have bet heavily on this one, and I believe that as the shorts are forced to cover, Silvercorp will go higher.

I don’t provide investment advice; I just write about what I’m doing; but read between the lines for yourself, and I suspect you will conclude that this one has no direction to go but up.

Also interesting are the markets in general. From mid 2010 to mid 2011 the Dow staged an impressive recovery, from 9,686 on July 2, 2010 all the way up to 12,807 on May 2, 2011. That’s exactly 10 months, and a gain of over 32%.

Since that peak, of course, the Dow then dropped to 10,655 on October 3. (Why not on October 2? Because the 2nd was a holiday). That’s a drop of 17%, giving back half of the gain.

The RSI is approaching 50, so it is quite possible we will have a continued rally from here, for a short period of time. As for the medium term, I see no direction but down.

Last week I sold my shorts, RSW – Rydex Inverse 2X S&P ETF, at a profit, and bought some longs, RSU – Rydex 2X S&P ETF, which I turned around and sold, three days later, also at a profit. That profit would have been greater had I waited for two more days, but let’s not get greedy.

This week, if we have a violent rally for a day or two, I suspect I will re-enter the shorts. However, I’m only doing it with play money; I’m not gambling big on my ability to pick the direction of the market.

In mathematical terms, if I had $10,000 to gamble with, I’d put $9,000 in SVM.TO – Silvercorp Metals Inc., and no more than $1,000 in a short type product. Remember, this isn’t investing, this is just gambling.

My investments continue to sit in junior and senior precious metals producers, since that’s where I see the upside. I still have some cash, so if we see a further correction (which I suspect we will), I have cash to deploy.

That’s the game plan.

The weather is great.

Off for my run.

See you next week.

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